Economic myths - another dose

Population growth

I have written at length on why population growth does not improve welfare. Mark Crosby over at Core Economics reiterates these fundamental arguments.

The pro-population growth arguments are theoretically flawed, and empirically dismissed. Below is a chart of the relationship between population growth and GDP per capita for around 200 countries and localities, showing a distinctly inverse relationship. If I was in the business of improving welfare, low population growth would be a key avenue.

Another emerging myth is that population growth will decrease interest rates. Renowned property spruiker Chris Joye has created plenty of media fanfare recently with his spurious connection between population growth and interest rates. This table shows the interest rates in 23 countries, and if I’m not mistaken, shows that countries with the lowest population growth (and highest GDP per capita) also have the lowest interest rates.

Food

Food myths are widespread. The environmental movement wants us to believe that vegetarianism is better for the environment and that ‘organic’ (what does that mean?) food is more nutritious and can solve hunger around the world. The agricultural lobby would have us believe that food self-sufficiency is of utmost importance, although their argument is shallow at best.

The latest myth to be busted is that chickens are pumped with artificial hormones and steroids to make them grow faster and larger. However, it appears that hormones are not part of the poultry picture at all.

While I firmly believe that raising animals for food should be conducted in a humane manner, those who push for change would garner more support if they were fully informed of current practices - their message could then be taken seriously by industry and government. Furthermore, the organic food movement could concentrate on promoting farming practices that reduce externalities, as a result of chemical use for instance, and improving land quality. The incentives for such change often align with the long term goals of the agricultural industry and may attract wider public support.

Safety

Under the rebound effect banner I have discussed how some innovations to improve safety can backfire if peoples’ behavioural response is to take on more risk. For example, the vigorous uptake in sunscreen use has led to a culture of sun exposure, offsetting the intended consequence of reduced skin cancer rates. The name for this behavioural response in the context of risk taking is the Peltzman Effect.

You can find this type of response in broad range of situations. Most recently, in trials of automatic lane correction technologies in cars, one participant noted:

...that she would love to have this feature in her own car. Then, after a night of drinking in the city, she would not have to sleep at a friend’s house before returning to her rural home

Minimum wage

The business lobby loves the textbook response to minimum wage laws, but even world renowned economists are sceptical.  No doubt this debate will continue.

Stay informed for Election 2010 - Labor Factions: Basic Questions Answered

By Andrew McMicking

Why does the ALP have factions? What are the benefits?

Factions have been set up to serve a useful purpose in the ALP. In brief they:

• Allow support to be readily marshalled behind candidates and ideas.
• Provide for a sharing of power between different philosophical or ideological interests in the party.
• Serve as a mechanism to settle disputes.

Any organisation or group of people – be it the workplace, a golf club, church group or school classroom – will always see groups of like minded people associate more readily together. The ALP has recognised this and, through factions, has formalised such groupings. Members and unions in the ALP can now formally apply and join a faction. Each faction usually has a membership list, executive, AGM, bank account, fundraising activity and negotiation committee for dealing with other factions. This formalised nature allows the principle of solidarity to be applied i.e. a decision is made within a faction and all members are bound to abide by that decision.

What is Right and what is Left?

You often here the terms ‘left wing’ and ‘right wing’ applied to factions by both the media and in public discussion. In political/philosophical terms, ‘right wing’ means you tend to take a more conservative and pragmatic view of policy issues, whereas ‘left wing’ means you tend to take a more reformist or progressive view. Support for a budget surplus, tax cuts as opposed to more government spending, a close defence relationship with the US, free market economics, less red tape for business and uranium mining is regarded as ‘right wing’. Support for greater government spending on health, education, disability services and infrastructure, an Australian Republic, recognition of the rights of indigenous people and other minority groups, and opposition to the war in Iraq is regarded as ‘left wing’.

What do we currently have in Qld? Federally?

The ALP, in each State, have factions which can be classified as either Left or Right.

