Fresh Economic Thinking

Taxpayers Alliance Chief Economist John Humphreys joins the FET podcast to talk all things tax. Is it possible to tax unrealised gains, as is proposed on superannuation accounts over $3 million in value? Maybe. But why bother doing it when it mostly changes the timing of taxation rather than the revenue? We speculate as to whether it is a daring political manoeuvre—propose something you know your opposition will find outrageous to trick them into arguing for exactly the tax setting you actually want.Enjoy this conversation on taxes, strange politics (where was this super-tax conversation pre-election?), my favourite topic of Effective Marginal Tax Rates, and more. Side note: One thing John and I have in common is that we both want to scrap the superannuation system. I explain my reasons in this article. As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.Theme: Happy Swing by Serge Quadrado Music—Creative Commons Licence CC BY-NC 4.0Interested in learning more? Fresh Economic Thinking runs in-person and online workshops to help your organisation dig into the economic issues you face and learn powerful insights. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

Given the Australian media's obsession with the housing crisis, it would come as a shock to many that the share of after-tax disposable income spent on rent by renter households is lower in 2025 than it has been for most of the last decade.But that's what ANU Professor Ben Phillips found in his latest research on rental affordability (you can find it here or download it below).In today's FET video podcast, I chat with Ben about this surprising data and how we can make sense of it in light of current housing “crisis” debates. A key part of the story is this chart. It shows the share of disposable income (after-tax) income spent on housing for renter households. Notice that the most unaffordable period by this metric was 2012-2018.The situation is not great for renters on the lower incomes. There are people struggling at the bottom of the income distribution to keep up and rent where they previously could. But they are struggling to compete with those household who can pay higher rents. One interesting part of our discussion was the big difference between the price growth in rent advertisments and price growth of rents paid by all renter households. The chart below, from Ben's report, shows that advertised rents (in this case using Corelogic's data) diverge from rents paid by all renters in a cyclical way, and by a surprising amount, with advertised rents being between 10% and 40% higher than rents paid by all renters. Currently, the gap is near record highs. The existence of a gap comes from the fact that turnover in the rental market is about 2.5% per month, or 30% per year, and the distribution is such that some properties turnover more than others and hence appear more regularly in the advertised rental figures. But why is the gap so cyclical?We also chat about the fierce media debate playing out around the proposal to increase tax on the gains in superannuation accounts for the marginal amount over $3 million, which is just the top 0.5% of accounts. This has been a hot topic online. We chat about the feverish and unhinged reaction to what is a minor tightening up of an overly generous tax break that affects very few people. And if you missed my recent deep dive into why scrapping superannuation could make us all better off, try this article. As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.Theme: Happy Swing by Serge Quadrado Music—Creative Commons Licence CC BY-NC 4.0Interested in learning more? Fresh Economic Thinking runs in-person and online workshops to help your organisation dig into the economic issues you face and learn powerful insights. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

There is an interesting debate taking place in urbanist circles. Is more density good for families because it helps reduce housing costs, or bad for families because it creates a lifestyle and environment that is not conducive to large families?Indeed, we might consider changing our policies and regulations based on what we think is the answer to this question. But do we have a reasonable answer?Daniel Hess runs the More Births Substack and is on Twitter @MoreBirths. Daniel has taken up the case against density because of its potential fertility effects and is my guest for this FET podcast video episode.Here is one of his articles on the topic.But Daniel is not alone in his concerns. The negative correlations between urban density and fertility are clear to many. In this episode, we discuss global and national fertility trends, and I push Daniel to justify why we should be concerned about these trends—after all, low-fertility places are the better places to live, have more opportunities for women, and many nations historically encouraged lower fertility to generate economic growth. In Hong Kong, the saying was “Two is enough”. In South Korea, it was “Stop at two, regardless of sex”. In Bangladesh, it was “One child is ideal, two children are enough”. Were they all wrong? I press Daniel to make the case for why low fertility is so bad, given that low fertility countries are generally the most desirable ones to live in. Here are three previous FET articles on the general topic, which show that I am not so concerned about declining fertility. A main issue Daniel identifies when it comes to the effect of housing density on fertility is the step-change in appropriateness of housing for families when increasing density from detached homes to apartments, even if the internal space in each dwelling is similar. Because of this, suburbia could be the secret sauce for high fertility. This makes intuitive sense to me.My own home is about 100 sqm internally, which is not too different from many nearby apartments. But it is on a 300 sqm lot and is therefore much more family-friendly than the 100 sqm apartments available in buildings just down the road. Maybe intermediate densities, like the small homes and townhouses that are more popular in new subdivisions these days, can still be as conducive to family formation as homes on large lots while economising on space and infrastructure. Unfortunately, this density is the most difficult to promote in existing areas where incremental change to much higher density and towers is usually the most economical for the property owner. We didn't have a chance to dig into the popular idea in urbanist circles that the market will accommodate all needs at all locations, but regulations prevent large apartments that can accommodate families from being built. If we could deregulate to unleash the large-format family apartment, then this fertility and density issue might be resolved. For example, here's one such statementThe fastest growing category of Toronto homes have zero bedrooms: Bachelor units grew by 28 per cent, jumping from 22,355 to 28,765."Basically, the only housing getting created in Toronto tends to be high-rise: 30, 40, 50 storeys," Mr. Moffat said. It's hard to put in units with three-plus bedrooms in those types of buildings.A mix of high land costs, restrictive zoning, using investors as preconstruction funders and high development charges pushes builders away from creating family-style units, according to Mr. Moffatt.I think such claims are 180 degrees wrong on the effect of regulations. Generally, if town planning rules limit housing types, they do so by preventing apartments so that detached homes are built instead, or requiring apartments that are built to be above a minimum size (or, in the language of The Great Housing Hijack, they restrain uses below the density equilibrium). But even having more three-bedroom and larger apartments would miss the step-change benefit of detached housing for families.Daniel comes down on the side of zoning regulations that promote detached homes where they would otherwise not be the market outcome. A key economic pattern that comes up in our conversation is that although young people have many detached housing options in smaller towns, they still commonly move to large cities and pay a premium to live in smaller apartments. For example, in Japan, small towns are giving away houses for free to try and attract families. In Australia, as in most places, housing is large and cheap in regional towns, yet the young people who grow up in those towns usually leave for higher-density places. Should we take this as evidence that low fertility and higher density lifestyles are a choice being actively made? If so, why is it bad?Finally, what of fertility policy?Should we pay a $5,000 per-child baby bonus, like Australia has done, and now Donald Trump is proposing? Or are social and cultural factors more important? After all, a lot of the decline in fertility was promoted through intentional moral suasion and cultural shifts, so perhaps this is the way it will reverse. I hope you enjoy the episode. I am keen to read comments from you all. As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.Theme: Happy Swing by Serge Quadrado Music—Creative Commons Licence CC BY-NC 4.0Interested in learning more? Fresh Economic Thinking runs in-person and online workshops to help your organisation dig into the economic issues you face and learn powerful insights. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

