The series does not contradict the arguments I put forth at all. It is in fact largely in agreeance. I merely point out that the federal government has been increasing immigration to increase demand and local governments have been taking steps to restrict supply(ie putting the brakes on small scale subdivisions). The series, in contrast, does not consider what governments and developers can do to control market forces and keep a bubble inflated, other than to suggest an effect from stricter planning regulations. The series also suggests that governments will act to depress prices, 'the government relaxes planning restrictions'. Local Governments in Australia are doing just the opposite! So supply could be constrained until immigration meets the shortfall. Can governments effect this; maybe, maybe not. But you can bet your life that they will try their darndest. In any event copydog, do you really think that there could be a bubble like the one now without immigration? I think not.
from the series... All this makes it easy to see how a property-price bubble can develop. A genuine increase in demand will raise prices because supply is fixed in the short term. If buyers' expectations about future prices and lenders' willingness to extend credit are both based on recent price increases, demand will then rise further, pushing prices higher still. Eventually, supply will expand and prices will start to fall, pushing the whole process into reverse. The role of supply is crucial in this process. Much of the analysis of movements in house prices concentrates only on demand factors, such as interest rates and the rate of growth in population and incomes. Yet a growing body of research suggests that the volatility of house prices is determined less by demand than by supply.
In a recent paper Stephen Malpezzi, an economist at the University of Wisconsin, and Susan Wachter demonstrate the importance of supply conditions in the formation of house-price bubbles. Markets with strict planning controls or natural constraints on building are much more prone to booms and bust. Chart 11 assumes a property market where in the short to medium term supply is almost completely inelastic (ie, unresponsive to changes in price), partly as a result of planning controls. If demand rises and the demand curve shifts up from D1 to D2, prices jump from P1 to P2. Over the longer term, however, the supply curve is more elastic: developers decide to build on land which already has planning permission, and the government relaxes planning restrictions. The supply curve shifts from S1 to S2 and prices fall sharply, from P2 to P3.
If, on the other hand, the short- to medium-term supply curve is more elastic, the supply of housing will expand more rapidly to meet any increase in demand. Prices will initially rise by less and subsequently fall by less, and the cycle will be moderated.
In the very short run, supply is fixed everywhere. But a study by Mr Malpezzi and Duncan Maclennan, of Glasgow University, suggests that in the medium term supply is much more responsive (ie, the supply curve is less steep) in America than in Britain, where planning regulations are stricter. This may partly explain why housing booms and busts are more common in Britain. In densely populated cities where land is scarce, such as New York and London, supply is particularly constrained, so bubbles are also more likely.
and an argument I put forth...
You say "In my opinion, the rise in property prices nowhere near corresponds with the increase in the population. I don't think we've seen the population rise by 85% in the last 5 years as we have with property prices."
Real estate is a commodity, and a commodity need only see supply exceed demand by a small percentage to effect a large price increase. Of course, this will not occur if there is a large amount of surplus inventory to meet surplus demand. But when you have a large influx of people into an area the surplus inventory will be quickly consumed.
I agree with you that values are very high, but what happens to an overvalued commodity? Precisely what you see happening now with the construction boom. If this were left to its own devices then the property surplus would bring prices down to a level more aligned with construction costs.
So, what levers are pulled to offset this? Land developers have formed cartels to stagger the release of residential land and so maintain high prices, so this market sector is somewhat protected. And what do governments do? At a federal level, immigration is increased. At a local level, governments protect the profitability of large scale developments by restricting and obstructing small scale developments, supposedly to preserve the character of the area, whatever the hell that means. Rather hypocritical in fact, when you consider that the same local governments dont seem to care much about the character of the area at the new estates, where narrow streets and footpaths, small blocks almost completely built on, and limited parkland are the norm. Without room for a tree anywhere these places will be far more hideous in twenty years time than they are today. Even more hypocritical are the pronouncements of councillors about the plight of the homeless, when they know full well that their actions are making the problem worse.
