FROM THE EXECUTIVE DIRECTOR:

High property prices in Australia are being propped up by wide-spread policy, and reducing innovation in the economy.

Today, Chris Zappone, a journalist at Melbourne newspapers The Age, and Fairfax Digital, wrote an article today reporting on a Reserve Bank speech, which discussed house prices. The telling point is in the final paragraphs:

In the speech, “the RBA seemed reasonably relaxed on the issue of housing stress-debt suggesting that international comparisons are difficult to make and that households appear to have ‘the capacity to sustain’ relatively high house prices,” said RBC Capital Markets economist Su-Lin Ong.

“This partly reflects the RBA’s view  – highlighted in some of its other research – that those with the highest debt levels are generally best able to manage it, the impact of accumulated compulsory superannuation savings, and some factors specific to Australia which encourage the faster paydown of debt.”

University of Melbourne finance professor Les Coleman said rising house prices was asset inflation by a different name.

“The RBA talks up a storm about controlling inflation for good and proper reasons… it’s no different with assets.”

“If you have rampant inflation it induces people to make poor financial decisions.”

“High home prices sustainable: RBA”, 25th November 2009.

Both have a point. As it happens, Chris and I have had intermittent discussions on house prices.

My view, is that start-ups and innovation are lowered by high house prices. Partly this is informed by data from Demographia on housing affordability.

On the other hand, economist Hernando De Soto, makes the point that mortgaging houses is a source of business finance.

The key is balance. Policy favours housing investment over any other asset class.

My trend analysis is that median house prices optimally should be between 11 and 44% less, depending on where you live. This is based on 2 income households, a transition Australian society made previously.

My concern for Australia, is that tacit support for property prices is blocking productive use of the Australian economy and favouring short-termism.

So in my view, the United States, Canadian and West European cities – in general, with some exceptions – may well fare better in creating the next series of high-growth companies from today’s start-ups.

Those who would like a more-rounded view on which cities 2thinknow pick as potential innovation “winners”, in the next few years, can view in the Innovation Cities Index city rankings. Bear in mind these are rankings of cities with potential for broad-based innovation, not industry-specific.

The 2thinknow Innovation Cities Analysis Report outlines how finance and property, fits among the 162 innovation indicators, to lead innovation in cities.

Interested parties can contact 2thinknow to commission a specific innovation analyst report on how property prices effect innovation within their country or city.

Keep innovating,

Christopher Hire
Executive Director
2thinknow.