Was voting easy and efficient for you? This is something we should all appreciate. Australia's electoral commission makes voting easy. Our preferential system improves on first-past-the-post single-member electoral systems. And all of this happens quietly and quickly for $30 per vote, thanks to the Australian Electoral Commission.Together with Jonathan Gadir, we riff on the good, the bad, and the ugly of elections. As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.Here's some recent paid subscriber FET content you might have missed:Theme: Happy Swing by Serge Quadrado Music—Creative Commons Licence CC BY-NC 4.0Interested in learning more? Fresh Economic Thinking runs in-person and online workshops to help your organisation dig into the economic issues you face and learn powerful insights. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

Anna Samson has had a decade-long career in aid, was a US State Department-funded Fulbright Scholar, and has a PhD in international relations and American foreign policy.In this episode we discuss the inadvertent economic and political outcomes of foreign aid on receiving nations. What surprised me was Anna's view on the scale of the rent-seeking across the aid industry and the transformation of the aid project into one of strategic military and economic interests rather than one of humanitarianism.Apologies for the audio quality.Please read Anna's full article below about foreign aid, its failures, and its creeping national security objectives.As always, please like, share, comment, and subscribe. Thanks for your support. Find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts. Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0The United States has had its fair share of Presidential foreign policy doctrines over the years.The Truman Doctrine underpinned America's Cold War containment policy to stop the spread of communism and Soviet influence.After the 2001 terrorist attacks on the World Trade Centre, the Bush Doctrine brought us preventative military strikes and the ‘if you're not with us, you're against us' principle.Just over 50 days into his second term, the Trump Doctrine is shaping up to be ‘you can't make an omelette without blowing up the entire chicken coop'.Nowhere has this approach been more sharply felt than in the dismantling of USAID, a cornerstone of contemporary US foreign policy.Jettisoning USAID has achieved symbolic and practical purposes; it is both exactly what MAGA fans hoped for and what its critics feared: Trump embracing radical honesty in international relations by saying the quiet bits out loud and rupturing the mythology of the self-limiting guardrails on Executive power.Moments after his inauguration, President Trump, bolstered by Elon Musk's analysis of USAID as “not an apple with a worm in it [but] a ball of worms”, froze $60 billion in overseas development aid and then stood down 97% of its staff.Industry veterans highlighted the catastrophe the Executive Orders caused: polio vaccination programs halted, tonnes of food aid left rotting in warehouses in the midst of famines, and a stop on urgent humanitarian assistance delivered to hard-to-reach conflict zones.That's the problem with applying a Silicon Valley move-fast-and-break-things mindset to government policy: you can't just CTRL-Z your way out of any unintended consequences.The recent Supreme Court decision ordering the Trump Administration to immediately unfreeze US$2 billion in existing aid contracts only provides temporary reprieve for those relying on American development assistance. The ruling doesn't apply to billions in planned program funding or USAID jobs that have already been axed, both of which are the subject of separate legal challenges.To the President's detractors, gutting USAID is ideological and myopic. But it's also another example of Trump seeing which way the crowd is moving and running out in front.Indeed, rather than leaping to fill the void left by the US vacating the field, UK Prime Minister Keir Starmer announced a 40 per cent cut to his country's aid budget. France and the Netherlands are also cutting their aid expenditure by about a third.While Western aid workers are wringing their hands and UN buildings are lowering their thermostats as a cost-saving measure, the sector bears a great deal of responsibility for its own demise.With little evidence to show aid programs are delivering on their grand promises of economic prosperity and development, spending billions on aid is increasingly justified as a tool to advance donor countries' national security interests.This connection is not new: the modern aid system was built by imperial powers to help maintain influence even as their former colonial territories were achieving political independence.It should come as no surprise that many aid recipients are not exactly mourning USAID's downfall. They point to numerous instances where USAID used humanitarianism as a front for meddling in other nations' domestic politics.For all the talk of ‘empowerment' and ‘local partnerships', government-funded foreign aid is rooted in and continues to reproduce historical structures of resource extraction, dependence, market distortion and racism.Explicitly blurring the lines between humanitarianism and self-interest lays bare the iron fist of neocolonialism within the velvet glove of benevolence.From the perspective of donor countries, all this real-talk about interests over altruism requires the aid industry to demonstrate bang for taxpayer buck.It's no accident that among the first casualties in DOGE's USAID cuts were expat bureaucrats enjoying all the cushy accoutrements that a career in the aid industry guaranteed.Government donor agencies - including Australia's Department of Foreign Affairs and Trade (DFAT) — frequently administer aid money inefficiently and ineffectively; 40 per cent of Australian aid investments were rated as 'unsatisfactory' upon completion.If the aim of aid is to bolster our own security, not only should this causal link be established more directly, DFAT should explain why Australia funds aid over other defence spending with a clearer line of sight to maintaining the nation's middle power status.Current approaches to aid program evaluations, including in DFAT's most recent Performance of Australian Development Cooperation Report 2023-24, do not provide that level of accountability. Taxpayers are expected to accept measures like “capacity building” and numbers of individuals “supported” or “reached” in pursuit of development goals.USAID's abolition, while confronting in its audacity, should not be met simply with self-righteous indignation about the supposed nobility of aid work or showing how aid can be weaponised to undercut the West's rivals.Instead, it should be seen as an opportunity to rethink the whole foreign aid system. It's a chance to create a world where countries drive their own development and self-interested ‘generosity' and donor dependence are no longer required.Decoupling foreign aid from national security will allow this money to do what it does best: humanitarian action based on foundational principles of humanity, impartiality, independence and neutrality. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

