Five thoughts on the property market from the RBA

The Reserve Bank of Australia’s head of financial stability Luci Ellis offered her thoughts on Australia’s housing markets in a speech last month entitled Space and Stability: Some Reflections on the Housing-Finance System.

In the speech, Ellis noted increasing coverage of housing markets in conversations about financial stability around the world. She urged her audience to remember residential are physical structures, located on fixed pieces of land, and emphasised the importance of urban structures to financial stability.

Here are five main points to take away from her speech:

1. Jobs are becoming more centralised
   
   “Jobs are concentrated in the central business districts and the areas immediately surrounding them,” noted Ellis.
   
   “The power of the central place is even more striking if we directly contrast where the jobs are with where the employed people live,” she said, with reference to the graph below, which shows the ratio of jobs in an area to employed people living there.
   
   
   
   “Places with ratios well above 1 are employment centres, attracting commuters from elsewhere in the city, or even from outside its limits. Places with ratios well below 1 are the commuter districts, the dormitory suburbs,” she explained. “As you can see, there are factory districts away from the CBD, especially in Melbourne, and office parks on the way out to Macquarie University in Sydney. But in all of these cities, the CBD is still the job magnet.”
   
   
2. Residences are densest around the CBD
   
   “The pattern of residence is similar, though not quite as pronounced,” said Ellis. “Population density is higher near the centres and declines rapidly.”
   
   “Some of the outermost districts still contain agricultural land and a good fraction of national parks, so it isn't surprising that population densities are low in these places. I find it interesting that even some middle-ring districts are not that much denser,” she said.
   
   She noted a trade-off between space and travel time, with 
   
   
3. …And that isn’t changing.
   
   “Part of the reason for the higher population density closer to the centre is historical. The inner parts of cities are older, built when we had to live more compactly. As incomes rose, people wanted bigger, nicer homes. As cars became more common, the cost of locating further out declined, and it became feasible to have those bigger homes,” said Ellis.
   
   “So newer homes further out tended to be bigger and sit on bigger blocks of land. Some of the older homes get renovated to be consistent with our higher modern incomes and aspirations.
   
   “But we don't see much expansion of block sizes in the inner areas. The land parcels stay small. Sure, it would be a legal hassle to consolidate land titles like that, but people generally don't even try. That is because they are trading off space against price and distance.”
   
   
4. The pattern is making non-capital city growth difficult
   
   Although some might expect that remote working would rise with the use of the internet, Ellis explained that “jobs are showing even greater tendency to congregate in existing centres.” And this is halting the expansion of regional areas."
   
   “I also can't help noticing how difficult it seems to grow the smaller cities in this country relative to the bigger cities. With the possible exceptions of Newcastle, Geelong and maybe Bendigo and Ballarat, few centres outside the state capitals have many corporate headquarters or other job magnets. These self-sustaining job magnets seem to be necessary to create the variety of job opportunities that would attract large numbers of former city dwellers.
   
   “Over recent years at least, these smaller centres had rates of employment growth and changes in employment-to-population ratios that were similar to or a little below those in the big cities, and a bit below those of inner-city areas,” noted Ellis.
   
   “At this rate, it will be hard for the smaller centres to start catching up with the bigger cities, relatively speaking. That means that if big-city housing prices should rise too high for some residents, smaller cities cannot provide alternative locations that are any more viable than they are today."
   
   
5. The dream of a backyard and picket fence may not be for everyone…but neither is the highrise.
   
   In her speech, Ellis said Australian cities should diversify the range of dwellings available, to ease financial and social pressures on Australians.
   
   “As a mode of living, low-density suburbia has its advantages,” said Ellis. But it does mean that distances are greater and almost every trip requires a car. The only alternative offered at the time of our first mass suburbanisation seemed to be the ‘tower in the park’, Le Corbusier's utopian dream of apartment living. But the reality turned out to be a nightmare of social isolation for the public housing tenants in those developments."
   
   She didn't advocate an end to low density detached housing, but instead said that a greater range of choices would help ensure financial stability for buyers.
   
   “I'm hopeful that the future brings Australians a wider range of places they would be happy to move to; different housing types for different family sizes and life stages; and a greater confidence that centres outside state capitals can offer the strong job markets and scope for entrepreneurship people need, and housing at a price they can better afford. 
   
   “That way, people can see an upswing in housing prices in the larger centres and say, ‘I don't have to buy into that. I don't have to stretch my finances’,” said Ellis. 
   
   “Australian household finances are not looking that stretched at the moment, and we'd like to see it stay that way.”
   

In the same speech, she urged first home buyers not to over commit themselves with large home loans. The Reserve Bank of Australia will make its June cash rate announcement tomorrow.