The Joe Walker Podcast - The Housing Supply Myth - Cameron Murray & Ian Mulheirn

Episode Date: August 13, 2020

Cameron Murray is a Research Fellow at the University of Sydney's Henry Halloran Trust. Ian Mulheirn is Executive Director and Chief Economist at the Tony Blair Institute.Show notesSelected links •Follow Cameron Murray: Website | Twitter •Follow Ian Mulheirn: Website | Twitter •Tackling the UK housing crisis: is supply the answer?', 2019 report by Ian Mulheirn •'Innovative Approaches to Reducing the Costs of Home Ownership', 2003 report by Joye and Caplin •'The Australian Housing Supply Myth', 2019 paper by Cameron Murray •'The Geographic Determinants of Housing Supply', paper by Albert SaizTopics discussed •Why isn't a lack of supply the primary cause of high house prices? 14:40 •The role of interest rates. 18:46 •The tangled web of causality behind house prices. 36:42 •Narratives in housing markets: are they exogenous shocks or post hoc rationalisations? 41:40 •Where did the housing supply narrative come from? 46:41 •How would the UK government prop up its housing market if fundamentals deteriorated? 1:04:52 •Arguments in support of the housing supply myth. 1:05:48 •What makes for an intellectually defensible forecast of house prices? 1:29:17See omnystudio.com/listener for privacy information.

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subscription and you get to try Blinkist premium free for seven days. Don't be a dummy. Go to Blinkist.com slash swagman, where you can get 25% off an annual subscription and try Blinkist premium free for seven days. That's blinkers.com slash swagman. You're listening to the Jolly Swagman podcast. Here's your host, Joe Walker. Ladies and gentlemen, boys and girls, swagman and swagettes, welcome back to the show. For many countries across the Anglosphere, high house prices have become a fact of life. They've also become a source of irritation, inequality and intergenerational enmity. The most pervasive narrative propagated by pundits, property spruikers, policymakers and prime ministers alike, is that house prices are principally driven by housing supply. And a shortage of it, whether due to nimbyism or geographic constraints, is what's responsible for

rising real estate values. Buy land, Mark Twain is reputed to have said, they're not making it anymore. But how does that narrative stand up to the evidence? Joining me on the podcast are two sceptics, infamous in their respective countries for challenging the housing supply shibboleth. Cameron Murray is an Australian economist and a research fellow at the University of Sydney's Henry Halloran Trust, and Ian Mulhern is based in England, where he is Executive Director and Chief Economist at the Tony Blair Institute. It was great to have both these economists, these mavericks of the housing supply myth, in on the same conversation, and I do hope

you enjoy it as much as I did. Without much further ado, here is Cameron Murray and Ian Mulhern. Ian Mulhern, Cameron Murray, welcome to the show. Hi, good to be here. Thanks for having me. It's great to have you both here together to talk about the housing supply myth. I thought we best start by having each of you introduce himself just so that people listening can associate the name with the voice so Ian let's start with you just tell us your name what you're doing at the moment so I'm Emil Hearn I'm the executive director of UK policy at the Tony Blair Institute in London and yeah I've been researching housing issues for the last four or five years.

And before I did this, I was an economic consultant. And back in the day, I worked at the UK Treasury as well. So I sort of come from a public policy kind of background in economics. And Cam? Yeah, Cameron Murray is my name. I'm a research fellow at the Henry Halloran Trust at the University of Sydney. Many years ago, I used to work for a property developer in Queensland, well, two different ones. And yeah, so I've been thinking about housing a lot

for a long time and, you know, currently doing a lot of research on this bloody housing supply myth. Well, what's interesting about each of you is that you're both famous or infamous in your respective countries, Ian, you in the UK and Cam, you in Australia for attacking this shibboleth of the housing market, which is that these historically high prices are a result of a lack of housing supply. And I think what's additionally interesting in terms of this conversation is that both Australia and the UK have had long-running housing booms by historical standards. I remember back in 2010, I think those were the two housing markets that the legendary

billionaire investor Jeremy Grantham was waiting with bated breath to burst. And he was very surprised that every other housing bubble in history that had moved so many standard deviations from its long run average had ended in a crash, but Australia and the UK held up through the Great Recession. Maybe an explanation for that is the prevalence of variable rate mortgages in our countries. In Australia, they account for about 84% of mortgages. Correct me if I'm wrong, Cam. I think it's something similar in the United Kingdom. And obviously, that's very different to the United States where the norm is a fixed long-term mortgage. So there is some interesting commonalities there. We have had these decades-long booms and on the face of it, the explanation is quite straightforward

or at least the public explanation, the public narrative is quite straightforward. And that is that supply is constrained and we've had these booms in net immigration and house prices are a simple function of supply and demand. And when demand outstrips supply, the price goes up. That's the explanation that we've all been led to believe. So we will come to this narrative. But first, Ian, I want to ask you how you came to be involved in this question of housing supply. Do you remember the moment you first started considering it?

Yes. Well, I guess I've long been considering it mainly because I've been for far too long trying to work out whether it's sensible to buy a house or not in an overpriced city. Yeah, right. So it's always been an interest. But I guess I suppose some kind of like interesting milestones, particularly in the UK, we started to produce data on rent levels, proper price index data on rent levels some six, seven years ago I think now. And it had always been a puzzle to me about why we perhaps hadn't seen the impact that we might have expected from the financial crisis. And, you know, it was really when that data came out that it was like, hang on, something doesn't check out here. What we're seeing in the UK, what we've seen in the UK is very flat rents, really not going anywhere in real terms.

And yet this massive volatility in house prices and I guess for me as somebody who hadn't thought hugely about it that was the kind of canary in the coal mine that the basic story cannot be right. I wasn't that confident in that initially but I got quite much more heavily into modelling the housing house prices in later years in sort of 2016 2017 and um and and again i didn't really hold a strong view at that point but um you know once you start to get to grips with the theory behind it and you look at the just the raw data let alone any complicated economic econometric modeling um it starts to become clear what what's happening here cam do you remember when you first started paying attention

to the housing market in the Australian context? Well, probably in 2003 when I bought my first investment property in the middle of a boom by sheer luck and was like, this is a really easy way to make money i should do some more of this and then realized it gets not can't be like this forever you know this is an unusual way to just make money is just throw money at houses and they give you back more money next year like it's a pretty unusual thing so I did start looking at it in detail but I actually I worked as a real estate agent for a little while and you know I studied town planning and many different things in the property market so I

I'd already always been aware of the the inner workings of the planning system and working for housing developers, what the general sort of strategies we would use were. And so every time I heard this myth, it sort of began in a 2003 paper, I think, by Chris Joy. He wrote it for the Menzies Research Center. It was a John Howard. I'm not sure if you're familiar with this joe um i am yeah and he's the one who decided oh for me that report sort of was one of

the first to to put that story out not from a developer lobby group but from a sort of economic side and and it just seemed to roll you know as house prices went up that was the great story and i'll tell you an interesting story because this is this is why i've never of you know i used to argue with leaf van onslaught at macro business at the beginning of that website we were partners we merged our blogs i don't know if you recall into macro business super blog and we would argue relentlessly he would go it's town planning and i would say it's not look at all these approvals look at all this supply and that was around sort of the 2008 9 10 period

but here's a story that really um cemented i think in my mind why it's all nonsense. I was working for FKP, a developer up here in Queensland, and we had an apartment building at Mooloolaba that was going to go on sale. First weekend sale, got the sales office ready, and it was in the middle of a boom. And we had our price schedule. There was a queue out the door. We could have sold every single apartment in that morning. But at 10 a.m., after the first few groups had come through, we decided that we're going to stop selling apartments. We're going to close the sales office.

