Weekend Reading & Selected Links
Happy weekend! Here are some links to things I've been reading that you might also enjoy:
- My new podcast conversation, with Peter Tulip. At the bottom of this email, I've included one key excerpt from the conversation. It's long but I consider it new and important.
- 2016 Bryan Caplan post on 'The Missing Moods'.
- 'The End of Children', a recent Gideon Lewis-Kraus article.
- 'Land Use Regulations and Fertility Rates'.
- What's up with American state capacity?
- What's going on with British state capacity?
- Stripe's new Economics of AI Fellowship.
- Taylor Swift's infosec (thread).
Have a great weekend,
Joe
Excerpt from my podcast with Peter Tulip
How quickly would a supply-side agenda get us to the desired equilibrium? And what does the transition look like?
JOSEPH WALKER: Okay, so I want to talk about your policy goal and your transition plan. Just to briefly understand your policy goal—and a 30-second answer here is plenty—but do you want to see prices fall, or do you just want to see growth slow?
PETER TULIP: I would like housing to be much more affordable and that is essentially the ratio of prices or rents to incomes. You could achieve big improvements in affordability by holding prices and rents flat at their current nominal levels and let incomes keep rising by 3% or 4%, 3% a year.
We should be so lucky to get that. Current policy is not delivering that. So I'd like us to be doing a lot more talking about long-term objectives. I'm not sure it's relevant. Yeah, I mean I would like, and I think we ultimately could get, very big increases in affordability. But to be relevant, the main question is we need to be building more. And so we need to have some downwards pressure on prices and rents, which we don't currently have.
WALKER: So earlier in our conversation, you mentioned that to get those kinds of 40% price falls in Sydney and Melbourne, it would require increasing housing supply by, did you say, 10 to 20%?
TULIP: Yep.
WALKER: How many years would that take, roughly speaking, if we got rid of those zoning regulations on the chopping block?
TULIP: As a simple calculation, if we increase the housing stock 1% a year, it would take 10 to 20 years. That's doing it over and above what we would normally do.
WALKER: Okay, so over and above the current baseline?
TULIP: Yeah. But even that is extremely ambitious. I mean, the national target that we talked about before is an increase of 200,000 above baseline over five years. So that's what, 40,000? Just 40,000 a year.
WALKER: So if we removed all of the zoning regulations on your chopping block, how quickly do you think we would get that 10% to 20% increase in supply?
TULIP: No-one has bothered to do that calculation, I think for good reasons.
WALKER: What are the reasons? It's just not realistic?
TULIP: It's not realistic and it's not on the agenda, and no-one is proposing it. I'm not proposing substantial or immediate changes to the legislation, or the process, or how we approve houses. All we need to do is relatively simple: under existing processes, we need to set higher targets for local councils that add up to 1.2 million homes. So that's being done in the New South Wales and Victorian governments.
And that just means local councils need to start approving a block of flats in every third or fourth suburb every few years. Relatively modest changes in the built form of our city will over time amount to a substantial increase in supply. And … there are good reasons for changing the process, but they're not necessary to deliver housing affordability. We just need councils to stop saying no and start saying yes.
And that can be achieved. I think what the New South Wales and Victorian governments are doing is basically right. They've said they're setting ambitious targets for councils. The next step that they need to take is to announce how they will be enforced, which hasn't been done yet. And there is a real worry that once these plans are lodged before councils, councils will start saying no. And then you do get a fight between the state government and the councils. And it's not clear that the state governments have the stomach for that.
WALKER: Right.
TULIP: So I'd like them to pre-announce automatic remedies for councils that don't make satisfactory progress towards their targets.
WALKER: Yeah, but even if we do achieve that national cabinet target of 1.2 million new homes over five years, you're saying that it's only going to lower prices about 5% relative to the counterfactual. And that is ambitious. I mean … I buy your point that realistically that's probably as good as we can expect from our political system. I'm now just kind of feeling a bit deflated listening to you. It feels like we're actually not going to solve the housing crisis, all the people who say we should be cutting immigration are probably right … that seems like the only solution.
