AFFORDABILITY AND THE PRICE OF BANANAS

In 2011, Cyclone Yasi wreaked destruction in Queensland, creating heartache and financial loss for many people. One of the downstream impacts was a 400-500% increase in the cost of bananas due to the loss of 80-90% of normal fruit supply. Across Australia we saw prices as a high as $14 per kilo which quite simply led to less bananas being purchased and consumed in Australia.

Simple economics and the laws of supply and demand meant that once the crisis was over, market values moderated and life continued as before.

So why is it that some economists ignore the same principles at play in the 2011 banana market when they attempt to analyse the residential property market in Australia? People buy fewer bananas when prices go up just as lower levels of affordability reduce demand for houses. In turn this has impacts on demand for rental accommodation and property prices. Here are a few of the more outlandish claims we have heard in recent weeks.

“Housing is overpriced as average incomes as a percentage of house prices have declined”.
Really? What precisely do average incomes have to do with housing affordability? The cost of borrowing money has a direct impact on affordability and the percentage of average income that goes on housing related costs is also a good measure and this hasn’t changed that much. In the late 1980s and early 1990s there were times where interest rates hit over 20% compared to less than 5% now. I know which I would prefer. Can you imagine what would have happened if someone announced in 2011 that we had an economic crisis because the price of bananas compared to income had increase by 500%? They would have been laughed off the stage.

“Negative gearing is damaging affordability”.
Negative gearing is simply saying to an investor that in return for providing housing supply and investing in the business of accommodation you can deduct the cost of doing business from your income. Just the same as any other business. It was such a disaster when negative gearing was curtailed in 1985 that it was reintroduced 2 years later to ensure the supply of affordable rental properties recovered. What is damaging affordability is supply of appropriate accommodation and we absolutely endorse any strategy to increase the ability of first home buyers to enter the market. It is important they can obtain affordable rental accommodation while they are saving their deposit and removing the ability for mum & dad investors to own a wealth producing asset which provides this would be the quickest way distort the supply/ demand balance and drive down affordability.

“Australian banks are over-exposed to property and in danger of a GFC-like crash”.
The less said about this the better. At the risk of over-simplifying the subject, Australian banks do not carry toxic loans with ballooning interest payments and limited due diligence. Many American and international banks did and they paid the price for this. While not everyone loves everything about our banking system, we have never seen a scenario where they did not take prudent steps to ensure borrowers could repay their mortgage even in a market where there was increasing exuberance amongst competing financial services businesses for the buyers’ business.

Property is not a generally a get rich quick scheme. It is a vital pillar for individual economic wealth and we need to ensure we are very careful of knee-jerk reactions to short term market fluctuations. For those prepared to buy for a minimum of 5-7 years of the property cycle, make sensible decisions on what they can afford, and commit to investing in their future security, it will almost always make sense to get into the market.

Writing in the Australian Financial Review on 25th September, Robert Harley made the point that “In the 40 years I have watched real estate, the financial stability of this country has never once been threatened by the housing market cycle”. Commentators who attempt to look at short term market changes for houses or bananas and make long term predictions based on the wrong set of data would do well to remember this.

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