We're going to delay the release for some fictitious reason so that we can boost all the prices up 20%. And it took us something like five years to sell the rest of them. So we could have sold them all Saturday morning, but instead we decided it's best to put the prices up and dribble them out. And I remember when I left, yeah, we still couldn't flog off the penthouse

in this full constructed building. And they wait years and years. So that was really a defining story for me. I'm like, well, you know, just because it's approved and ready to build doesn't mean you're going to flog it off as quick as you can. But Ian, it's sort of intuitive isn't it like we've had these huge booms in immigration both in the uk and in australia um you know we see nimbyism everywhere in our major cities um what why isn't it supply that's driving up house prices in the united kingdom well i think um i mean this is one of the misperceptions i guess of um most things that i

say on this and i suspect the same is true for cameron is that people often assume that what you mean is uh oh yeah um the population size or the number of houses has no impact on prices and obviously that's not true of course it does um This is only a question of what's the relative scale of effects. And, you know, there's a lot of houses in Australia and a lot of houses in the UK. And so small changes in population really don't have a huge effect. And it's an empirical question. Obviously, what is the scale of an increase in house prices as a result of change in population or the number of houses. So I think that's the first thing to say. But I think the other side of it is that, and that relationship is relatively weak. But the other thing to say is that the unintuitive bit

is that it's not just, I i mean obviously the number of houses the number of households uh and the incomes of those houses are going to be an important driver of of house prices but the unintuitive bit is the is the is the cost of capital and and the uh uh and the cost of owning a house and and the importance that has in determining house prices. And I think for most people, that's the bit that is difficult to get your head around. And that leads people to kind of miss the big mover in this story that does most of the heavy lifting when it comes to changing prices.

Yeah. Yeah, hold that thought for a moment. Just give me a sense of how many more houses we've been building than, you know, households that have been forming in the United Kingdom over the last however many years. So, it's all pre-corona now. The numbers in my head are somewhat rusty, but it's roughly for the last 25 years when you look at the figures i think we've been adding about 170 000 households a year um and we have been building um something like 190 000 i can't remember the exact figures, but the gap is about 20,000

to 30,000 a year. So over the course of 20 years, you get sort of a very build-up in the excess number of houses over the number of households. Cam, is that also true in Australia, that general point? The general point is I'm just having a quick look at what sort of uh documents i have on this but um i i have a paper called the housing supply myth uh and i i reckoned that we built about half a million additional dwellings compared to households in the last two decades. That's my sort of adjusted total. Dwellings minus households, yeah.

So if we had the same rate of growth of dwellings as we did of households from around 2000, yeah, we'd have half a million fewer houses than what we actually built, which is quite a lot, I guess. There are around 10 million households in australia so what's that five percent oh yeah point wow what am i what am i up to dividing 10 million by a half anyway and you mentioned the cost of capital just talk talk a little bit about that and the role that these long declines in interest rates have played in pushing up house prices in the united kingdom yeah so um so i guess the way, you know, in simple terms, the way to think of the relationship between, I think, you know, one of the problems is that people think about the number of houses, number of households, the incomes of those households. And they think that directly determines the house price.

And for many people, that house price then determines what rents flow from from it but it's kind of get kind of get get it the wrong way around because really the thing that's being priced in the market is the market for housing services i.e the rent and so the number of households the number of houses uh and the their incomes is the thing is the kind of equation that determines what the level of rent is in the market for a given house. And if those variables change, then rents can go up or down. But how houses get priced is effectively people discount the future stream of rents on a given house. If you buy a house, you're buying the right not to have to pay rent

on that thing forever and a day. So how much is it worth for you not to have to pay rent on that? Well, the standard way of doing it is that you take the interest rate, what you could earn on the money somewhere else, and you use that to discount this rental stream, and that gets you to your house price today. So obviously, if interest rates go up to 10%, then your valuation of a stream of rental payments

is going to be much lower in terms of a lump sum today than if it was 1%, in which case, you know, the future stream of payments looms pretty large and the present value of it is very high. And so that's why, even though you've got very flat, very stable levels of rent that really only move with incomes, that can still be consistent with very volatile house prices, because the rate at which people discount the future is changing all the time. And that's what we've seen over particularly over the last 25 you know 25 years or so particularly since the asian financial crisis

i guess you might say um we've seen this global interest rates dropping um and again even further and harder since the financial crisis uh which has led people to um you know assess the present value of that future stream of rent much more highly. And that's why the prices are where they are. Do you think the present value relation is really the model of the economy that's in the public's mind? Definitely not. No.

And I think that's partly because of the sort of, you know, people think of housing as a good, just like going and buying a can of baked beans. But it's not. It's obviously an investment that yields a stream of services over time. And the other thing is kind of the confusion of the relationship between rents and prices. People thinking that rents are a result of a given house price rather than the other way around so I think there's it's definitely down to some of those confusions I think that the story is kind of

unintuitive for a lot of people. Cam I'm conscious we haven't mentioned the nasty B word yet. That is to say bubble. But this is a contentious topic down under, as it has been in the United Kingdom for decades as well. And when Ian speaks about the present value relation, it leads me to question whether house prices are a reflection of intrinsic value. What do you think about that question? How do you make heads and tails of that?

Well, I think the missing factor, Ian's explanation was perfect and I couldn't have said it better. Thank you. But the added part to that is that not only are you buying the right not to pay that stream of rent into the future, you're also buying the right to any accumulation in the capital gain that occurs over time. So your total return to buying that house is two things. It's the flow of rent plus that value of that right to get the capital gain. And so when capital gains are rising, regardless of the level of interest rate, you will actually pay a premium for that right to get that additional capital growth in the future, that additional return coming from the capital growth.

And so you can sort of see that the reduction in interest rates itself increases the price. The increasing price is observed, and then people add that into what their total expectations of total returns are, and then they pay for that increase in price that they've just observed. And because they're willing to pay for that, that increases the price further, and the next buyer observes that increase in price. So I think you do get these bubbles and feedbacks. And quite clearly in Australia we had the Royal Commission

into banking a few years ago and prices fell 20% in Sydney because we constrained the ability of new buyers to capitalise and borrow and leverage up into that cycle that was going on. So I think that's pretty clear evidence. But that's the other thing that we need to be aware of is that, you know, if we tax capital gains at 100%, so you didn't have, you couldn't own that right to that capital gain, then the world would be the capitalization model that Ian's talking about. You're just buying out your right to rents.

But because we do get that extra bit, it adds a lot of volatility to the market, especially when you have, you know, the ammunition of a banking sector that is willing to just hand buyers who have these crazy expectations the money that they think they need. So, yeah, look um the other interesting thing that ian mentioned that i just wanted to build on was that the rent is the price of the supply and demand determined price for houses and that the house price is like the asset price

so you know you can think of the rent as the price of an iPhone and the house price is the value of an Apple share in the company that makes that. But when I say, you know, it's not supply, people think I'm saying supply doesn't matter. I'm saying it does matter. We should observe it in rentss which is the price of houses if there was a shortage of iPhones you would see them being sold on Gumtree at premium prices okay that price of Apple shares could do whatever I don't know for what market reasons that might

change but we should see that we should see them on gumtree and so we're going to have very good evidence now that we do have a lot of houses in the economy somewhere in society because airbnb uh is basically switching off uh it is it is done for for 2020 and we're going to see what happens when you supply houses to households that were just sitting there, not used for residential occupancy, but tourist accommodation. And we're going to see that effect come through rents. Anything could happen to prices because of changing expectations of capital growth, but we're going to see that supply

and demand in action coming in rents. And it may very well be the case that we have negative you know rental growth for quite a period of time and the puzzling thing will be that this supply myth will still not die even if we have a period of negative rental growth for multiple years what were you going to say ian yeah no i was just gonna there's i mean there's a lot there i i completely agree i mean just on the bubbles point i think one thing that's interesting is and i guess i think it's the same certainly in sydney and melbourne but definitely in in in uh um london um you know what you had before one of the things when i say to tell the story is that people will say

well hang on a second uh back in 2007 interest rates were nearly as low as they are today. And prices in the UK are basically back up at those peaks. So really, if we look over the last 13, 14 years, prices actually haven't really changed. They've gone down and up again. They haven't really changed. Interest rates have fallen. And I think it's the pre-2007 period where you'd see in the UK,