Richard Tooth has a plan—save 300 lives a year on Australian roads. How? By using economic ideas to align risks and incentives better.Take a look at the chart below. People who die on Australia's roads are young. Preventing a road death would save 40-50 years of life on average. That's big. Cancer treatments typically save 4-10 life years, then we get five to ten times the life gains from preventing a road death as many deaths from diseases. I learnt from Richard that people will change their behaviour on the roads, either by driving more carefully, choosing a safer vehicle, or choosing not to drive at all, given the incentive to do so. But how to improve people's incentives? Richard argues we can do this by changing how we regulate insurers. Give the insurers the right incentives for road-safety and they'll encourage people to make better safer choices.And it works. He points out that relative to Australia insurers in the United Kingdom have greater – but still not optimal - incentives for road safety. In the United Kingdom insurers try to save money on payouts by offering discounted vehicle insurance to young drivers who opt in to telematics, a tool on your vehicle or phone that tracks your driving behaviour (braking, speed, acceleration, etc), which changes behaviour and only the whole reduces risks for all road users. Here's a working paper of Richard's about changing the way insurance functions to align the incentive of insurers with reducing road injuries and fatalities, using the insurance relationship to incentivise safer driving choices. It makes sense. Although I sometimes wonder whether such marginal changes make big differences, the fact that risk on the roads is heavily skewed by age and across people means that such incentives can have tangible effects on aggregate risks by focussing on those key people. To give a sense of the scale of the benefits, Richard reckons that such incentive changes through insurance could reduce the road toll in the range of 20% to 40%, saving 300 lives of the 1,300 lives taken on the roads each year and preventing a similar proportion of the 40,000 road injuries. In all, he reckons there are about $20 billion of benefits from better incentives to reduce overall road risks, while the cost of these changes would be extremely low. If you have an interest in this policy area, please reach out and I can put you in touch with Richard.For those who want to dig more into the topics we discussed, try these links* The 2021-22 Parliamentary Inquiry into Road Safety. Note its the Committee's Recommendation 26:The committee recommends that the Australian Government work with state and territory governments, the insurance industry and other road safety stakeholders to investigate opportunities to reform motor vehicle insurance and to develop a roadmap towards policy and law reform.The Government responded in October 2023.The Australian Government will raise this recommendation with the state and territory governments, who are responsible for compulsory third-party insurance.* The Bureau of Infrastructure and Transport Research Economics (BITRE) publishes an annual report that compares Australia's road safety performance with that of other OECD nations. Find it here. The BITRE also reports on the social cost of road crashes, and you can find that here.* We spoke of the Tullock Spike and how decreasing risks for drivers in the road makes them behave in a way that increases the risks for others. This article on the Peltzman Effect describes the incentives at play. As always, please like, share, comment, and subscribe. Thanks for your support. Find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

Paul Frijters runs Academia Libera Mentis from a castle in Belgium. After a distinguished academic career in Australia and Europe, he is creating an academic oasis in the Ardennes for thinking, learning and growing. I've written before about this project.Today, we reflect on five years of the corona panic debacle, the economic and social fallout we are still experiencing, and what we could have known early on but refused to collectively acknowledge due to the madness of crowds. We discuss in detail the enormous cost to our lives of lockdowns, the fact that the low-risk nature of COVID was clear early on from things like the Diamond Princess event, and how to minimise panic in the future when the unexpected happens. You can read the full story of my COVID experience in these two articles:Unfortunately, here in my city of Brisbane, we are going through another panic and lockdown. We are so far a week into a “cyclone lockdown”. There have been two days of school closures in a large part of the state, deferred hospital treatments, extra delays of construction work (beyond justified by the weather), and shortages at supermarkets (especially toilet paper, the preferred emergency ration).It is okay to prepare for potential power losses and strong winds. But “potential” is a key word here. Why did we panic early rather than waiting for better information? Conditional statements seem too advanced. Differential consideration of risks—based on location in this case, rather than age and health condition in the COVID case—seem too subtle. All I hear is that a risk is a risk, so stop complaining. The craziest part is how much people love it. Take action, any action. Will that action help? Who cares! It doesn't matter. And I fear that the collective impulse that makes for a rich and functional society is exactly the impulse that drives this behaviour. What else will we do to be part of the crowd in the next emergency?Paul predicted in 2022 that as a society we would learn that an instinct for such action has been nurtured and that new lockdowns would emerge. Here are some of Paul's early writings on COVID and the nature of the crowd reaction to it from 2020 and 2021 that we mentioned. * Here's a March 2020 assessment of the sheer scale of the human cost of lockdowns, border closures and other policy choices. * Here's an August 2020 prediction of a baby bust (with some hope of a small boom). * Here's a 2021 explanation of how many physical policies probably led to more virus circulation rather than less. * And here are some of Paul's predictions from the comments section of this article about the likely ways the NDIS will be rorted from back in 2016.As always, please like, share, comment, and subscribe. Thanks for your support. Find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

A few weeks back, I had engineer Ben Beattie on the podcast to explain some of the unappreciated costs of transitioning to a renewable electricity grid. Before this, Aidan Morrison had explained how many of the costs required to deal with variation in when and where energy is produced from wind and solar were excluded from the (in)famous GenCost report from the CSIRO. Today, Professor Mark Diesendorf, who has studied the electricity grid and energy markets for many decades, provides the counterargument to these claims and makes the case that renewables will be cheaper in the coming decade. A couple of insightful points I took away were:* “Baseload” generation still requires some backup for breakdowns and maintenance* Sometimes expensive electricity in countries with a lot of renewables is just measuring the expense of the country overall (my interpretation of his point).We tried to get to the heart of where disagreements exist, and where they don't, rather than talk past each other. I hope we achieved that. Find Mark's writings at https://www.markdiesendorf.com and his latest book, The Path to a Sustainable Civilisation: Technological, Socioeconomic and Political Change, here.—————————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

In a recent FET article, I explained how the rental market adjusts to inflation arising in non-housing goods and services. Find that article here:The key quote is this:Another insight from the rental equilibrium is that inflation in non-housing goods means that renter households can pay more for rent because that means giving up fewerother goods and services for an extra quantity or quality of housing. This is the opposite of what many people might expect. Some might think that if goods and services have risen in price then households have less left over for rent, so rents should fall when there is inflation. This is wrong. In this episode, Jonathan and I discuss the mechanisms at play, whether housing is different and more important than other goods and services, and more. Enjoy. —————————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

Electrical engineer Ben Beattie runs The Baseload Podcast, providing “common sense and unfiltered commentary” on Australia's energy sector. Given the enormous investments taking place now (and planned in the next decade) to transition Australia's electricity grid to predominantly renewables, it is worth keeping a close eye on the engineering and economic realities at play. To know if the costs of the planned energy transition path make sense given the benefits, we at a bare minimum need to know the true costs. Follow Ben on X here and read his articles on energy issues at The Spectator here.In the podcast, we discussed the graph below showing the total generation and demand in Australia's electricity network (link here). Notice the enormous increase in nameplate generation capacity in the past decade while grid-electricity demand has remained flat. This shows that there has been very little extra energy generated for all that extra investment in capacity, as most of that new capacity is highly variable. You can find data here on the daily generation from different sources in Australia's grid. Below I show a typical day with the features we spoke about in the podcast:* Coal (brown and black in the chart) is being curtailed during the day to make room for solar generation.* Gas (pink) fills up the even period when solar generation quickly drops off.* Wind (green) is variable and unpredictable throughout the period. * A baseload of about 18,000MW of generation needs to be delivered 24 hours a day.The Frontier report discussed offers an alternative to the Integrate System Plan (ISP) (in the jargon we used, this report shows what Toyota has for sale, not just Ferrari). You can find it here. Lastly, find below a previous FET article by Aidan Morrison explaining some of the deceptive analysis behind the story of a renewables grid being the cheapest option. —————————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