In Qld we have The Left as a left wing faction. However we have two right wing factions: Labor Unity known as the ‘Old Guard’ (refer page 3) and Labor Forum known as the ‘AWU’ faction (as the AWU, Qld’s biggest union, dominates this group). These two factions are now in close alliance together and many view them as one right faction. They technically remain separate entities, though, and many in Labor Unity would not see themselves as a right wing faction, but more in the centre between The Left and Labor Forum.


Key Labor politicians and unions who are members of each faction in Qld include:

• The Left – Anna Bligh, Rod Welford, Margaret Keech, Stephen Robertson, Senator Claire Moore, Senator Jan McLucas, Cr Helen Abrahams, the Missos Union, the Qld Nurses Union, the Manufacturing Workers Union, the ETU and the Transport Workers.

• Labor Unity or Old Guard – Arch Bevis, Kevin Rudd (although he claims to have resigned now), Peter Beattie, Andrew Fraser, Rob Schwarten, Judy Spence, Cr Shayne Sutton, the BLF and the National Union of Workers (the Old Storeman & Packers).

• Labor Forum or AWU – Craig Emerson, Senator Joe Ludwig, Yvette D’ath, John Mickel, Paul Lucas, Cr Victoria Newton, Cr Milton Dick, the AWU (Secretary Bill Ludwig) and the Shop Assistants Union.

In other States, different labels are also applied. For example, in NSW the right wing faction of the ALP call themselves ‘Centre Unity’. Present/past members include Premier Morris Iemma, Graham Richardson, Paul Keating and Laurie Brereton. In Victoria we have Labor Unity (including Simon Crean), an AWU faction (including Bill Shorten) and the Left (including Julia Gillard). There is also a ‘Pledge’ faction opposed to privatisation policies.

When the Federal Caucus, National Conference or the National Executive meets, the different groupings come together and assemble as either left or right. Remaining (few) members are either independent (like Bob McMullan) or the remnants of the Centre Left faction (formed by Bill Hayden in the 1980s and previously very strong in Qld, SA and WA).

How did modern day ALP factions start?

The 1970s and 1980s saw factions formalise in the ALP, particularly in the 1980s when Bob Hawke came to power and Labor was in government in 4 of the 6 states. Some rationality and control was seen as being needed to apply to party processes, to ensure Labor enjoyed a successful period in power (which it did enjoy). The party did not want a repeat of the turmoil and chaos that marked some periods of the Whitlam Government.

In some States, reform or federal intervention was often needed first to pave the way for factions to operate. This was particularly true in respect of Qld and Victoria. In both states a small clique of labor/union interests wielded extreme power. Factions were a way the party could be opened up and power shared more equally. Factions allowed the bulk of branch members and affiliated unions to have a greater say in party affairs.

What does the term ‘Old Guard’ mean? Was Peter Beattie in a faction?

Queensland provides a ready example of how factions came about in the ALP. Back in the 1970s and early 1980s the Qld ALP was an unelectable basket case (we only returned 11 members at the 1974 State election and 2 members after the 1977 Federal election). A key reason why we were seen as dysfunctional was that the party was dominated by a small clique of unrepresentative union leaders – unions affiliated with the old Trades Hall. People such as Jack Egerton (Boilermakers), Neal Kane (ETU) and Arch Bevis Snr (Transport Workers). These people and others were part of the (now) notorious 7-member ‘Inner Executive’ which ran administration of the Qld ALP during this period. It meant power was not shared with the vast majority of party members, and no free flow of ideas within the ALP was occurring.

Reform efforts were led in the late 1970s by people such as the late Dr Dennis Murphy, Peter Beattie, Manfred Cross and Bill Hayden. It led to intervention by the National Executive during 1979-1980. Reforms included:

• An expanded State Conference, with Conferences eventually occurring annually.
• An enlarged inner executive to be known as the Administrative Committee.
• Elections to party positions, such as State Conference delegates, coming about by the proportional representation system – much like how we vote in Senate elections. This ensured one group or clique in the party could not monopolise power.

These reforms were important as it opened up and democratised the party more. Factions formed so groups of like minded people could gain representation in different party forums. At the time factions included the Socialist Left (now part of the Left), the Centre Left (has ceased to exist in Qld) and the AWU (with this union readmitted to the Qld ALP in 1979, after leaving in the late ‘50s, a move generally seen as a positive and ‘healing’ step for the party.)