and the Bank of England's modelled this now, only after some of us have been talking about it for quite a long time, but has now been modelling it and has shown that when you run this kind of a model, this counting model, discounting model, you can see that bubble in the data. It's very clear in the run-up to 2007 where you get this divergence of prices from what the discounting model would justify because

people have been able to get their hands on the money. There's been this overshoot that Cameron explained and therefore you've got this bubble. So people say, well, are these high prices a bubble or not? And I say, well, in 2007, they were a bubble. They were not justified by the fundamentals, but now they are justified by the fundamentals. And that's kind of difficult for people to get their head around. Some people might say it's a bubble because we might see reversion

of interest rates to more normal levels, which would cause a price crash. But I would see that as a fundamental driver of prices. So I wouldn't describe it as a bubble myself. There's also the possibility, Ian, though, that the expectation of declining prices becomes embedded. And so as well as, you know, paying off in the price, buying out the right to pay rent for that house and instead paying the price up front,

what you're going to see is that, well, you also then have to pay that price and then lose the value of your capital gain each year. So sort of Japanese stagnation view is that even though interest rates are low, the price can be below the capitalised flow of rents because there's an expectation of continual decline. And I mean, I see that more as driven by long run demographic trends, more so than these 10 to 20 year cycles. But that is still a possibility that you can have low interest rates with high prices, which are justified, as you say, but then have low interest rates and low prices

because you're buying a depreciating asset in some ways. So I think that's also a possibility. I don't hear people talk about it much, but I think in the next 10 to 15 years we will when the baby boomers start dropping off and their kids realise they have 15 houses they don't want that they've inherited and maybe want to sell them off. We'll see.

I mean, I think the London story is kind of the other version. It's sort of the same story but the other way around. Like what role is there for these kind of expectation driven uh divergences from um because you know what the other this is the other challenge that i get is how come there's such variation in the yield so that you know the yield is obviously the uh the rent is a proportion of the price of the market price of houses and in london it looks like the yield is very much lower than it is in the rest of the country and i think a similar story plays out in australia that's right so in

other words what you know what why why is why a price if it's just straightforwardly discounting if that's the story there shouldn't be that difference in yield and i mean one of the stories has to be you know i mean imf has done work on this and looked at globally integrated, you know, financial hubs around the world and how they may be more exposed to these kind of changes. But there may also just be a straightforward expectations thing. I mean, certainly in the UK, you get these kind of stories that London's invincible and, you know, whatever, they may be myths, but that's what people think. But I think that is a huge area of our kind of, we just don't know about a lot of these.

Yeah, you're right. And I guess the only thing I would add to that expectations of the tier one cities versus the regional cities is that often banks will be more willing to lend up more. So there's a bit of feedback in with the banking, the lending ammunition for buyers. We know that in certain periods of time, there were blacklisted suburbs where banks wouldn't lend

because, you know, there were high-risk areas. So that sort of feeds into those expectations as well. Whereas those blue-chip prime big city areas, you know, those mechanisms of constraint aren't there. And just to kind of come back on that again, actually one of the most frustrating objections I get is people saying, well, if it's all about interest rates, then everyone should be doing the same and therefore it can't.

There's this idea that because you can't explain every movement in a market price, that invalidates the basis of housing economics for the last 30 years. It's just ridiculous. I mean, the idea that it's just straightforwardly interest rates and then straight on through. I mean, institutions, lending policies, narratives, they all interfere with the transmission from one to the other. But that doesn't change the fact that the tide is global interest rates.

Correct. And the one thing I mentioned to Joe earlier when we were chatting is a lot of these Rust Belt areas in the US with low house prices and apparently unlimited supply and great planning systems, the Houstons, Atlantas or whatever, apparently unlimited supply and great planning schemes systems the Houston's Atlanta's or whatever's um uh did I say Rust Belt the southern US cities uh in Texas particularly uh they have very high property taxes right and so that's another factor in this capitalization of the flow um that keeps the prices low so you can say oh it's 50% cheaper there. But of course, you've just also bought this massive property tax

liability to go with it. Of course, you're not going to pay as much money. And so you get this whole weird literature that is sprung up using this wrong measure, this house price measure that we know is affected by you know banking and expectations and all these other feedbacks and taxation and interest rates and we go no that's that's our measure of the supply of housing when you can just count houses and look at the price of rents like yeah have you do you ever find anyone looks at rents in this sort of area i i've not seen it maybe because the story is not at rents in this sort of area? I've not seen it. Maybe because the story is not in rents, it doesn't exist. Sorry, Cameron, what do you mean?

People who think there's a supply shortage look at rents? Correct, yeah. No, there's none of that. But you're right, they don't want to look at it. They don't want to look at it. And I haven't heard any decent rejoinder about how you can explain this stuff. I mean, you're absolutely right. So much of the literature revolves around trying to explain something

that is very, very hard to explain in its totality, i.e. the many, many factors that drive house prices. Meanwhile, theory and basic economics tell us your story should be evident in this much more simple relationship between rents and supply. And so, I think it's slowly percolating through into the debate, but it is remarkable how,

and I think it's something deeply, it says something deep about how our societies operate that you know certainly in the uk there's such a fetishization of home ownership therefore somehow house prices are in some sense superior or more important than rents which are just some kind of artifact things that 25 year olds do uh and as a result uh all the things we should be thinking about are just prices and it's like let's strip this down and try and try and model something much simpler that can shed light on this question and we don't see a lot of people just don't seem to be prepared to do that

no i and when i ever criticize this i'm i always say can you do the same exercise with rents now and then we can talk but no one's come back to me. I wonder whether part of it is also that for many years you've had rent controls and therefore it's just not been possible. I mean, certainly in the UK, until there was a decent price index produced by the ONS, it's been almost impossible to stack this up as anything other than a theory. But maybe that's true in other countries as well. I don't know.

Yeah, similar price index problems. But I mean, I don't think it's any worse than house prices. And we've got plenty of decades now of good data. Yeah. There just seems to be a tangled web of causality when it comes to explaining prices. And I'm trying to sort out the different causes. And part of the issue is many of them we can't observe. So we rely on these models which are prone to emitted variable bias and i'm trying to think through

so for a long time the way i thought about interest rates was that they were essentially permissive of high house prices rather than necessarily causing them and that is to say it was like opening the floodgates but the force of gravity that was driving the water down the hill was expectations as to future house price rises so those are you know your narratives and your optimism extrapolative beliefs and then and then i kind of thought maybe um the the model of the economy in the public's mind probably wasn't the present value relation.

People weren't discounting their future rental cash flows in spreadsheets and working out how the value of their home should be appropriately priced. But maybe in a world of like secular long-term low or negative real rates maybe the public would cotton on to the fact that interest rates played a really important role and so maybe the public would like eventually learn do you have any any reactions to that either of you i'm just kind of thinking out loud here. Property investors in Australia, all the ones I know, are pure interest rate machines.