Cameron and Jonathan discuss the trend of moving from Australia to cheaper countries abroad to beat the cost of living and the apparent inability to get ahead down under. ——————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

Cameron and Jonathan examine Australia's proposed social media ban for kids aged 16 and find it hard not to be critical of it.——————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

Robert Sobyra is the research lead at BuildSkills Australia. Earlier this year Rob predicted that Australian unemployment in December would be above 4.7%. I took the other side of the bet and that now seems to be the winning side. Hear about why that unemployment uptick was forecast and the puzzling strength of the Australian economy, especially relative to its peers in Canada and New Zealand. Also learn about how important immigration is, or is not, when it comes to skilled construction workers.Find Robert on LinkedIn here.——————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

Robert is an insightful Aussie commentator who has written at Fresh Economic Thinking before about the puzzle of the Labor party refusing to move left politically.Hear Robert's thoughts on bicycle helmets, superannuation, school lunches and public transport fares and see if you are convinced by the arguments. Find Robert on X here.——————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

Today we talk about the ongoing mystery of how to get sustained economic growth in Australia and peer nations and some of the political challenges we face trying to break out of this stagnation.Australian journalist and economic commentator Tarric Brooker coined the term “Burnout Economics” and writes regular analysis at burnouteconomics.com. Find Tarric on X here.——————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

Why does the Australia Human Rights Commission think that the proposed misinformation bill is bad news? In this deep dive we look at what is proposed in the Combatting Misinformation and Disinformation Bill and its strange provisions, such as the specific harms of questioning elections or referenda and questioning the merits of public health measures. Looks suspiciously like an attempt to rewrite the history of the COVID era and the voice referendum. ——————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