The Jack Egerton-cum-Neal Kane group which dominated the ALP fought tooth and nail to stop reform efforts in the ALP. Other members associated with this group included Jack Camp, Greg Moran and Arch Bevis (now MP for Brisbane). Because of this they were known as the ‘Old Guard’. Interests associated with Dennis Murphy and Peter Beattie were known as the ‘New Guard’ as they fought for a new administrative direction for the ALP.

Reform did occur in the QLP ALP as the National Executive had the power to intervene. The Old Guard reluctantly accepted the change (although some didn’t) and formed their own faction: Labor Unity. However this group, which now includes Arch Bevis, Andrew Fraser, Michael Dart and Kate Jones, is still referred to in the party and media as the ‘Old Guard’.

Of note, Peter Beattie ended up joining the Old Guard in 1988, having previously been part of the Reform Group, then the Centre Left faction, and then the Centre Majority faction (which was an ill-fated alliance with the AWU). This move virtually guaranteed him preselection in the safe Labor State seat of Brisbane Central – an area dominated by Old Guard members.

Have the reforms of the early 1980s helped in Qld?

The reforms of the time helped the Qld ALP do much better at the 1983 State and Federal elections. At the March 1983 Federal election the ALP won 10 of the 19 seats on offer in Qld. An influx of talented Labor members also occurred in the State Parliament at the October election that year – people such as Wayne Goss, Pat Comben and Ann Warner (with Paul Braddy entering Parliament a few years later). It paved the way for an eventual State election victory under Wayne Goss in 1989 (where Peter Beattie won the seat of Brisbane Central). In the past 10-20 years we have seen high quality people enter State Parliament and climb the ranks - people such as Anna Bligh, Rod Welford and Paul Lucas. The Qld ALP scored massive State election victories at the 2001, 2004 and 2006 polls. At the Federal level, the ALP did superbly well at the 24 November 2007 poll. We received a 7.5% swing to us in Qld and captured 15 of the 29 seats. Wayne Swan, Senator Joe Ludwig and Craig Emerson are all key Ministers in (Qld) PM Kevin Rudd’s Cabinet team.

Although not perfect, our party is more open and involved compared to the dark days of the 1970s and early 1980s. We are widely seen as a professional and well-financed campaigning outfit. We have a sophisticated system in place that incorporates an annual State Conference, monthly Administrative Committee meetings, Regional Conferences, Policy Committees, and geographic-based ALP branches - with FEC, SEC and MEC campaign units.

What are the problems with the factional system?

The formation of factions in the 1970s/80s was seen as a way to combat then problems. However, since then factions themselves have presented new problems for the party:

• People who join a faction come to regard it as more important than the party as a whole. They work exclusively for the faction as opposed to promoting good policy and good candidates for the ALP. They see other factions or independent members as ‘the enemy’ rather than the Liberals, Nationals and One Nation.

• Factions often collude together to ‘annoint’ people for parliamentary and council seats (particularly safe ones) leaving party members with no say in choosing a candidate.

• Factions tend to see parliamentary/council seats as ‘theirs’ - it is up to them to decide a successor candidate. Like the House of Lords, a seat is seen as belonging to one faction, and it is theirs to pass down among their own from one generation to the next.

• Appointments to ministerial posts and seats are based on factional service and longevity - rather than talent, merit and community service.

• Independent or unaligned party members are regularly left out of party decision making and preselection processes. They have few opportunities for public office.

How do I join a faction?

To join a faction, a party member is usually invited to by an existing faction member who has noticed their service or activity in the party. If this doesn’t occur, a person should simply contact the relevant organiser at party office aligned with a particular faction

Is residential property Super?

The retirement plans of working families may soon succumb to Australia's residential property mania. If Chris Joye had his way, Australian super funds would invest in the emerging residential equity market to diversify their portfolios against highly correlated domestic and global equities markets. The argument for this move is summarised below.