They just say, is the interest rate below the yield? All right, let's buy some houses. And I think interest rates do facilitate, but I think human nature for this free money and the leverage available to get it. I mean, you still have to have the expectation that that capital value is sustained or growing. But, yeah, I think most of the sort of price moving investors in the market are pretty aware of it, I would say. What do you think ian just to sort of reprise really what we were just saying i guess uh that's the sort of starting point so it's like you know we've got the

basic relationship between houses households incomes that drive rents and then the question is what's their impact on prices but you've got all of these other things going on the cost of capital expectations regulation global capital markets narratives lending policy to banks all of these things so you're kind of right jesse that i think it's like um it's a necessary but insufficient condition to have a sustained rise in house prices that you have a sustained drop in interest rates i mean you can have rise in house prices for a bubble, but bubbles aside, that's a necessary but not sufficient condition. So Germany's regulation of mortgages is much

tighter. And so it's not that surprising, really, that they've been able to keep a lid on these kind of things. I think you're probably right that people are more likely. There's a couple of things going on. First of all, once you end this 40-year bull run of house prices, the dinner party chat of prices always go up probably stops. So maybe some of that expectation stuff starts to damp down. And then also, critically, in the UK, once you've got people taking out 40-year mortgages or whatever,

it's looking just like rent. Your mortgage payment is basically your rent and people start to see the two. And so I think there probably is a point where you get to where people are like, hang on, all I'm doing is taking on capital risk. And otherwise, it's basically rent. But I kind of wonder, like, you know, what people are effectively doing is, what is the better thing to do? Is it to put all your money in a single asset that's completely undiversified, the cost of fortune and the might at any point tank in value? Or is it better to diversify your investments and use the stream of income

you get from it uh to carry on paying the rent and for some reason people think the latter is more risky than the former uh which is completely the wrong way around in my view yeah look i think the the main reason um the main reason i i've seen for that is that the stability of the renting is the risk the having to move house so if you had much more stable renting laws much more security of being able to stay and I think that changes that equation as well yeah great yeah how do we think about narratives in housing markets bob schiller started working on narrative economics in a more formal sense beginning in 2017 then he had a book out last year called narrative economics and one of the chapters is dedicated to narratives in housing markets

and narratives like exogenous creations and stories that exist out there in the ever that can possess people like mind viruses and drive economic events. Narratives like safe as houses or the insert country here dream. Narratives like the supply myth. Where do these narratives come from? Do you think of them in an exogenous way in the context of economic models or are they just ornamental post-hoc rationalizations that people tell themselves and tell each other so they can sleep better at night, where really there are other more important forces driving

their economic decision-making. What a question. I mean, I would say much more the latter. I go for the other. Yeah, it's the latter. I mean, you know, Cameron might be different in different places to me on this, but I do think that,

you know, when you look at the hard data, aside from a few years where momentum carries prices above where they should be by the fundamentals, you know, pretty much you just, you know, you just,

you take your interest rates and you, you can figure out what the, and your rents and you figure out what the prices are going to be, give or take. So I think a lot of it's just exposed rationalization. I think the one thing that challenges that is, as I say, within the UK, for example, the geographic differences, where it's possible that narratives about London and stuff are more powerful. But I still am somewhat sceptical about that.

I think it's something to do with the kind of liquidity of the market, things like that. I mostly agree. I would say it's a sort of rationalisation of following the trend and that narrative is the mechanism that sort of perpetuates fads and fashions and it's not the reason we do it we do it because we're human beings and we're social creatures that have certain needs and we do it by instinct and then we go that's the story

that makes me feel best about what i just did to feel good and um because everyone else is doing it, I feel good. I didn't think economically about the decision. I thought like an animal, a social animal that I am, and then I rationalised it with my conscious mind and now we have great dinner party conversations about why that story is the best of all stories and how smart we are for buying houses at a million dollars a pop but in terms of in terms of this sort of could you could you spark a housing bubble by telling stories if you were a if you owned a large media empire could you just tell the big lie or feed the

myth through your empire and that's that's a really interesting way of phrasing the question. Yeah, probably. Look, I... Yeah. Do you think? Yeah, well, I think... Could you? Look at...

That's essentially what the housing lobby's done with the supply myth, right? They've orchestrated through their media and their lobby groups a story that makes us feel good about overpaying for houses because there's a supply constraint. They're not making any more housing.paying for houses because there's a supply constraint they're not making any more house yeah so i think there's a yeah a bit of that but yeah that's true but still if you just if you just discount the you know the the rent you get to the prices you've got so like for all the brouhaha about narratives and stuff and clearly there are some strong narratives out there,

it doesn't seem to be, like, people paying a million quid for a terraced house on my street, not that my street house is going for a million quid, but, you know, it's perfectly rational because interest rates are so low. It's not irrational. It's not based on a narrative, or not solely. Yeah, look, I think if you're looking at the blue chip, the Sydney and Melbourne and, you know the the uh what do you call them t01 cities that have this sort of expectation built in i think that's where it plays out and and you'll notice in australia

for example i live in brisbane that housing supply myth is is quiet it's all sydney and melbourne talking about it because they're feeding this sort of behavior, these expectations, whereas outside of that, it doesn't really exist. So look, maybe I don't have a good answer. I just wanted to tell you that. Whether or not the housing supply myth is like an exogenous story that bob schiller would kind of try and take and taxonomize or whether it's just a convenient post-hoc rationalization i'm still interested in where it came from i'm interested in like a sociological account of the housing supply myth and i guess the first first thing to note is that we've observed it through history in housing bubbles of the past.

It often pops up, which is not really surprising because it offers quite an intuitive explanation for price rises. But currently, we observe it in Australia, New Zealand, the United Kingdom, Canada, the US, essentially the five eyes countries, I guess you could say. But as well, other countries around the Anglosphere. And it's interesting how prevalent it is. It's interesting. So, I go to a lot of property investor seminars, or least i i used to um just as an observer and this was like the main narrative that was dragged out to explain australian house prices and it's usually the first thing that rolls off somebody's tongue when you ask them for an account of house prices at least in my experience. Cam, that probably checks out for you as well, I'm guessing. And the last guest I had on the podcast, Ian, was Malcolm Turnbull, who was Australia's previous Prime Minister. And I had to read his memoir ahead of the interview. I was

talking about it with Cam before we started recording. But I struck upon his explanation of housing unaffordability in Australia. And again, it's just quite a blasé reference to the housing supply myth. And I'll quote him directly from page 320. If housing was too expensive, the answer was to build more houses. And that meant reforms to planning so that supply could respond more readily to demand. So, almost everywhere we look in public policy narratives, the notion is that house prices are high because we're not building enough, which is a result of either geographic constraints or nimbyism. But do you have any insights either of you into where this myth, spreading as it does across many countries in the Anglosphere, originated and why today it still exercises such a hold over the imaginations of policymakers and economists and the general public so there's two parts to that question i think it probably makes sense for me to start with that in the uk

because i think cameron will have probably a better sense of lots of places around the world it'd be interesting to see if you think the same things hold um i think for the uk i think there are just been trying to note them down but i think there are probably five things that have driven this one is just the simplicity right you you can't be wrong for saying more supply will lower prices in any market right so people just come with their economics 101 and they're like and they're pub, and they're like, yeah, you're not going to be wrong for writing that in your memoir, right? So that's the first thing, simplicity. The second reason it takes hold is because none of your fancy stories,

Cameron, just keep it simple. Then the second thing is the long you know probably since volca right declining interest rates story um that's been critical so when that just you've got a non-stationary time series you know that that's just gonna that gets embedded into a whole generation of people who made money from prices always going up and that that of fed the narratives the third thing is in the uk particularly and i think in lots of countries including australia you've seen this kind of household size declined rapidly in the middle late 20th century and then started to bottom out at around i don't know two to 2.5 people per household in the UK. At least it sort

of ended up around, I think, 2.3 or something like that. And in successive censuses, the estimates of household formation rates were always based on the past rapid decline in household size. So as it started to bottom out, there was a persistent in the UK for several decades, persistent overestimation of the rate of household formation. So people would go to housing conferences, show these terrifying charts of the number of households that are forming each year and the number of houses we were building and look at the gap. And that went on time after time after time because we were always looking in the rear view mirror to see what had happened to uh you know social norms about housing household size so that really fed it with some

good hard empirical data that was actually just wrong um the the fourth thing i think is this primacy of ownership story so people um uh just kind of misunderstanding the role of rents. And that's partly related to the simplicity thing. And the fifth thing I think is just, again, sort of relates to simplicity, but the misunderstanding that there are two markets here. This isn't like the price of baked beans or the price of something else. You've got two markets, two prices. The market for housing services is the rental price.

The market for housing assets is the house price. It's just like Cameron's example of the iPhone price versus the Apple share price. These are different markets with different prices and people just don't get that. So when you put all those things together, that's, I think, why the UK debate is where it is. I agree with all that.