Note: Monthly FET subscription prices are rising for new subscribers. This is intentionally to make an annual subscription much more attractive. Current monthly paid FET subscribers are unaffected and will always keep their original price. Yearly prices remain unchanged. I hope you find it in you to support my efforts here to raise the quality of our economic conversation with an annual subscription (it might even be tax deductible for you!)Markets are good at making trade-offs.Even if everyone in the market is irrational, the constraints of the system—of money balances and property rights—often lead to acceptable and favourable trade-offs. I explained that logic in more detail here.Markets also encourage innovation because new technology can break down old trade-offs by getting more output (in terms of its value to others in the economy) per input. The market in real estate is no different. This market efficiently uses high-value locations for high-value uses. This means people with a low value for a location will be excluded from that location. It is the same in other markets. Those who place a low value on luxury goods won't buy them. You might claim this is often because of unequal wealth and income. And you would be right. Some people don't like the inevitable inequalities in market outcomes, and they often search for market failures to explain it, especially in real estate markets (as I document in this academic article).Today's topic is not inequality. The topic today is the forgotten temporal dimension of the trade-off that participants make in all markets. As well as allocating products to who values them most, markets allocate across time to when new products are valued most. In other words, markets will efficiently delay or bring forward production decisions across time.For example, Toyota is bringing its new Prado model to Australia this year. But it isn't pricing them to maximise its 2024 profits only, even though the market for four-wheel-drives in Australia is very competitive and lower pricing could greatly increase 2024 sales. Toyota is pricing in a way that it expects will maximise not just its 2024 profit (quantity of sales in 2024 times the margin per vehicle) but the present value of its flow of profits in 2024, 2025, and beyond. Toyota will bring forward sales with lower prices only if it increases the total present value of production profits by more than it gives up in future sales at higher prices.All firms are forward-looking and consider the effect of their choice of production rate and pricing on their future profitability—not just this year's, this month's or this week's profit. Back in 1931, a popular concern was that markets would use up natural resources like coal, minerals and oil, too quickly. Were markets just wasting these resources? Harold Hotelling pondered that question and explained how (like Eric Crampton explained more recently) markets won't inefficiently use up resources too quickly. They trade off extracting more resources now with extracting more later. Unfortunately, most economic analysis mostly assumes away the intertemporal trade-off, and this can lead to major errors in reasoning and interpretation of evidence. This intertemporal trade-off in real estate means that most feasible housing development projects are delayed into the future, even when prices or rents appear to be high and projects are profitable today. As I noted earlier, some people don't like this inevitable market outcome, so they search for market failures to explain it. But it's not a failure. We want markets to efficiently delay building homes, don't we?Why isn't this well-known?I admit that it took me a while to notice intertemporal trade-offs and fully recognise their significance. That's probably because most economic analysis at best consists of assuming away time altogether, simplifying to a short-run (single static period) and a long-run (some other single static period) with no way of bridging the two.Because economists are trained this way, it leads to a blind spot across the discipline when it comes to timing decisions. On X, I was surprised to see that a seemingly innocuous post below garnered over six million views in a few days. It simply asked why landowners in private markets would build so quickly that prices fell. Which is a very good question!The thousands of replies almost unanimously explained most smugly the crossed swords of supply and demand from Economics 101 that they learnt, forgetting that this simplified model assumes away the time dimension. The replies showed complete ignorance of the dynamics of housing supply and price effects from supply today on profits tomorrow— a hot topic of study in the academic literature with many researchers trying hard to understand it. People for some reason don't believe me. They want settled science—preferably ECON101.So today's article is a deep dive into the forgotten economics of inter-temporal market trade-offs when it comes to housing production. It takes you far beyond ECON101 and to the cutting edge of knowledge about when and why homes are built.Let's start with a quote from urban economist Alvin Murphy, who noted in a working paper version of his 2018 paper entitled A Dynamic Model of Housing Supply that:A static model would predict that a parcel owner would build the first time it becomes profitable, whereas the dynamic model allows a parcel owner to delay building (even when profitable) in order to attain higher profits at a future date. [p15]That line didn't make it into the final version of the article, which in typical economics fashion was published eight years later, but that version makes the same point clearly in its opening sections.In the model, landowners choose both the optimal timing of and the optimal size of construction. These owners take into account current profits and expectations about future profits, balancing expected future prices against expected future costs. Analyzing these decisions with a dynamic framework allows one to meaningfully separate the effects of current profits on supply from the effects of expected future profits on supply, which is the key mechanism through which forward-looking behavior reduces the housing supply elasticity.Here's moreForward-looking behavior substantially reduces the responsiveness of landowners to current price changes. This reduction occurs because rising prices make building today more attractive, but also signal higher future prices, making waiting more attractive, thus reducing the responsiveness to current price. Interestingly, this forward-looking behavior suppresses the responsiveness to current price by a much greater extent during boom periods with rapidly rising land and house prices.That forward-looking behaviour considers the returns given up on the assets required to develop new homes (the cash to pay for construction and the land asset) for the returns to the new home (net rent and capital gain) after consideration of local price effects from faster development. A simple demonstrationThe tools most relevant for understanding intertemporal trade-offs come from a field of economics known as real options, which analyses timing choices of irreversible capital investment—clearly relevant for understanding housing production. The logic of real options and the intertemporal trade-off means that for new housing, two conditions must hold to make it worthwhile to build a dwelling today rather than tomorrow (though not really today or tomorrow, it could be this year instead of many years in that future or any other trade-off between some future period and the present). These are:* The market value of a dwelling must equal the development cost plus the value of the land (which itself gets a value because it is a financial derivative—an option). In the lingo of real options analysis, this is called the value matching condition.* The total return to the developed home must equal the total return to the assets swapped for it. In the lingo of real options analysis, this is called the smooth pasting condition.The first of these is a bit tricky to understand if you have in mind that the price of goods comes from the summation of input costs, but the second is more important for dynamics and I think it is quite straightforward to grasp.Value matchingIt seems intuitive that new homes only get built if the market price of what is built is as high as the market price of the land plus the development cost. Where property markets differ from many other markets is that homes need places to put them, and those property rights to places, or land, have a value because of their potential ability to generate future returns. Land gets its value like any other financial derivative. So the important thing to understand is that there are market constraints on being able to buy land cheaply, then build homes, and make abnormal profits (i.e. profits that more than compensate for the risk involved in that process).The reason is that every potential land seller also has the option to build homes themselves and take that risk and make a profit. They can arbitrage the value themselves. So the sale price of developable land, at a minimum, will be the residual of the market price of developed housing, minus development cost (which includes a margin for the risks involved in actual construction and sale). The diagram below shows on the left the market price of a completed housing project. The next part of the diagram has the land value (yellow) as the residual of market price minus development cost (blue) at the value-matching equilibrium condition where development today is the highest value option for the land. Let's make this example more concrete. Imagine that a home is worth $1 million (for the sake of round numbers). By definition, if the home costs $500,000 in construction and development costs (including a risk margin), which is the blue bar, then the land is worth a minimum of $500,000, which is the yellow bar. The sum of these inputs equals the market price, but only because the land value is caused by the market price of the home minus the development cost.The value matching condition says that this must hold for the marginal project that will be built today rather than delayed until tomorrow. But what is commonly misunderstood is that a land value of housing price minus development cost is the minimum amount that land will be worth for a development site.It might be the case that at a particular location for a particular lot, buyers are willing to pay $600,000 for the lot, even though construction and development costs (including a risk margin) are $500,000 and homes are only worth $1 million. The land is valued more highly than the residual for the best choice project today because the land owner has the option to instead build a different project later that might be even more valuable.The next columns in our diagram show this common situation where there is a delay premium in the market value of land. That extra value of land above the residual value, if developed today, is an option premium. This premium is the value the owners (buyers and sellers) of land derive from being able to choose when to develop and potentially build something bigger, better, and more profitable in the future on that site. In this case, landowners think there are more gains from waiting.So we have seen how land values can be above the residual of today's housing price minus development cost because of an option premium. But why is the value matching condition a minimum land value for a site with development potential?The far right of our diagram shows a hypothetical situation where the market value of land is lower than this residual value matching condition. The trick to understanding why this situation cannot happen is because it requires land sellers to leave money on the table—after all, they have the option to develop or delay if they want to. It can't be the case that land is available to buy in the market for $400,000 if homes that cost $500,000 to build (including a margin for risk) are selling for $1 million. Sellers are giving up $100,000 if they sell the land rather than building a home and selling it themselves. So they won't accept a lower price. In asset markets, the concept of “price is above cost” doesn't work. How does that apply to shares (stocks) in BHP or Apple? How can the price of those shares be above their cost? The price is the cost. The same applies to land.It is a common mistake to think that land can be purchased at a price that represents its value only if the current use is allowed. People say things like “Only zoning is stopping developers from buying land at agricultural prices and building homes”. That's not how land markets work. If you are allowed to build homes, no property owner will sell the land for the agricultural price, and you will be competing with other buyers willing to pay at least the residual value of the price of development today minus the cost.So to wrap up, the value matching condition means that for the marginal site that could be built today (with the lowest value to delay), its value is equal to the residual of the market price minus the development cost. For other non-marginal development sites, the land value is above this residual of today's market price for homes minus development cost. But even if this value matching condition holds, it is not enough to justify new housing production today. The second condition must hold too. Smooth pastingBuilding a new home is an asset swap of cash and land for housing. That swap will only occur if the expected rate of return is higher for the purchased asset than the asset given up to get it. Not only do the sum of values of the land and cash (for development costs) assets given up to build a housing asset have to match (the value matching condition), but so do the rates of return on the assets given up have to match the rate of return on the new housing asset. The rate of return between building a home and not building will be equal in an inter-temporal market equilibrium.The diagram below shows this second equilibrium condition, known as the smooth pasting condition (or sometimes it is called rate of return equalisation). The left in red shows the total return from one period to the next for developed housing, represented as the rate of change in total value (including net rents and capital gains). So if the $1 million home in our hypothetical example makes $60,000 in capital gains and net rental income, then that's a 6% total return— the value of that asset in a year's time is $1.06 million.The next part of the diagram shows the return to waiting from the gains in value to the land (yellow) and the return on cash needed for construction (blue). Here, we have a case where the capital gains to holding developable land are 6% and the interest rate on cash is 6% too. In this situation, the rate of return from waiting is equal to the rate of return from building. If you had $1 million in a home your assets would be worth $1.06 million next year, and if you had $1 million in cash and undeveloped land, then your assets would be $1.06 million in a year's time as well. On the right of the diagram is the situation where the rate of return from waiting is higher than from having a home. Say the interest on cash is 7% and the value of developable land is growing at 8%. In this situation, you give up $1 million of cash and land assets making $75,000 in total returns to get a $1 million house asset earning $60,000 in returns. You will be better off in this case by waiting instead. People always forget the smooth pasting condition that must apply in a housing production equilibrium. Back to the rate of home production (i.e. supply)Let's check in. We have two dynamic equilibrium conditions that must hold in a housing production market equilibrium. These conditions help explain why most feasible sites for housing remain undeveloped — the market is trading these homes into the future, efficiently delaying them until they are produced at the most valuable time. If the rate of return to waiting to build a home is higher than from building it now, then markets are efficiently delaying housing production. But how do we know how many homes are built each period? Where does that rate of housing production come from? There must be a flow of new housing per period that sustains these equilibrium conditions. We need to think about this carefully. And to be clear, we are now approaching the end of our collective knowledge about what determines the rate of housing production. There are many possible trades of assets in housing markets. For example, you can trade cash directly for homes, as well as trading cash for construction and combining that with a land asset to get a home. You can also “cash out” land and get its value as cash by selling rather than building homes. The available trades are shown below. In each of these asset swap markets, equilibrium forces dictate the rate of trading, which depends on the relative returns to each asset. The diagram also helps us understand why construction cycles tend to track house price cycles. If you have cash and want to get the return from homes instead, the two ways to get that return are to buy homes or build them. So more of both happen together. Another point to note is that building homes is irreversible. The arrows of this asset swap are shown pointing one way only. You can of course physically go back from a lot with a dwelling to a vacant lot by spending on demolition, but this generally won't make economic sense (though there are extreme scenarios where it does). So the production of new homes represents the willingness of current owners of land to convert that land asset to a housing asset. This is the idea behind a phrase I like: “Supply starts when speculation ends.” Building new homes is the act of giving up an undeveloped land asset for cash or a dwelling.Here's how I am trying to extend our thinking on how the rate of production fits in this market system of asset trades. First, I take as an assumption that the growth rate in the value of dwellings and undeveloped land is reduced by faster production of homes. More supply, in the form of faster production, reduces prices.Another assumption is that in the absence of demand growth and new production of homes, price growth is zero. This implies that only demand growth (from higher incomes or population) leads to rising prices. Combining these two assumptions creates the following relationship, whereby the rate of growth in housing asset prices is the rate of growth in demand, minus the price effect from the rate of new housing production. Mathematically, a portion of undeveloped land that can be converted into one dwelling, has the price growth ofwhere the first term (rate of price growth) is equal to the rate of demand growth minus the sensitivity of price to the rate of production of new homes, q. To be in an equilibrium, this gain from owning land must be the same as the gain from cash or other asset market investments—otherwise, you could swap land for cash or other assets and get a higher return. This is the exact condition Harold Hotelling identified in his 1931 paper on a theory of exhaustible resources. He noted that even in a market with completely free competition, the price growth of a resource not extracted will track the prevailing rate of return of other assets in the economy. Undeveloped land also has the economic feature that you have one chance to use it up by building before it is exhausted. So if we call the return to cash and other assets, I, and assume that there is an equilibrium with the price growth rate of undeveloped land, then we have:The only equilibrium rate of housing production, q, is one where this condition holds. Therefore:This last equation essentially says that the asset market equilibrium rate of new housing production is a function that increases with the rate of demand growth, decreases with higher interest rates, and decreases with the price sensitivity of the market to faster sales of new homes.This fits with the cycle of housing construction in Australia. REA Group's Cameron Kusher shared this chart recently, showing declining interest rates leading housing construction cycles (though of course demand growth and interest rates are themselves not independent).Other rates of housing production mean that abnormal returns can be had by making certain asset swaps shown in the above diagram. This is the only condition where the gains from waiting equal the gains from producing homes, and the rate of return is equalised across all asset trading margins. But this is very much the edge of knowledge as I said. In fact, an academic paper of mine where I first looked at the question of equilibrium rates of housing production found the opposite relationship with interest rates (more on that paper here). In this setup, where a single landowner optimises their net profit flow, higher interest rates mean a higher cost to waiting (i.e. by holding land instead of cash) and hence a faster optimal rate of supply. How these individual-level and market-level incentives interact, regarding the return to holding other assets (the interest rate), is an unresolved issue at the cutting edge of economic thinking on housing supply. Either (or both) of these approaches may be wrong. Or both incentives may exist, but interact in ways we don't know about. In sumKnowing that markets trade-off production across time, and specific intertemporal conditions required to make housing production worthwhile today, are just the first steps in understanding how taxes and regulations might affect the rate of housing production. How do changes to taxes, monetary policy changes, and regulations on development affect these outcomes? We honestly don't know. The thing is, this type of dynamic optimisation must happen in every market. Toyota's production of Prados will be responsive to demand growth and they may also reprice higher if demand grows quickly, and lower prices if demand is falling. Despite the widespread confidence in our knowledge of housing supply, there is a theoretical black hole here. This post has taken you to the event horizon of knowledge.But I hope by coming this far, you are ahead of 99% of pundits who yell “supply and demand, stupid” to anyone who wants to understand markets better. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of Rigged: How networks of powerful mates rip off everyday Australians via their favourite podcast app.Chapters will be released weekly over the coming months.A physical copy or ebook can be bought here.Rigged was originally published in 2017 under the title Game of Mates, but was …