Investors, such as super funds, get extremely low-cost, highly enhanced and very long-dated exposures to what has, during the past three decades (including the recent calamity) been the largest and best performing of all investment classes: residential real estate. Historically, investors have only been able to access highly concentrated, risky development-style holdings comprising small parcels of properties that incur heinous transaction costs of about 12.5 per cent. By investing in a portfolio of thousands of shared equity interests, super funds could avoid all of these costs and secure the low risk diversification that they have never had before. Independent actuarial analysis suggests that about 15 to 30 per cent of all super fund capital should, in theory, be allocated to housing, in part because its returns are so unrelated to the performance of other investments. Compare the 50 per cent plus losses in shares and listed property trusts in the past year with the fact that the RP Data-Rismark Australian House Price Index has tapered by only -0.8 per cent. (emphasise added)

Is this idea worth embracing? Or to put it another way, how many people would actively choose to invest superannuation in the residential property market?

Super funds investing in residential property equity face a couple major of problems in my view:

1. decreasing the diversity of investor portfolios, and
2. moral hazard associated with residential equity finance.

To begin a proper analysis we need to take think in terms of investor portfolios, not super fund portfolios. Outside of their super fund, Australians have other investments - mainly in residential property. Already we see that most (70% home ownership) households have plenty of exposure to this apparently superbly stable market, particularly those close to retirement age.

But Joye's argument also rests on the fact that typical investments in housing are lumpy - people own just a single house rather than a share of the housing market. An individual home can be high risk due to its location, but the housing market is much more diverse and is thus far less risky. If super funds invest in residential equity schemes they are reducing risk against not only other equities markets, but from households' own lumpy property investment. It sounds almost too good to be true.

Opponents of this idea also have some fair points to make. Directing more investment at the housing market will increase market risk and fuel speculation.

There may also be severe moral hazard in the market for residential equity. Only people who view their property as below average, and whose money management is rather poor (since they are negating part of the investment benefits of property ownership yet still leveraging wildly), may take up equity finance, thus reducing the diversification benefits that were the initial selling point. Equity finance is an easy way to hedge against a falling property market.

While the residential property index has low volatility (and therefore low risk if you believe in that type of thing) it also has very low returns. Although equity finance is structured to take twice the capital gains (if you take out 10% equity finance when you buy, you owe 20% of capital gains when you sell), it misses all the 'dividend' of rent. Sellers have less incentive to hold on through a market downturn if losses are shared. They also have less incentive to maintain the property, since they take a smaller share of capital gains.

Further, those who are willing to take the risk can already invest in property via a self-managed super fund - further exposing them to residential markets.

All I see from residential equity investment is a small upside with a potentially huge downside. If, from this point on, house prices track wages, which slightly edge ahead of CPI, the best outcome for a residential equity investor is about two to three times CPI, or 6-9%. The downside is all there in the event of a residential price bubble deflating, and it may be many years before positive returns eventuate.

Because an equity mortgage typically supplements a debt-leveraged purchase, they are second in line for cash upon sale. People taking out equity finance will probably not fully understand the downside risks of having this funding arrangement.

For example, if you borrow 60%, equity finance 20% and put up 20% of your own, in the event of a 40% drop in the value of the home which forces you to sell, you will still owe the equity financier 12% of the home purchase price and the mortgagee 60%. The equity mortgage is not real equity – it does not share in leveraged losses. The possibility that a proportion of equity mortgage holders will default on the balance owed, was not recovered from the sale price under such a scenario, adds to the downside risks.

In the end, if owning an equity share in the housing market as a whole provides such benefits, why would anyone buy their own home in the first place? Wouldn’t they simply want to lend to others under this fantastic scheme? Some people may, and some people do. But the significant moral hazard problems may mean that the diversification benefits so loudly promoted are not all there. Furthermore, super fund investments in residential equity will divert an even greater proportion of the typical retiree’s funds into the housing market, negating the apparent diversity benefits.

