Wasteful investment not the cause of housing un-affordability

March 20th, 2007

Share |

Today, we saw this news report, Housing fall to keep costs up, which said, ?THE number of new dwellings built in Australia fell at the end of last year, which would work to keep housing unaffordable, analysts say.?

This is an example of misinformation that is perpetuated by housing industry ?analysts? through the mainstream media. That ?analyst? was confused between cause and effect and hence, misapplied the law of supply and demand.

Why did Australia?s housing become unaffordable in the first place? As we said before in The Bubble Economy, it was the negligent oversupply of money and credit that gave rise to the housing bubble, resulting in housing un-affordability. When money was too cheap, it artificially induced a boom in demand for housing. Builders, upon seeing the rise in price as a result of the artificial boom, rushed to construct more homes than what was really required by the underlying demand. As a result, wasteful investments were made by the housing industry. Such mal-investments eventually had to be liquidated when (1) the artificially induced demand subsided as a result of the drying up of liquidity (brought about by rising interest rates) and/or (2) the economy did not have enough resources to complete the mal-investments, which was manifested in symptoms of rising cost and lower margins.

Our analysis, which is based on the Austrian School of economic thought, is well validated by the news report itself: ?The industry is continuing to face all sorts of pressures from high land costs and a lack of interest from the market in general.? For more information on the Austrian concept of mal-investments, please refer to our previous article, The first step in an economic slowdown?mal-investment in capital.