That was good. And now I've forgotten the question. I was just enjoying the answer. So is that true elsewhere, do you think? Yeah, I would say so. And I think that's all the reasons that it's such a good story. The question is, though, stories need storytellers and they need someone who has an interest in banging this drum.

And I have a book called Game of Mates, How Favours Bleed the Nation, which is about how political favours are given out and how we socially organise to corrupt the system for our benefit. And the beautiful thing about property is we have rules that apply to what you can do with it, and that can vary its value quite significantly. And so the property development industry likes to buy plots of land

where the rules say you can farm this land. This is agricultural purposes. And then they need a story if they want to get some free money about why those rules should be changed so you can build high-rise buildings there. And that driver, when you have in Australia huge, multi-billion dollar listed companies, thousands and thousands of small developers whose main sort of boundary

where they can exert influence to make more money is through changing the planning system, you're going to have a huge number of storytellers lining up to perpetuate this story every single day. Because there's this free money on the line, because they want the planning system changed, not so that houses can be cheaper. I mean, what sort of idiot property developer would I be if I was lobbying to flood my market with competition and make housing prices cheaper? I mean, the insanity of that alone should stop this. But of course, people don't think logically. They like the simplicity that you were talking about. So I

think, you know, that's what's going on in the background. There is an economic motive with many, many storytellers who are very politically connected to jump on this bandwagon. And we legitimized that. In Australia, we had the National Housing Supply Council created in 2008 after the pre-financial crisis boom. You know, what's the problem with Australia's housing supply? And the most awesome thing about this is that they made these 10-year projections about housing need, which we can now look back at. And they made these population projections,

of which the lowest that they made was higher than the population growth we had, despite us massively increasing migrant intake in that very year. We still didn't reach the lowest population projection but we actually exceeded on the housing supply their highest of three projections. So they thought we, you know, so we built essentially one and a half million new homes when according to their forecast back in 2008, we would have only needed 1.2.

So we've far exceeded that. And yet this myth is still there. It's just crazy because it makes you money, right? I've looked at presentations done by lobbyists for developers to politicians and they've said oh we need to change this huge piece of agricultural land into residential subdivisions because there's a housing shortage we're going to solve the housing crisis of this town we're going to build 30 000 new houses in this massive subdivision.

Okay, great. They get approved. In their prospectus to investors, they say, we got an approval that's going to last us at least 35 years. And I'm like, whose housing supply crisis are you solving? You've just promised to flood the market here. But what you really the the to write up the value of your land because of that change in zoning and you're just going to drip feed at the same rate you would have if you could build half as many so that's what i think is the big thing and that's that's been an

issue i've been harping on about since i worked on the other side of a fence and found it very disheartening that that was the main business of property development yeah so so i so i really should have shouldn't have missed that sixth one uh which is absolutely critical that interest groups right but i guess also and this is i think it kind of goes to the heart of the problem is that in the public narrative you have this why would it must be developers aren't uh they don't want to build because uh they will uh bust the bust the market price and one of the things i'm always saying is well they can't really do that none of them are big enough or even if they didn't want to drip feed them out over 30 years none of them are really big enough to massively dent their own profits by dumping stuff out there but what where the narrative really suits them

is that they can get this you know markup on the land because they manage to tell everybody there's a shortage so you need more permissions and that's the i think the real trouble but the other thing is and camera i know you want to come back on that but the other thing is i think also you see all the actors around and it's not it's not malicious or anything but all the actors around this debate also echo it because it's in their interest to do so so um turnbull there in his book or like we just had a thing in the uk where the bbc did some big splash on housing apparently really detailed report which they apparently got no experts in housing to to uh really write uh and they sort of echo around the simple message

because it's in people's, they think, you know, I'll just weigh in on the side that's simple and everybody gets around the dinner table rather than, and that sort of bolsters this story. And it's very hard. In a sense, it's a bit like the reproduction number of, you know, coronavirus, right? It's like, what is the R of your story about housing?

And unfortunately, the R of the simple and rubbish and wrong story is extremely high it tears through middle-class dinner parties and r1 doesn't look that is so good um, you're totally right. And let me just add the final ingredient in that storytelling part and the vested interests. Just remember these vested interests who tell this story don't want house prices to fall. Their interest is the opposite. So by talking about planning, constraining supply,

they've ensured that all the policy focus is on the thing that's not really going to do anything and it's no risk to them. Because what I always say is, oh, is there a housing supply shortage? We should go build some houses then. Oh, no, no, no, no. What you need to do is give me some rezoning and some new permissions, right? I'm like, no, maybe the government should just build

200, 000 dwellings a year i mean like if there was a submarine shortage would we just issue permissions to build submarines or would we just bloody well order them to be built and pay for it and they go no no no oh yeah we could do a bit more public housing maybe i'm like no just flood the market if you think this is it that's your answer But they don't want the answer to their question. They just want the story, in my view. Maybe that's a tad extremely cynical. But, Kevin, presumably you'd also agree that even if they did that,

I mean, in the UK, even if they doubled the rate of building or they hit this fancy target of 300,000 houses a year in England over the cycle. I mean, on our figures, it's kind of like, well, after 20 years, you might lower prices by 10%. And the context of prices having almost tripled over the last 20 years in real terms, that's a drop in the ocean. Yeah, it is a drop. So even if they do this it's not gonna that's true but i think that's that's once it's smoothed out but if you put 200 extra houses for sale each year do you know what i'm saying then the market of trades would be like well we can't find the buyers for that we have to drop the price we've got right so fire sale. You just flood it.

And it's quite interesting, the political problems with this. In the ACT, where Canberra is, for our foreign listeners, Australia's capital, the territory government actually is the land developer monopolist. So they own all the non-urban land and they drip feed it to the market and uh and i've had a lot of discussion with uh you know people in the minister's offices there and i said well you know you keep issuing all these reports about house prices and stuff why don't you just flood the market till you get to the price you want you've you're the monopolist and they're like yeah well

we can't do that because then everyone's house prices will fall. We don't want prices to go down. I'm like, well, why are you pretending with decades of reports analysing what are the causes we want to know when you actually don't want the outcome itself? And that's a crazy thing that that's how it works. I mean, it makes sense, right? We've got 7 million homeowning households.

We've got 1.8 million investor households. We've got $7 trillion worth of housing in Australia. A 10% fall is a lot of money, you know, $700 billion off everyone's balance sheets to highly concentrate it at the wealthiest. It's political suicide, really. I actually said this at a conference a housing conference last year i said well you guys even want prices to be lower i feel like

you've been here for 10 years saying the same stuff you know isn't it just political suicide for you to do anything about it and a few people started cheering um because you know you gotta you gotta think about that as well this also plays into, Josie, you might want to take it off in a different direction. I don't know. No, I'm enjoying this. I was going to say that this plays into the other debate that sometimes happens, which is so what happens if you do get some interest rate normalization

or whatever? I mean, obviously, it looking uh pretty unlikely right now um but um and could and some people say well you know interests are so you know strongly aligned with keeping prices high that they will step in stop the market falling and in my view that's just um uh impossible really i mean i don't see you know, the UK government can prop up, you know, seven or eight trillion pound housing market without putting vast amounts of taxpayers' money behind it, and even then probably not, credibly. I mean, what do you think, Cameron? Do you think there's any way, you know, fiscal authorities or whoever, financial regulators can do anything to maintain high prices

if the fundamentals shifted? That's a very good question. Look, I think if we were in that situation, I'm wondering what other economic fallouts there might be that are more top of mind because, you know, a large and sustained fall uh look i think there'd have to be efforts you know stabilizing the market would be the mantra even though it's really quite funny because for years you don't we want cheaper houses and now we don't