Skilled labour immigration removes incentives for Australians to invest in education

The shrill from commentators warning of Australia’s apparent skills shortage is deafening. But there are a number of reasons why this claim, and the inevitable recommendation for government to increase quotas of skilled migrants, is flawed, and why the solution is not in the best interests of Australia in the long run.

For the acute observer the transparent falsehood of the claim jumps right out at you.

… skilled labour in an area like project construction is an international problem, so poaching what we need from overseas is not going to be easy.

ACIL Tasman points out that LNG project specialist workers are globally mobile, moving from site to site (and often between projects at varying stages of development) – wherever their services command the highest price. As the consultants warn, opting for less-experienced personnel carries with it the dangers of higher error rates in construction and resulting delivery delays and still more expense.

Translation: if you want the skills you need to pay.

A government with backbone, and an eye on long term prosperity, would tell industries crying poor to sort it out themselves. Large mining and gas projects have very long lead times - long enough in fact to train some of the existing workforce in skills that may be required for future projects. If you need the slam-dunk of skills and experience, you are inevitably poaching people from another project - experience only comes from a finite number of places.

LNG project specialists, discussed in the linked text above, can only develop specialised skills and knowledge of LNG projects by actually working on LNG projects. A company aware that the industry is expanding rapidly would be wise to have succession plans and internal training programs in place to plan for this highly predictable competition for workers.

Domestic companies have numerous options available to ensure adequate skills are brought to a project, but costs are kept to a minimum. Labour efficiency could be improved through improved task delegation for example. Administrative tasks can be time consuming, and an administrative assistant could be shared amongst a few technical people to greatly improve their productivity. Other technical innovations may also be possible in addition to the paying more to attract Australian workers back from abroad.

What is most bizarre about most of the skills shortage claims is that there is never a mention of salaries. In claiming any shortage in a market economy, neglecting prices will undermine your analysis. Furthermore, a recent study suggests that immigration itself can accentuate the problem:

LESS than a third of people from non-English speaking countries who migrate to Australia on skilled workers' visas are gaining work in their fields and many of them are adding to the skills crisis they were brought in to solve

Government intervening to increase immigration quotas of skilled workers results a number of problems. First, governments inevitably pick winners and losers. The industry that lobbies hardest to get their skills on the list can expand without having the added cost of paying their technical people higher salaries. It also raises the question of why we should limit immigration quotas to highly skilled people. Wouldn’t letting anyone through the door keep the wages of unskilled people down as well? Wouldn’t that also keep inflation down, and interest rates low? At least that’s the argument of one infamous spruiker.

Second, and in my mind more important for the long run, people who invest the time, effort and money to acquire skills need a return on that investment. Why would I spend over $100,000 and seven years of my life studying to be a doctor when I will end up earning the same as a plumber? Not until I have invested more than ten years of training into a specialisation will I end up charging a premium for my time. Acknowledging the importance of this return to education highlights a key feature in labour markets relevant to this debate.

Part of the return on education investment for Australians is the opportunity it creates for working abroad and earning a much higher salary. Doctors can easily be attracted to work in the US or the UK or for those with linguistic skills, continental Europe. The same applies for doctors and engineers from India and South East Asia. Their investments in education have opened the door for them to come to Australia. Put simply, skills in demand get raided by countries that can offer better pay and quality of life. Australia is a middleman in a global game (and our departures statistics confirm this - apologies for the age of this data).

This global competition for skills is no secret. A 2004 Senate inquiry into the ‘brain drain’ was commissioned in order to understand the problem better.

Many of these expatriate Australians are young, well-educated, highly skilled, and keen to see the world and to make the most of the opportunities presented to them. This has led many to fear that Australia is experiencing a ’brain drain’ of its best and brightest workers, with damaging consequences for Australia’s economy and society.

A key finding of this research was that Australia is in fact experiencing a ‘brain gain’ – more highly skilled workers were arriving rather than departing. Unfortunately, this simply supports the argument that returns on education for Australians are far greater if they move abroad, and that our skilled migration system is providing returns for those educated in less developed countries. If we continue to perpetuate this shuffling of skills around the globe, Australia will always struggle for skills and may become completely reliant on imported skilled labour.