If you have an interest in land value taxes and Georgism, you might have come across the acronyms ATCOR - “All taxes come out of rents” - and EBCOR “Excess burdens come out of rents”. Tim Helm, Research Director at Prosper Australia, helps unpack these concepts and how they can be useful for understanding the economy in the 21st century.——————Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

We step through the wild claims in a marketing campaign by the new superannuation lobby group Super Member's Council. Find those claims here. Can you believe that after all the fuss of super and getting people off the age pension, one of the big selling points used by the super lobby is that you can still get the age pension? Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

It's a classic economics joke. President Truman once complained about trained economists: “Whenever I ask their opinion, they say on the one hand, so-and-so; but on the other hand, so-and-so, On the one hand, — but on the other hand. I would like to meet an economist with one hand!“In this episode, Jonathan pushes Cameron to explain why his recent interviews gave the impression that he thought there was nothing wrong with the housing market. Yet at the same time, he pushes for major public intervention. Which is it!?Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.These are the final chapters. Thanks for listening, and thanks for your support. Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0

Michael Matusik has been a property analyst for decades. Find out his views on where we are in the cycle, what types of housing has a promising future, and more. Follow Michael's terrific Matusik Missive Substack here.______Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.Two chapters will be released weekly over the coming months.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0

Ben is an economist at the Australian National University. He studies many of the big policy questions in Australia, from housing to childcare to welfare and more. We chat about the misunderstandings of our economic situation that are perpetuated by the media, and how reality is more boring and generally positive than portrayed.Find Ben on X/Twitter here.Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.Two chapters will be released weekly over the coming months.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0

How should we think about housing? As an asset, like a bond? If so, how would city planning affect its pricing?Aziz Sunderji writes the excellent Home Economics substack. Follow Aziz on Twitter here. _____Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.Two chapters will be released weekly over the coming months.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0