um look i think i think they'd be politically fairly limited as you say yeah um i'll have to put some thought into that actually good question i mean i reckon they could probably what do you think and if if you were the government and you were trying just to rescue the market in that situation what would be the first policy that you would cook up well that's the thing i just really struggled to see how you can do it. I mean, ultimately, you know, on the basic discounting model, if you make it far more costly to own a house or try and make it far more, I mean, you know, people just aren't going to, they're just not going to buy them. You know, if the daily cost, day-to-day cost is higher

than just renting them, people are just going to wait until the market reaches its equilibrium. So I think that's the one thing. I thing i mean obviously they can do all sorts of things like they can ease you know capital buffers and things like that and they can perhaps i don't know uh you know force the banks into forbearance and they can um you know perhaps beef up housing benefit for homeowners and they can do all these things which will probably stop a fire sale but I don't think it changes the market equilibrium you know I've got a couple of questions about your critique of the housing supply myth in the United Kingdom so I just want

to push back a little bit and I'm sure you've got good answers to these but and I'm sure also we might have implicitly touched on the answers as well throughout the conversation, but I just want to kind of get them on the record anyway. The first question is, you mentioned that we've been building an excess of homes over the past, say 25 years, give or take. And the response to that is to say that, sure, the shortage might have been getting smaller over that period, but maybe we were so behind to begin with that there's still an overall shortage. So, is there a question as to when you begin measuring, like what the start date is well okay so essentially back in the raw figures are that back in 1996 you had like about 660 000 more houses than there were households in england uh and then that had grown to by by 2019 that that's up at about 1.2 million or something like that. So the surplus stock has kind of doubled. So it's true to say that the, you

know, some people criticise that and they say, well, you know, what's the surplus house? Is that a good measure of spare capacity? You know, those are all fair criticisms. You don't want to put too much weight on what it means to have 600,000 spare houses. Is that enough? Who knows? What does enough mean? All sorts of things. But what we can say is that if it's hard to, even on those kind of contentious figures,

it's pretty hard to stack up the idea of a growing shortage, i.e. a shortage that's just getting worse, when that surplus number is trending very clearly and persistently in one direction over 25 years. So I think that's the thing. It's like not putting too much weight on the actual measure, but it's just saying, like, the challenge is back to the dominant narrative. How do you explain this? How do you explain what we expect to see when we see this measure of surplus capacity trending in one direction?

What we'd expect to see rents versus incomes trending in the other direction, and we have. So, you know, all the bits of the story check out. So it's more like just saying, well, we need an explanation for this if we're to believe this shortage story. And that's when we never really hear one all right second push back just just giving voice to the the critics here and playing devil's advocate so sure a lack of housing supply may not be the overriding problem in this situation but maybe injecting a surplus of housing supply into the market would be a solution. What do you make of that response?

Yeah, so this kind of goes back to the point I was making earlier that it's not wrong to say more houses with lower prices than they would. And quite often the argument that we're making is spoiled down to claim that we're denying that. And we're not at all. It's just that, you know, as I say, you've got this kind of very large stock of houses. And it takes even building very large numbers of housing, implausibly large numbers of houses in the UK is not going to radically change the size of the UK housing stock anytime soon. And then into the bargain, the sensitivity of house prices to that change in stock is, you know, it's 1% more houses will get you 2% off prices.

It's there. But like, you know, it's not massively sensitive. It's not unusually sensitive. So you put those two facts together and what you see is um you know you have to build huge amounts of housing for many years before you get house prices back to anything that people might have previously considered to be affordable in terms of a ratio to their income so you know you can if you if we build 300,000 houses a year in the UK, and bear in mind we've been in England over the next 20 years, bear in mind we've been kind of doing sort of under 200,000 for the last 25 years.

So if we add 50% to that for the next 20 years, then you're going to maybe take 10% off house prices compared to what they otherwise would have been. But I don't really see that that's massively helping the people who've just seen price to incomes more than double over the last generation. That's not going to make all these millennials go, oh, hallelujah, housing is really cheap, we can afford it. So we're going to get to the end of 20 years with all these great promises and find out they're still completely unaffordable. So it has an effect. it's just that it doesn't solve the problem yeah can i add two points to that

um i've done the numbers for australia as well and um so my numbers with a one percent elasticity is uh you increase construction rate for 50 for 10 years years, which from the record highs from Australia, and you get a 7% reduction in house prices after a decade. And, you know, and I can tell people that's how much prices went up in June 2013 in Sydney. And so, right? But there's more to it, right? This is a 50% increase in total housing construction.

Housing construction is something like 7% of GDP and 8% of the workforce. So you're going to somehow have this macroeconomic cost of hauling 4% of the workforce from what they're doing and getting them on the tools to build more houses for a decade for 10%. You know, it's a massive macroeconomic cost. It's like implausibly high.

People go, oh, we should just double construction. I'm like, you want to take it from 8% to 16% of GDP every year? Like this is like wartime type of build-ups. And you're just like, oh, it's really easy. Just change a bit of few town planning rules, change the gross floor area limit, mate, and we'll do it. I'm like, you're just like oh it's really easy just just change a bit a few town planning rules change the gross floor area limit mate and we'll do it i'm like you're insane yeah that's yeah i mean yeah but and the story the story goes on further too right in the in the way these models work all of them is you know they're based on some measure of spare capacity what is the spare capacity in the market so when you see you know see, in England, you've got this kind of doubling

of the number of surplus empty homes, what we're saying is we need to kind of, I haven't quite got the figures to hand, but we're saying, oh yeah, 1.2 million empty homes isn't enough. We need 2.5 million empty homes. And it's like, so not only are you going to do the massive macroeconomic distortion that Cameron's talking about, but also nobody is going to consume those services because they're going to be empty.

So what's the point? Like, wouldn't we rather spend our economic resources being able to create something that we actually want to consume rather than having empty houses? And the fact that this is uh difficult for people to grasp when we've just seen you know endless ghost estates appearing in spain and ireland and the us and there is as a result of a housing uh construction boom and it just doesn't seem to compute that this is a waste a massive capital misallocation that ends up reducing all our living standards so the

cost benefit analysis really needs to be done what is the optimal level of spare capacity in the housing market and you know the uk at the moment the spare capacity is about five five and a half percent something like that what what is the optimal level that allows labor mobility and all the rest of it to to operate unimped? I don't know. No one knows. Maybe it's a bit higher. Maybe it's even a bit lower. I'm pretty sure it's not 10% plus. So, you know, we need to really reframe this debate instead of always saying always more is better. We need to have a much more nuanced cost benefit analysis of what's the appropriate level of spare capacity and how do we balance consuming empty houses with consuming other stuff that might make us have higher living

standards i think the other yeah that's exactly the point that no one seems to want to talk about but i think to your original question joe you know what does injecting supply mean with are we are we pretending that changing a few town planning laws are going to do this and i think a lot of people are pretending that um you know and you know the evidence is just not there that if you give if developers have more lots of land that they sell them faster you know they're not going to inject supply. And I think it brings me to one of my real bugbears about urban economics. And I've come around to calling urban economics the art of confusing the optimal density of housing per unit of land

with the optimal rate of new housing supply per period across all sites with development options. And so you end up with this confusion that, oh, look, it's profitable to build this high-rise and on this piece of land, that's high density. That means there's going to be a lot of new homes. But it's actually optimal to build that high-rise at that density but also to sell it over a five- to eight-year period.

Okay? So in density terms, yes, it's very dense, but in housing supply terms, it's one eighth of that per year. And if your building was taller, it might be one tenth. That optimal number that you sell each year is probably the same regardless of the density. And so it's pretty, that's the other thing that really bugs me is that you just, you know, approve some developers and they'll build it. So I don't know if you are aware, Ian, I went to the annual reports of Australia's top eight listed housing developers

and I added up their land banks and what they tell their investors about their intentions to supply and what they do when they get rezoned. And it's the exact opposite of what they tell the media, right? It's crazy. This is Lendlease that I'm going to quote from the annual report. The community's pipeline consists of an estimated 52,333 lots with an annual target of 3,000 to 4,000 completions.