We do have an advantage though. Educational services are one of Australia’s biggest export industries. Our universities are full to the brim, but not with local students keen to pursue careers in Australia. Foreign students and those looking for returns on the education investment abroad are becoming more common – the incentives are stacked in their favour. We need to attract domestic students and then keep them here to retain and grow our skills base in the long run.

Allowing more skilled migration will keep the wages premium low, and further remove incentives for domestic students to invest in these skills. Decreasing skilled migration will force business to place a wage premium of those skills it values most highly, which will in turn attract students to these professions.

While this is quite clearly a chicken and egg problem (did we need to attract skills because skilled Australians were leaving, or did they leave because we imported so many skills and decreased their domestic returns to education), a government, if it had the will and the backbone, could incrementally step back skilled migration quotas and other sponsorship arrangements, thus forcing salaries higher and temping some of these Australians home, and many more into our universities.

As a member of this group of relatively young and highly skilled professionals I can attest to the growing numbers attracted overseas by high salaries and fashionable lifestyles. There are apparently more than one million Australians living abroad, and a large proportion of them have taken the skills they acquired at home on the road. Because of the higher salaries, having skills in demand can offer a far better lifestyle even in the most expensive cities in the world. My network of friends and family here in Brisbane is diminishing by the month as the world tempts them away – will I be next?

Remember, well being is not about how much business is in your country, or how quickly you can dig things out of the ground. Well being is reflected at the level of the individual. One key aspect to this the real wage, or how much stuff you can buy with an hours work time. In the long run this key measure will improve if we can train and retain highly skilled people who will be driver of future productivity improvements. In the short run, businesses will need to adjust their operating structures to more effectively utilise these necessary skills as their wage premium grows. Immigration is not the problem here, but twisting the composition of new Australians in favour of those already possessing skills simply exacerbates the ‘brain drain’ and reinforces a reliance on imported skills.

Generations of housing affordability

The degradation of housing affordability is widely acknowledged, but unfortunately mainstream explanations miss the fundamental stories of easy credit and tax rules encouraging property speculation.

One of the best collections of Australian residential property analysis on the web has emerged at The Unconventional Economist.  Leith's latest article explores changes to housing affordability since the 1970s and the key drivers behind the change. 

He summarises the article as follows:

• It is the demand for, and supply of, credit that is the key determinant of house prices. Whilst demand-side factors such as tax concessions, benign economic conditions, and population growth might increase people's willingness to borrow for property, ultimately, if you cannot obtain the finance, you cannot pay a high price. Similarly, tight housing supply would have little impact on house prices when credit is not readily available.
• Lower interest rates and easy credit do not make houses more affordable. Rather, they quickly get capitalised into house prices, increasing the amount that home buyers must borrow.
• When examining interest rates and their effect on housing affordability, it is real interest rates (i.e. the mortgage interest rate less inflation) that matters. Whilst mortgage interest rates averaged a seemingly high 9% in the 1970s, due to high inflation (averaging 11%), real interest rates were negative, resulting in borrowers' mortgage debt being 'inflated away'.
• Importantly, be very weary of offers of more credit and the promise that it will "improve housing affordability". Any scheme that increases home buyer's borrowing capacity, such as shared equity loans and the Never Ending Mortgage, will instead fuel further house price growth, thus eroding affordability.
• Beware the property spruiker. Always be sceptical when reading property-related articles in the press, or when listening to politicians talk about housing affordability. Whilst they might, on the surface, sound reasonable, they are often talking their own book. Instead, think critically about their motives and who their constituents really are.

Election 2010 just got serious!

Effects of dwelling composition in the property market

Much popular property market analysis based on flawed principles.  A secret to identifying rubbish analysis is to note the following meaningless buzzwords and phrases; underlying demand, housing shortage, urbanisation or population growth.

These buzzwords are based on fallacy.  The problems they have in common is that they are quantity based (thus ignore prices), and they ignore changes in the composition of dwellings.

