increasing housing affordability by identifying and monitoring property cycles

Increasing Housing Affordability by Identifying and Monitoring Property Cycles

16th Annual European Real Estate Society Conference24-27 June 2009 – Stockholm

Richard G ReedDeakin University Melbourne 3010 Australia

Email: richard.reed@deakin.edu.au

Hao WuUniversity of Melbourne 3010 Australia

Email: haow@unimelb.edu.au

• Housing stress and affordability• Cycle theory and analysis• Melbourne case study• Methodology and analysis• Findings and conclusions

Introduction

Table 1. Housing Stress for Households and Individuals

Affordable (3.0 & under)

Moderately Unaffordable

(3.1-4.0)

Seriously Unaffordable

(4.1-5.0)

Severely Unaffordable (5.1 & over)

Total Median

Australia 0 0 3 24 27 6 Canada 1 15 5 4 34 3.5 Ireland 0 0 2 3 5 5.4 NZ 0 0 1 7 8 5.7 UK 0 0 6 10 16 5.2 US 7 59 23 16 175 3.2 Total 8 74 40 64 265

(Source: Cox et al. 2009)

Table 2. Housing Stress for Households and Individuals

2001 2002 2003 2004 2005 2006 All Household 10.6 10.9 11.2 11.5 11.5 12.3 Individual 8.7 9 9 9.4 9.3 9.9 Owners Household 5.3 5.4 5.6 6.1 6.4 8.1 Individual 4.8 4.8 5 5.5 5.9 7.2 Renters Household 23.9 24.4 25.3 24.8 24.3 23.1 Individual 20.1 21.6 21 21.4 19.9 18.4

(Source: Marks and Sedgwick 2008)

 “Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar character with amplitudes approximating their own” (Burns and Mitchell 1946, p3).

Figure 1. How the Building Cycle Works

(Source: Barras 1994)

Real economy Property market money economy

Economic up-turn Credit expansionIncreased proeprty demand

Supply shortage

Rising rents / falling yields

Economic boom Building boom Credit boom

Increased supplyEconomic down-turn (+) Slankening demand Rising interest rates

Falling rents / rising yields

Recession Property slump Credit squeeze

Table 3. Summary of Cycles per Suburb

Total number of suburbs 138 Suburbs with one cycle 138 Suburbs with two cycles 36 Suburbs with three cycles 10 Suburbs with four cycles 4 Suburbs with five cycles 2

Figure 2. Amplitude of the First Cycle for each Suburb

0.00E+00

2.00E+11

4.00E+11

6.00E+11

8.00E+11

1.00E+12

1.20E+12

1.40E+12

1.60E+12

Suburb

Sp

ec

tra

l D

en

sit

y

Table 4. Cycle Characteristics

Range (yrs) Average (yrs) 1st property cycle 6-40 39 2nd property cycle 4-24 5 3rd property cycle 2-5 3 4th property cycle 3 3 5th property cycle 2 2

• Understanding cycles will reduce risk and increase housing affordability

• Cycles are evident at the micro level

• Cycle length and amplitude vary

• Most expensive suburb has the largest shock

• Inner-city suburbs have multiple cycles

• Spectrum analysis is not common for property cycle analysis

• Further research required re: correlation with demographic characteristics

Conclusions and Further Research

Increasing Housing Affordability by Identifying and Monitoring Property Cycles

16th Annual European Real Estate Society Conference24-27 June 2009 – Stockholm

Richard G ReedDeakin University Melbourne 3010 Australia

Email: richard.reed@deakin.edu.au

Hao WuUniversity of Melbourne 3010 Australia

Email: haow@unimelb.edu.au