More than a decade of supply has already been secured. The development pipeline brings long-term earnings visibility and the flexibility to be disciplined and patient with the pursuit of future opportunities. So developers know they've got 52,000, you give them 55,000. They only want build $3,000 a year because they want to wait. In Australia, we've got, you know, in Queensland, we've got 40,000 new detached housing lots zoned. How many do we produce a year? 6,000.

67 years' worth. You know, people go, change the density. Change the density and, you know, you'll supply twice as quick. It makes no sense to me. It's a classic mistake because of the simplicity you were talking about. People see a high rise. It looks like a lot of dwellings, right? But it's a lot of dwellings per unit of land. What we care about is the number per period of time being added

to make sure it's sufficient if we are concerned about supply. Yeah. Yeah. Final pushback for you, Anne. I'm conscious we haven't spoken much about the United States in this conversation, but I was wondering what you made of the study by Albert Saez from a few years back where he used satellite data to construct estimates of the amount of available land around major US cities. And essentially, he found that cities that were constrained by bodies of water or steep slopes that meant that they couldn't spread out very much had systematically higher house

prices what do you make of that and how does it jibe with your theories i mean i can't recall that one uh in any great detail i mean there's a lot of studies that try and do similar kinds of things. And, you know, there's a few things to say about it, right? One is that at the very most basic level, yes, obviously, no one's denying that there's a relationship between supply of houses and prices, you know, as we said. So that's the first thing. The problem is they get this sort of magnitude, the order of magnitude wrong. But the second thing is there's lots of fancy econometrics that's done with all sorts of confounding variables and all sorts of emitted variables. Basically, they're saying, trust me, I'm a magic econometrician i've done this model it's great it's perfect and and i'm like look let's use some basic econ 101 theory the accepted theory of

housing house pricing in the literature let's just use that theory and then let's look at some basic data let's not over complicate this there's no need to get into the, you know, I'm a magician stuff. We just need to keep it simple. And when you keep it simple, it becomes very hard to, to explain these things away. I mean, you know, you see it in, you see it in, I'm not an expert on any US cities, but just, you know, people talk a lot about, you know, what Atlanta and San Francisco and the differences between them. But I mean, if you, if you just take the data on their rents

and their median incomes in those cities, you can basically explain what you're seeing there with nothing more fancy than that. I don't say that like that's the entire story, but like to a first approximation, it looks like median incomes in san francisco have absolutely skyrocketed in real terms in recent decades so rents have too so prices have too and there might be some of the expectations bubble type behavior that karen

talked about earlier on top but it's not clear to me that uh you know there's a slam dunk story about a supply shortage here um and you know you can play the same story the other way for places like Atlanta. So I just think we need to be convincing. Supply shortage advocates need to be able to, let's just explain the simple stuff first, and then we can get on to more fancy stuff later and i think that's the problem that there's no engagement with the more simple simple story and there needs to be yeah i've i've read that paper i've had uh referee reports come back to me and say why

didn't you cite this paper it's become infamous um but you know they do the same thing they use house prices and we know house prices, the capitalized net rents that are affected by interest rates and taxes, and you have this halo effect to the tier one cities, and all this other baggage. And, you know, some of the variables they use, I just think, well, I could have selected them to make it anything I want as well. I've been through that paper in detail. But of course, in the US, they have this whole Harvard A. Glaser School of Thought, this whole machinery that supports this story. So it becomes popular. I'm going to quote to you about that in the US, about this sort of- And of course, when you say Harvard Glazer School of Thought, you're referring to Ed Glazer, the

renowned real estate economist at Harvard University. The renowned real estate economist who writes stuff that people in real estate and planning just rub their heads, they bang their heads heads together and go does this guy know anything about real estate um you know it's madness so i have a paper critiquing one of his methods and this is this will just get to the point about what i mean that you know it's not the validity of the argument they didn't use rents they use prices they missed all these other factors you know there's a lot going on can they they explain the simple stuff? They say, they tell a story that suits their tribe. Let me quote to a comment I got back from a journal reviewer of a

paper I did critiquing Glaser. Glaser and Giorco, who wrote this paper, Glaser and Giorco, I'll quote, have both done a lot of good work. This strand of the literature is an aberration. So the profession's prior is that Glaser and Giorco are right and Murray is not. To move that prior, Murray has to be succinct and serious. Succinct because nobody is going to start reading a long paper by someone they think is a kook. And serious because Murray must prove himself part of the brotherhood,

not an outsider or rabble rouser. That's literally, that's word for word. I've got to join the Brotherhood, worship Ed Glaser, and then you will consider that he was full of crap when he wrote that paper. This is the reality of it. It's mad. They're like, yeah, you're totally right that what they did was stupid it's wrong two people have already said it's wrong everyone

who knows anything thinks it's wrong but you've got to suck up to him because we've got a club who likes saying this thing and it suits our professional interests so you know i think there's a lot of that in the housing supply story, and I've probably been going on about it too much. I think there's a lot of that, and that's why it's kind of interesting what the Bank of England's now done. Now they've got two separate bits of work. They've published two separate research teams that have basically come out and said, you know.

So I've explained the simple stuff without some complicated model i mean we've we've done quite a lot of econometric modeling in previous papers but i just felt like you don't get any cut through with an econometric model that tries to explain this stuff better because it's just my magic versus your magic and who cares so you need something that's just based on the simple story um but what's interesting is that then the bank has gone and taken that and gone, okay, let's try and model that more formally. And now they're sort of saying there's no evidence of a supply shortage having driven this.

And it'll be interesting to see whether that shifts the brotherhood story because I think it was until recently completely unanimous among academic economists that this was the explanation and now it's very far from that and most public high profile public economists in the uk are starting to say you know it's not that it is an interest rate story so it may change i can only hope we're just a few years behind you because our central bank is doubling down on their brotherhood worshipping and replicating more of Glace's failed methods and doubling down on the supply story. So I've got my fingers crossed that maybe when we can travel again, I'll take a tour to the Bank of England and share some ideas.

Yes. What's also interesting is that David Miles, who's one of the former Monetary Policy Committee members who wrote the latest paper, certainly in the past, I think he's been on record as saying, you know, it's a supply issue and things like that. So, yeah, he's shown a lot of kind of uh um kind of flexibility in trying to you know look at this afresh and that kind of thing and it's quite that's quite encouraging

really because i think i've been involved in a few discussions with him and he's um he's always been pretty pretty pretty open-minded and and you know quite flexible about it but so many other people just not exhibiting any kind of uh you know, willingness to look at things again. Do you think, Ian, there's a series of reports, what do you call them in the UK? A couple of famous ones looking into housing supply. We call them like... Yeah, there was a...

Lewin report and another one. Do you think they had much of an effect on, I guess, looking more deeply and unpicking the story, or do you think they mostly reinforced it, the supply myth story? Sorry, do you think there are some that said, that articulated the supply myth? I'm asking whether you think those, yeah, I'm asking whether there was the Lewin report.