Commentators calculate underlying demand by dividing the quantity of population growth in a given period by the average occupancy rate.  This is supposed to give a measure of quantity of dwellings that ‘should’ be constructed of the period.  Unfortunately, the occupancy rate itself changes over time.  It has been declining dramatically for three decades.  If the trend continues we may soon be able to calculate a housing shortage even if we build a new home for every new person!

Calculating a ‘housing shortage’ is then a simple matter of subtracting the number of dwellings constructed over a time period from the underlying demand.  The graph below shows the result of this calculation for Australian from 1994 – 2009 using quarterly data (and the occupancy rate at each quarter – not the current occupancy rate).

Spruikers use this measure to justify the likelihood of price gains, however the price changes observed seem to in fact be inversely correlated to underlying demand.  We had a price boom from 2002-2004 at the same time as a housing surplus!

These measures also fail to acknowledge the heterogeneity of housing.  Counting a studio apartment and a 5-bedroom house as equal in the calculation of a housing supply is mere fallacy.  Clearly these two different dwellings will house different numbers of people.

Furthermore, the size of existing homes change over time with renovations and extensions.  It has been widely acknowledged that many home owners have chosen to renovate instead of relocate in their search for more spacious accommodation.  It is easy enough to imagine a street of heritage homes, for example, being renovated and extended to allow a large increase in the population of the street.  No new homes, plenty of new people, and no housing shortage.

What we have seen in the latest property boom is a continuation of the trend to build larger homes with more bedrooms, while the occupancy rate continued to decline.  At some point you would expect the occupancy rate to bounce back before we all ended up living alone with three spare bedrooms.  And it did. 

The ABS summarises the long-term change in dwelling composition and occupancy as follows:

The average number of persons per household has declined from 3.1 in 1976 to 2.6 in 2007-08. In the same period, the proportion of dwellings with four or more bedrooms has risen from 17% to 29% and the average number of bedrooms per dwelling has increased from 2.8 to 3.1.

In 2007-08, most households enjoyed relatively spacious accommodation. For example, 86% of lone-person households were living in dwellings with two or more bedrooms; 75% of two-person households had three or more bedrooms; and 35% of three-person households had four or more bedrooms. Over a fifth (21%) of three-bedroom dwellings, and 8% of four-bedroom dwellings, had only one person living in them

Important demographic reasons explain why we should expect the declining occupancy trend to come to an end.  The aging population including baby-boomers downgrading is a key way in which this will occur (others include a rise in share housing by the forever young Gen-Y who are delaying family formation).

For example, the parents of a family whose adult children have moved out with friends or partners might find that the upkeep of a large house conflicts with their ‘grey nomad’ retirement plans.  They can sell their 5-bedroom house and move into a new 2-bedroom unit, pocketing the price difference for their retirement. 

In this scenario the construction of a 2-bedroom apartment resulted in a 5-bedroom home being available to meet the housing needs of population growth.

The final fallacious buzzwords that provide property bulls justification for their position are urbanisation and population growth.  If we were discussing any other good or service the pattern of habitation would be of little consequence to the expected prices.  Increased urbanisation doesn’t drive up the price of food, petrol or any other goods – nor does population growth.  

Increased urbanisation can lead to increased land prices, but that doesn't necessarily lead to increases in median housing price measures due to compositional change.  Because new dwellings in outer areas are typically inferior locations to existing homes, the prices one would expect for identical dwellings in new estates would be lower.  Since there is more land at the fringes of cities, we would expect that proportionally more cheaper dwellings to be added to the mix of housing.  Prices for existing homes can rise, but due to the greater proportion of housing in outer areas in the mix, a price index can remain flat at the same time.

The table below shows a hypothetical city made up of identical dwellings, where new supply is mostly added at the fringes.  Even though the price of each individual dwelling increases 10% over the period, a city-wide mean price index would remain flat due to the greater proportion of cheaper dwellings.  The same effect can happen with new apartments in traditional detached housing areas.

Also constantly overlooked is the fact that urbanisation can only occur AFTER new urban dwellings are constructed unless driven by an increase in occupancy rates.  Until the end of 2005 prices was rising fast, urbanisation and population growth were occurring, but the occupancy rate continued to decline.  