A new report on Speculative Vacancies by Tim Helm, Research Director at Prosper Australia, is out now (full disclosure, I currently do consulting work for Prosper on other projects).Using water meter data for every residential dwelling since 2018, Tim looked at trends in long-term unoccupied (empty) homes on a suburb-by-suburb basis across Melbourne. The concept of a long-term empty home is different to what we call housing vacancy, which typically refers to the number of rental advertisements, whether those homes are occupied or not. It is also very different to the concept of empty homes on census night, which is the source of the notorious one million empty dwellings figure.Looking at this more comprehensive measure of properly empty long-term homes helps illuminate a big unresolved issue in our understanding of housing markets. As the report says, it is “A window onto the economics of waiting and the hidden barriers to housing supply."What it showsThe basic story is that the number of year-long empty homes in 31 council areas across Melbourne (excluding 33 postcodes with a high proportion of holiday homes), grew from around 23,000 in 2018 and 2019 (or 1.4% of all dwellings) to over 35,000 in 2021. That's a one-third increase. For homes with less than 50L of water use per day over the calendar year, the rate grew from about 3.9% in 2019 to over 5.7% in 2022, before falling a touch in 2023 to 5.2%. It is also interesting to look back on previous reports and see that in 2012, only about 12,000 dwellings were empty year-round (with no water use) so the number in 2018 was already double the number just six years earlier. The top ten postcodes in 2023 all had more than 10% of homes using less than 50L of water per day, and a surprising number of postcodes had 3% to 5% of homes with not a drop of water used for 12 months straight. What it revealsThis is the more interesting part of the report. Let me quote at length. We don't understand vacancy well. There is little research on what drives it, partly due to limited measurement.Some explanations centre on growth- focused investment strategies, investor inattention, tax avoidance, drawn-out estate settlements, loan conditions for investors, and slow adjustment of price expectations. But there is little evidence on which factors matter most or which policies would have the biggest impact.On another level vacancy can be explained as a result of inequality – a sign that renters cannot afford to outbid the convenience value of an empty investment property. Some homes remain empty simply because their wealthy owners feel no need to use them.The economic explanation boils down to the relative value of flexibility versus yield. The decision to leave a home vacant depends on the trade-off between option value and cash returns. (The next section explains how this also applies to land development.)Empty property offers more options. If rents are low, landlords can avoid locking in low returns and the challenge of raising rent later. When sales prices are low, vendors can postpone sale, keeping the property untenanted to ensure the buyer pool includes owner-occupiers. If an owner plans to occupy their property in the future, keeping it empty makes this easier. The idea that property owners balance flexibility against yield is a catch-all explanation for these many and varied situations.When flexibility is valued highly, leaving property empty is rational. As a stylised numerical example, with a net rental yield of 2.5% and a 5% sale price premium on an untenanted home, an investor waiting for optimal selling conditions would profit by keeping it vacant for up to two years.The value of flexibility over yield is higher when yields are low and property is valued more significantly as a growth investment. This has been the case in recent decades, with low and falling interest rates. Taxing capital gains less than rental income reinforces this trend.What about empty homes taxes?These types of taxes, which add to the cost of flexibility of holding housing empty, seem to work to reduce empty homes and raise revenue. Here's a table listing eleven such taxes from cities around the world. Victoria has an empty home tax on its way. The problems they often face are in the monitoring and enforcement. How do you prove vacancy? How can criteria be gamed?My thoughtsI don't think the fact that there are over 30,000 empty homes in Melbourne is what is causing rents and prices to rise. Melbourne has been a world leader in its rate of new home building in the past 15 years or so. So I hope people don't interpret the report as saying that this is the cause of prices. I see it as, like the subtitle suggests, offering a window onto the economics of waiting—in other words, the value of flexibility. This is a very much overlooked feature of property markets and applies much more to vacant land without any homes than occupied land with empty homes. Any theory of housing production (converting developable sites into homes) and housing utilisation (getting empty homes occupied) much grapple with the dynamic where waiting pays. An interesting coincidence is that Canada's CBC did some reporting on empty condos in Toronto a couple of weeks back too. Seems like empty homes are a normal feature of market adjustments, and we need to understand this if we want to understand housing supply in general. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This was a great conversation that covered some big-picture issues about how an incorrect view of money changes our macroeconomic analysis, and also the finer details of monetary operations. Find out more about the Modern Money Lab. And for those following closely, here is the document Steven refers to about the RBA buying Treasury bonds to maintain control of the interest rate. The relevant section:"Under the TAP system there was considerable uncertainty as to whether the Government's financing needs would be met by the financial market. The Government had the capacity to fund shortfalls by issuing Public Treasury Bills to the RBA  ...... The TAP mechanism was not sustainable with increasingly flexible interest rates. As a result, a tender system was first adopted for short-term Treasury Notes in December 1979 and for Treasury Bonds in August 1982."Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.Two chapters will be released weekly over the coming months.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0