I know there was about three of them in the late, what do we call the noughties, the late noughties and early teens. And they all looked at this housing absorption rate and whether there's sufficient housing supply. And I noticed that those reports were a lot more open-minded than many of the ones I've seen here from our Productivity Commission in 2011, Reserve Bank and things. Do you think they had much of an effect,

or do you think it was really the Bank of England got lucky with a few researches who were just sticklers for the evidence and went out? So yeah the the the let win review was actually two years ago it was quite recent but it was basically it was basically trying to get at the point that you articulated that why is the build-out rate so slow um so it they kind of accepted that basically the the largely unspoken premise of that is like, it's not really about how many permissions we're issuing. There's plenty of them. The problem is they're not building out fast enough. Why is that? And broadly, you know, not in quite the same terms,

but it basically says what you're saying that, you know, there's the, they're worried about, they don't want to have a fire sale, there an absorption rate uh they can handle and it doesn't go into the stuff which i think is much more behind it which is the sort of stuff you've written about about um you know managing hedging and managing risk over the long term and all that stuff but it's basically um pointing it's basically uh a tacit admission, I think, that really is not going to do the job. Well, that's my impression. You know, you have to read between the lines of these things. And for someone who wasn't there to be in the policy debate,

it felt to me like it was a bit of a tacit admission. But then often I've seen tacit admissions get talked up as, you know, the previous myth through the media. So, you know, hopefully we'll have some of those key moments that shift our thinking here. Look, I think after this coronavirus crisis, the Airbnb, you know, the volatility that's going to come, there's going to be a lot of scope for rethinking

and having real frank, hard look at things and dropping all those sort of deeply held stories and myths. So, yeah, I've got my fingers crossed. We live in hope. Yeah. Final question because I'm conscious of time and I know you're in the middle of your work day there, Ian, especially. But essentially, we've been backward looking in this conversation so far and thinking about

what has caused and what can explain house prices in Australia and the UK. I want to talk about forecasts uh finally and the australian housing market has been very fertile ground for lots of headline grabbing forecasts over the years um especially around claims that it's a bubble. I myself was very bearish on Australian house prices beginning in 2017 and was still very bearish in 2019 until APRA, that's Australia's macro prudential regulator, until they backflipped and removed the minimum serviceability buffer. But more broadly, the Australian housing market

is sort of regarded in hedge fund circles as the widowmaker has been for many years because a lot of macro funds have betted against it for so long, but it just, it never seems to deliver the crash that all the housing bears are eagerly awaiting i remember um a report that jonathan tepper and john hempton famously produced well it was tepper's report i should say in 2016 it was titled i know a guy who can get things done and it was based on a trip they did around western sydney where they were investigating

loan underwriting standards um hempton actually came on my podcast last year. John's a fund manager, hedge fund manager, and told the story of how they went undercover to these banks and mortgage brokers posing as a gay couple to see how disproportionate a loan they could borrow. And I was always struck reading that report that TEPRA produced. There was a lot of like reasoning by analogy. And, you know, these are some of the valuations we've seen in previous housing markets that ended in crashes. And, you know, this is the

story in Ireland, in Spain, in the United States, or going back further, this is what happened in Japan or in the Scandinavian countries in the late 80s, early 90s, looking across many of the famous housing bubbles of history and then using almost like, I guess, a base rate approach or what Danny Kahneman would call like a category view or an outside view to form the basis for a forecast on the Australian housing market. And I always wondered whether given the non-stationarity of these time series, like so many of the parameters have changed over the decades. We've spoken about many of those changes, interest rates or, you know, just the size

of households or population growth or even just narratives more broadly. In recent months, I've kind of had serious reservations about like the base rate approach for thinking about where house prices will go. And I guess to cut a long story short, my question for both of you is, what classifies, in your opinion, as an appropriate forecast when it comes to a housing market? Like, what is something that is intellectually defensible

when it comes to a prediction about house prices? That's a question. Now, I'm not sure whether this is exactly answering it, but I guess the first point is that almost all house price forecasts are not intellectually defensible. So I don't expect you to screw that. And I guess to the extent, you know,

I suppose there's two things you can do to get a headline. If you're some sort of estate agent or whatever, you can do some kind of momentum based guesswork. And maybe that's not a bad thing to do, right? You just say, well, last year they went up 5%, so this year we think they'll go up 5% again. Great. So the only thing that it's,

I think the only thing that it's in any way really possible to do is to have some kind of medium-term forecast. You can probably do that with some value but i think the value only comes from spelling out the channels and your view on on them so i would never bother to make a forecast of what uk house prices are going to be in five years time i've been wrong so many times before that i'm not going to be right now um but i can say that you know like if you think about the major drivers well what one of you think about the major drivers well

what one of the one of the major drivers is houses and household numbers well that's gonna that's hardly gonna change right it's gonna tick along maybe the surplus will grow a bit tiny downward pressure on prices incomes that's the big unknown at the moment but there could be quite a big shock certainly in short terms of incomes that could take a chunk out of house prices in in a short period interest rates well it looks like they're staying low for a very long time now so that's the biggest uh driver and i don't really see i mean you can certainly tell stories where you get some inflation spike because of a supply side shock and all the rest of it um so we could be in that in a world where interest rates start to rise but rise but you need to be convincing on that story before you said that prices were going to fall a lot

because of that and then there's regulations how much is that going to change who knows and then there's narratives and you know I think you can imagine you know some of these narrative stories particularly around cities like London might might be punctured, particularly given the nature of coronavirus and its population proximity. And it could really turn the narrative into reverse. So I think you've kind of put those things together and you kind of get a sense of the balance of risks coming through each of those channels. And then everyone can form their own view on them. i don't think it's worth putting a number on so i guess a roundabout way of saying it i suppose is what's an intellectually defensible forecast is probably one that doesn't involve a number but it just involves a bit of reasoning so sorry about that yeah great no no that makes total sense and cam um look the defensible one

is i have no idea um but i i, I guess I just agree with Ian there. You've got to get the orders of magnitude right on what these drivers of prices are. A lot of people go, well, we're going to keep having population growth, so that's going to support prices. I'm like, well, yeah, I guess it sort of does in a way because of buying, but, you know, we're building enough houses. Maybe it only works through the story of population growth in Sydney and Melbourne. So maybe the mechanism is not that there's a lot of people and not enough houses.

It's actually like we believe that. It's wrong. But because we believe it, we're willing to pay a higher price. I've always thought that. And I think, yeah, just getting the orders of magnitude of the effects right. I think I agree that low interest rates is the reasonable forecast. I always call the monetary policy is a ratchet, and it works by expanding the debts and making it more difficult

to raise interest rates the next time. And then you lower them and you expand it, and it makes by expanding the debts and making it more difficult to raise interest rates the next time. And then you lower them and you expand it and it makes it more difficult. I think looking to countries like Japan, who've had a big demographic shift that's coming, I think it's worth having in the back of your mind that a lot of the richest homeowners are going to die in the next 20 years

and that the attitudes and you know stability of work and all the rest of the potential buying pool might be different so apart from these short term or short to medium term you know interest rates um you know regulations taxation of home ownership whatever whatever the case is, I think it's worth having in the back of your mind that in 20 years there's going to be a lot of forced turnover of housing from a large pool of homeowners to a small pool of potential buyers. And that's the thing that I keep in the back of my mind

and I think if you're looking out past 10 years, you should think about that. And I guess in Tokyo, for example, you've also got the impact of that fact of changing demographics on the narrative combined with the searing experience of whatever, 89, 90, you know, probably conspired to make a very powerful narrative, I suspect. It's basically impossible to model. So forget about it. I remember speaking with somebody in finance about how the narrative changed in Tokyo where you had the bubble years where property was a fantastic investment, obviously, and everyone was buying it. And then more recently, you could get brilliant yields in Tokyo

and you ask people why they're not investing and they say, well, prices always go down. Why would I invest? Right, yeah. Look, and I don't, look, well, we should maybe come back to this in 20 years, but that could be like the norm in a lot of the current developed rich old. This, you know, we'll be looking back and laughing on new yorker it's where it's where they used to think prices only went up how silly were they yeah yeah it might it might happen i think

you just you know just just be prepared that there's that these are large um tsunamis of change that are inevitable and that they're coming. So, you know, the average home ownership of people over 60 is something like 82%. You can correct me if I'm wrong. It's much, much higher than the potential buyers under 40. Right. Yeah.

And so, and they that group also owns multiple more investment houses so we'll see

either the wealth will concentrate or spread through their families or they'll have to be passed around

we'll have to check back in in a few decades then but until then ken murray in mohern thank you so much for joining me thanks joe thanks guys thank you so much for listening i hope you enjoyed that conversation as much as i did for links and show notes for everything we discussed you will find those on my website, josephnoelwalker.com. That's my full name, J-O-S-E-P-H-N-O-E-L-W-L-K-E-R.com. I also want to draw your attention to

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