Analysis of the property market should focus on returns in comparison with other investments, with renting, and historical returns.  Counting dwellings, and implying demand from population growth or urbanisation is problematic due to compositional factors.

Automation and the housework rebound effect

As I have previously argued, innovations that aim to save time, increase safety, decrease energy consumption can be subject to flow-on rebound effects that lead to the opposite result. These counter-intuitive results have lead to ineffective government intervention and bizarre social norms.

A typical challenge to the idea of rebound effects goes like this.

“If a business has to pay each worker more due to government intervention on wages, they are clearly going to employ fewer employers. Are you challenging the Law of Demand? If the price of labour is higher, demand will be lower.”

No, I don’t argue that if we hold everything in the world outside of an individual business constant that the business will employ more people. I argue that to believe the world is held constant robs you of the vision to see flow-on effects to society and the ability to estimate the real net effect of a policy or action.

Today's rebound effect concerns time saving and housework.

Day time television is full of advertorials explaining the time saving benefits of new appliances to homemakers. An automatic slicer, a no hands blender, a steam iron, a self wringing mop – the list goes on. A key selling point of all these goods is the time saving. Each task - cleaning, slicing, ironing - can now be performed in a fraction of the time.

Economists would have us believe that it is this very type of innovation that is leading society to a future of leisure filled days. Keynes predicted, is his 1931 essay “Economic Possibilities for Our Grandchildren,” that his grandchildren would spend most of their time at leisure, finding ways to “pluck the hour and the day virtuously and well”.

But the present is not the Keynes’ future. Hours of work per household continue to climb with the rise of two income families and reduction in the physical demands of work, while hours of housework remain much the same as they did a century ago.

Maybe the ignorance of rebound effects has lead economists to be far too optimistic.

So what is the real net effect of time saving innovations to housework tasks? The following excerpt from The Big Switch explains how the electrification of household chores failed to deliver its time-saving promise due to rebound effects in the form of evolving social norms. Ironically, these effects are completely in keeping with the Law of Demand and also happen at a micro level. As the cost (in time and effort) of household chores declined, we demanded more of them.

The utopian promise of electricity seemed within reach inside the home. Many women believed that new appliances like vacuum cleaners and washing machines would, as General Electric advertised, transform their homes from places of labour into places of ease. The home would become less like a sweatshop and would become, as Thomas Edison predicted in a 1912 article on "The Future of Women," "a domestic engineer [rather] than a domestic labourer, with the greatest of handmaidens, electricity, at her service." The first widely purchased appliance designed specifically for housework, the electric iron, seemed to fulfil this expectation. Women no longer had to heat a heavy wedge of cast iron over a hot stove and then drag the red hot chunk of metal over a piece of clothing, stopping frequently to reheat it. They could just plug in a lightweight appliance into the wall. During the first two decades of the century, scores of homemakers swapped their old-fashioned irons for modern electric ones. A photograph of the time shows a General Electric employee standing proudly beside a small mountain of discarded flat irons.

As it turns out, though, the electric iron was not quite the unalloyed blessing it first appeared to be. By making ironing "easier," the new appliance ended up producing a change in the prevailing social expectations about clothing. To appear respectable, men's and women's blouses and trousers had to be more frequently and meticulously pressed than was considered necessary before. Wrinkles became a sign of sloth. Even children's school clothes were expected to be neatly ironed. While women didn't have to work as hard to do their ironing, they had to do more of it, more often, and with more precision.

As other electric appliances flooded the home through the first half of the century - washing machines, vacuum cleaners, sewing machines, toasters, coffee-makers, egg beaters, hair curlers, and, somewhat later, refrigerators, dishwashers and clothes dryers - similar changes in social norms played out. Clothes had to be changed more frequently, rugs had to be cleaner, curls in hair had to be bouncier, meals had to be more elaborate, and the household chine had to be more plentiful and gleam more brightly. Tasks that once had been done every few months now had to be performed every few days, When rugs had had to be carried outside to be cleaned, for instance, the job was done a couple of times a year. With a vacuum cleaner, it became a weekly or even daily ritual.