TULIP: So 5% reduction after five years, but then you do it again the following five years and that adds up to a 10% reduction and so on. I mean, this was a problem that built up over generations, so it is going to be very difficult to solve it quickly. It will take time, particularly as it requires a very substantial increase in our construction industry, which has difficulties. I mean, we can do it. Other countries have done it; Auckland doubled its construction workforce. But it will take time, and requires changes to training and immigration and accreditation and wages.
WALKER: Do you think over those five-year intervals we can ratchet up the amount of supply we provide each time?
TULIP: I would hope so.
WALKER: Ok. And do you think that's more likely than the opposite? I guess maybe people come to accept it, or people realise it's working, so you can add more supply each time.
TULIP: That's a good question. I mean, so what's happened in Auckland is [that] you've had two effects. One is people have seen that it works, that rents have risen substantially less in Auckland than in other New Zealand cities. But at the same time you've got a backlash, that some people think that the new buildings going up are ugly, and there's this fear of change element we talked about before. And it very often happens that when you change what people are used to, they're uncomfortable with that, and they object. And how those two balance, we don't know.
WALKER: Right. So it certainly feels as though achieving that 1.2-million-homes-over-five-years target is going to require a lot of political will. If we want to do even better than that, it's going to require even more political will.
I want to talk to you about what your transition plan is. Because the expectation that your home equity values will increase handsomely over the course of your lifetime is so deeply entrenched in Australian society and so entwined with how people plan for how they'll build wealth, how they'll retire, that it seems like you need to have that conversation with them and offer them some kind of alternative.
Let me just kind of quantify how deeply entrenched this really is in Australian society. So obviously there's a home ownership rate of about 65%. I think that equates to about 10 million Australians who own their own homes. Our residential real estate market amounts to about $11 trillion in total, which is about three times the size of the total value of the pool of superannuation.
And people view their homes as nest eggs. Older people think that's what they'll use to retire on when they downsize. Younger people think that's how they'll build wealth. Obviously, tax concessions enable this. Primary residences aren't subject to capital gains taxes. They're not subject to the pension assets test. You also have a lot of mum-and-dad property investors. So on the last ATO data, about 15% of Australian taxpayers own at least one investment property.
Half of those taxpayers are negatively geared. So in other words, most of them are probably only invested because they're expecting capital appreciation. And property is the largest source of net capital gains in Australia. I think it accounts for about, again, on the last tax data, maybe about 40% of capital gains. So property is the way the middle class builds wealth in Australia.
What's the Peter Tulip alternative?
TULIP: You're talking about this as though it's somehow normal and natural, which it's not.
WALKER: I don't think it's good.
TULIP: I mean, this is mainly a Sydney culture, where the affordability problem is terrible.
WALKER: Okay.
TULIP: And the culture changes depending on what the property market does. Okay, it is true that housing is also very expensive in the other big cities. But as you go to small cities and regional centres, the housing becomes affordable. And those people are perfectly normal and natural, and they have a sensible culture; it adjusts when the prices adjust. And I don't think people that live in regional towns—where you can get a large family house for just a few hundred thousand dollars, just a fraction of what it costs in Sydney—that they somehow think their wealth accumulation is unnatural or there's something wrong with it. I mean, they save in other ways.
WALKER: That's great, but I think you still have to convince the homeowning constituency. Or politicians will need to.
TULIP: That is definitely true. You mentioned before that two-thirds of Australians own their own home. And … a lot of people think that as a result, you won't get a majority voting for lower house prices. And there's a strong element of truth in that.
But what it misses is that those homeowners care about their kids, and they are aware that the housing market we have at the moment is locking their children out of the opportunities that previous generations had, and that that's unfair. And it's also driving the kids away from the neighbourhoods [where] they grew up.
And so the wealthy homeowners in Sydney's affluent suburbs, the north shore, eastern suburbs, inner west, have to ask themselves the question: “Do I want to drive to Bathurst to babysit the grandkids?”
And many of them will not want to do that. And so they will want a housing market that lets the rest of their family live near where they grew up.