The goal in own housing worsens our inflation problem

Not surprisingly, starts peaked in June 2021. Applications for the HomeBuilder grant closed 14 days into the quarter.

But starting to build a house is not necessarily finishing it a few months later. The real value of work done on new private homes per quarter rose just 15 percent for the nine months through June 2021. Nine months later, it was up 12 percent compared to before the pandemic.

For the most part, the homebuilding industry kept working during the two big shutdowns. It seems that, between them, the nation’s macro-managers took over an industry that was doing quite well, sped it up tremendously, but failed to build many more houses or employ many more workers.

Perhaps he soon ran into supply constraints: a shortage of building materials and adequate labor. I don’t know if the industry was privately lobbying governments for special assistance, or if it didn’t have to. Perhaps the pollies, federal and state, instinctively rushed to his aid.

But I wonder if the builders don’t want to get much bigger. There are few industries more cyclical than homebuilding. Builders are used to construction activity going up and down and prices doing the same.


When demand is weak, they try to keep their team of workers and members together by lowering their prices, perhaps even below cost. Then, when demand is strong, they compensate by charging whatever the market will bear.

It is the height of neoclassical naivete to think that it never crosses the mind of a “company” that exists outside the pages of a textbook that manipulating supply might be a profitable idea.

So perhaps builders found the idea of ​​raising their prices more appealing than the idea of ​​building a bigger business to accommodate a temporary surge in demand caused by politics.

They may have learned a lesson from those real estate developers with large undeveloped land holdings on the fringes of big cities. Dr Cameron Murray, a research fellow at the University of Sydney’s Henry Halloran Trust, has shown that private bankers limit the regular release of land for development in a way that ensures the market never overflows and prices continue to rise.

So, back to our inflation problem. Whenever people say that the recent big rise in prices is largely due to supply disruptions abroad, that they can’t be influenced by anything we do and will eventually go away, the econocrats always reply that some price increases are the result of strong domestic demand. .

That’s true. As I wrote last week, it seems clear that many of our companies, large and small, have used the cover of large increases in the cost of their imported inputs to add a bit of luck by passing them on to consumers.

But I left for today the big headache of excess demand that adds to price increases: the price of building a new house (excluding the cost of the land) or major renovations. This accounted for nearly a third of the increase in the consumer price index in the June quarter and jumped more than 20 percent over the year to June.

The price of newly built homes carries a whopping 9 percent weight in the CPI basket of goods and services, making it the single item with the highest weight in the basket. This implies that new housing costs have added almost 2 percentage points to the total rise of 6.1 percent.

When economists worry about the domestic contribution to rising prices, they never admit how much of that problem has been caused by their own mismanagement of the pandemic.

In fact, when people argued that the main thing that further reduction in interest rates would accomplish would be to increase house prices, the Fed was unrepentant and argued that increasing house prices and housing demand was one of the main “channels” through which lower rates lead to increased demand.

But the crazy thing is that this weird way of using the cost of a new home to measure the cost of housing for homebuyers – which, I seem to recall, was introduced in 1998 after pressure from the Fed – exaggerates the true cost of people with mortgages, especially at times like these.

Few people buy a new home, and even if they do, they rarely pay cash instead of borrowing the cost. This is one of the reasons why the office No view the CPI as a good measure of the cost of living, but does it publish separate cost-of-living indices for certain types of households.

Ben Phillips of the Center for Economic Policy Research at the Australian National University used the bureau’s cost-of-living indices to calculate that around 80 per cent of households saw a cost-of-living increase. down the rise in the CPI of 6.1 percent. The average (typical) increase over the past year was 4.7 percent.

What trouble do the econocrats get us into when they use housing as a toy for macro-administrators?

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