With the prices of homes in many Australian suburbs rising beyond the reach of many wannabe home owners, the RBA has singled out an unlikely solution.
In a speech to real estate experts in Sydney on Tuesday, the RBA’s Luci Ellis hinted the spread of single-origin coffee beans and organic grocery shops could help undo Australia’s housing bubble.
That’s right. Hipsters, trendy boutiques and babycinos have helped to push house prices out of reach for many wage earners, but could, if they spread far enough, do the reverse.
“In the space of a few decades, suburbs like Paddington, Newtown and Balmain in Sydney or Fitzroy and Northcote in Melbourne went from ‘scary’, to edgy, to trendy, to pricey,” Ms Ellis explained. The problem being that it took decades.
The current house price surge, she explained, was partly caused by too many people trying to buy too little land. While Australia has a lot of land, it’s not all equally desirable.
“It’s place – location – that really matters,” Ms Ellis said.
“If we think back to boom–bust episodes of the past, whether in land for new development, railways or prime office buildings, in every case you can see people trying to get their hands on the best locations … The same holds true for more recent times, and for residential property. ”
The recent housing boom in Sydney illustrates her point. While the whole city has risen, the more gentrified inner city has risen faster. In 2006 a house in the inner part of Sydney would fetch two houses in the outer part. Now it is worth 2.4. It’s a similar story in other capitals. (See graph right.)
This is hardly news to people who know real estate. The one truth in the real estate game is the following: location, location, location.
So when might gentrification cause that “bust” that followed the booms she described?
Not straight away, Ms Ellis said.
“The supply of good locations is more or less fixed in the short term … Newly built property is simply not the same as the existing stock, because it’s somewhere else.”
How babycinos can help
For now, there’s no reason for prices to fall. The long-term is different.
“The set of good locations does change. Improving transport infrastructure can certainly help here; the process of gentrification is probably even more important.”
It is amazing to hear the RBA say gentrification can do more for improving “good” land supply than transport infrastructure. But it is certainly the case that inner city suburbs are considered very desirable.
Some terrace homes in Melbourne’s Fitzroy that once housed factory workers are now worth a million dollars and have celebrity owners.
They buy in Fitzroy because of its proximity to the centre of Melbourne, and because of access to strips like Gertrude Street, where you can get, for example, white miso cured salmon with pickled cucumber and daikon, seaweed butter and croutons at a café open to midnight.
The availability of such meals is a metric the RBA might like to keep an eye on as it tries to guess future house prices. They should expect availability to spread because the list of suburbs that are counted as gentrified or gentrifying is certainly increasing.
The term has even been applied to Blacktown, 34 kilometres from the centre of Sydney.
Time will tell if Blacktown becomes a gentrified suburb. Presumably if it becomes gentrified, the whole of Sydney has been. That could take a while.
And that’s the point the RBA is ultimately making. The risk of housing boom and bust would be lower if we could gentrify faster or supply desirable land faster.
Property markets are inclined to get “strong, but perhaps temporary, price increases in the face of increases in demand”, the RBA’s Ms Ellis said. “The inherently sluggish supply of location strengthens this [boom-bust] dynamic.”
So if we could open desirable new inner city suburbs as easily as we can build big housing estates on the fringe, the house price bump would be absorbed a lot more easily. Ms Ellis – to be clear – knows this is not possible, and was using her speech to warn against over exuberance and a possible future bust.
However a lot of developers have been exuberantly trying to create huge gentrified suburbs – by building apartment towers in the inner city. While they do have great access to the inner city, apartments are rarely seen as being as desirable as houses.
In fact, some property players are predicting an apartment oversupply and a price crash.
That might slowly deflate housing prices. Or it might deliver the opposite effect to what the RBA was describing. Instead of a slowly increasing supply of nice suburbs, we could get a rapid surge in towers that end up cheap and undesirable.
That outcome could be the opposite of gentrification.