Fresh Economic Thinking exists to elevate the quality of economic discussion. This is why I write detailed articles about influential economic ideas—I want to help progress the discipline. Please consider a paid subscription to support these efforts. Like many well-trained economists, I took Adam Smith's argument about productivity gains being caused by the division of labour at face value. It wasn't until I read Joan Robinson dismiss the argument in her 1973 textbook An Introduction to Modern Economics that I began to put the effort into understanding the division of labour. I realised it was an incoherent explanation for productivity gains.But I also realised that the pin factory story could provide valuable lessons about economics nonetheless.Robinson dismisses Smith by suggesting that people can equally divide their labour across different tasks through time. The 18 distinct operations Smith recounts at the pin factory could just as easily be conducted by the same labourer on 18 different days to generate the same output per person over 18 days as in the case where labour is divided between workers.Further, the fact that relatively unskilled labour could perform any of these tasks adds to the case that it is not specialist skills from the division of labour at play in generating productivity gains. One-way causality from the division of labour to productivity gains is a highly problematic story.But that leaves open the question about the actual mechanism that provided the enormous productivity gains in the pin factories of the mid-1700s.Instead of Smith's division of labour hypothesis, let me propose a capital investment hypothesis to explain the productivity of his pin factory. This hypothesis suggests that it is the technical nature of capital that determines the way labour will be divided across tasks to maximise output and that the division of labour is a response to this capital investment. The causality goes from capital investment to labour division.To guide my inquiry I use the structured approach I have described in the past for confronting economic issues by first asking questions about aggregation. For example, why are there 18 tasks to make a pin, not 5, 9, 16, or 37? Why are 18 workers in one pin factory and not 9 in one factory and 9 in another owned by a different entity? The answer to these questions is capital. The image above shows the tools and equipment used in the pin factories described by Smith. Notice that the tools and machines in the picture have been designed to more efficiently perform distinct parts of the pin-making process. It is the way the tools have been designed to efficiently break down the task of making pins that leads to the labour division to man the tools.Smith came close to instead presenting the capital investment hypothesis. He says…a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. [my emphasis]He suggests that the division of labour probably gave rise to the machines, rather than the machines themselves giving rise to the division of labour. This seems very strange to me.And this logic comes undone later in the paragraph, even though he ignores the inconsistency in his argument. …the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. [my emphasis]Even based on Smith's observations it is the tools and machines that generate the 18 tasks. People can, and do, perform more than one of them. So how exactly did the division of labour give rise to the invention of the necessary machines that generate 18 tasks with only ten men?If it was the division of labour that led to increased productivity, labour could just as easily be divided between firms. The fact that pin factories, even with only ten men, still performed all 18 tasks, instead of specialising in just 10 tasks, is clear evidence that there is something special and coordinated about the tasks themselves that arise from the particular capital investments. The tools and machines are designed to be compatible with each other, and if part of the process is done outside the firm, each of the two firms would inevitably be tied to the same compatible capital equipment, and would therefore find gains by merging into a single firm. The next step in a structured inquiry is to ask questions about timing to see if we can more sharply distinguish between the division of labour and capital hypotheses. If it was only after the machines were introduced that labour was divided in a particular way, then that is evidence for the capital hypothesis. If labour was divided into 18 tasks before the investment in machines, achieving the same tasks in the absence of those specialist tools, then the division of labour hypothesis holds. Quite clearly when we look at timing, the capital investment hypothesis comes out ahead. The third and final step in our inquiry is to think about prediction. The capital investment hypothesis predicts that labour task specialisation can respond to capital investments in either direction—either with more division of labour or by adding to the tasks done by a single labourer.A modern test of these predictions could be garbage collection. With rear-loading trucks, labour is divided between driving the truck and loading the bins. But with more advanced side-loading trucks with robotic arms, the labour is once again undivided between driving the truck and collecting the bins. The progression of capital technology determines the division of tasks.The same would be true in the pin factory. If new tools were invented to get the same result with 5 steps instead of 18, that would be a huge efficiency gain but a major reversal of labour specialisation. Where is the confusion arising?What is strange to me is that increasing the number of possible production tasks in an economy means that each person does more tasks rather than fewer—the opposite of labour division. Imagine a tribe of 50 people that can undertake 100 productive tasks. Then with the invention of new tools, the number of possible tasks the tribe can undertake expands to 150. The average tribe member is now doing three instead of two tasks each.That doesn't seem like labour division. I think the confusion arises partly because of labelling conventions about roles in society rather than actual units of labour being devoted to fewer clearly defined tasks.Here is a minimal example of mixing up socially-labelled productive roles (i.e. butcher, baker etc.) with actual tasks (baking, mixing, filleting etc.).Inspired by stories about how the division of labour was part of early human tool-making in tribes of Jordan, my example is a six-person tribe that undertakes six defined tasks, of which the two named roles undertake three tasks each. Thinking in terms of roles there are three hunters and three gatherers. That is, two types of specialist. But in terms of tasks, there are six tasks to be done. Each hunter must be able to track, kill and clean the game. Each gatherer must collect, prepare, and cook the fruits and vegetables. You might want to argue that the way I define tasks is open to limitless ad hoc classifications. Tracking an animal could be further divided into a team pursuit with specific sub-tasks for each member. Same with cleaning an animal. But this is kind of the point. Any defined task will be a bundle of sub-tasks. But to understand the division of labour we need to keep track of tasks at any one particular level of aggregation and not fall into the trap of calling something specialisation when it is just a different bundling of more tasks into one job.One of the tribe members now invents the spear and woomera. Regular production of these tools requires three additional tasks to be undertaken by the new toolmaker role in the tribe. One former hunter becomes a tool maker, and one former gatherer becomes a tool maker. Now, after this new capital invention, we have more roles and fewer people in each of them. Exactly as predicted by the division of labour story!But if we instead look at the tasks, we have more tasks per person. Instead of being able to specialise in one task, like tracking, each hunter must now undertake more than one task on average as there are only two hunters available for three tasks—the same for our gatherers. What we see as specialisation in roles is the automatic result, not the cause, of increasing productive capacities. What has happened is that the invention of new production techniques has allowed more tasks to be undertaken by each person leading to fewer people in each role. Here, we again see that it is the nature of capital that defines both roles and available tasks at a societal level, just as within a pin factory the nature of the capital equipment defines the roles and available tasks. At the macro level, the most productive countries are not full of people doing repetitive narrowly defined non-skilled tasks, but highly educated people doing specialist roles involving a hierarchy of complex and interrelated tasks that require specialist capital and training to master.So what?Like many stories in economics, the division of labour as a productivity enhancer has been approached far too narrowly. There are many economic lessons in the story of the pin factory, and if we probed deeper we could understand more about what considerations determine the boundaries of firms, why firms are internally not structured around market principles, and other important questions about how we coordinate productive activities. There is also a big question about the incentives to invest in new capital equipment and experiment with new technologies. Although economics has a focus on technology as a productivity enhancer, there is really limited coherent theory on what causes faster or slower capital investment. Had we taken a different lesson from Smith about his pin factory, perhaps our knowledge of capital investment incentives would be better today than it is, and we would likely understand the process of economic growth and productivity gain much better than we do. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

If the macroeconomy experiences a radical disruption, is a Universal Basic Income (UBI) going to help? How different is that from existing welfare systems? And how likely is a rapid shock from a technology change like Artificial Intelligence (AI) compared to other shocks like we experience during COVID lockdowns?Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.Two chapters will be released weekly over the coming months.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0

Just about every nation has a local debate about how it is uniquely bad at improving construction productivity. But how do economists use that word and can we really interpret what gets measured in a meaningful way?Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.Two chapters will be released weekly over the coming months.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0

It is nearly the end of the financial year in Australia. A paid subscription to Fresh Economic Thinking could be a tax-deductible expense for you. Please consider supporting to get access to this and all articles, the audiobook of The Great Housing Hijack, the charts page, and more.A dominant line of thinking in policy-land is that allowing higher housing densities increases the rate at which new housing is produced.Few people express it so precisely, but many believe it to be true. In doing so, they unwittingly conflate the two completely separate concepts of ‘density at a site' and ‘rate of housing production across a market' under the single label of ‘supply'. Indeed the less aware they are of the distinction, the more cocksure they are in calling out idiots who don't see the world as they do. After all, “it's ECON101, stupid”.But supply is not density.I'm reluctant to use the word supply at all. Supply, in its specific and technical economic meaning, is not a quantity of existing homes nor a rate of production of new homes. Supply is a concept of market exchange. Think of it as an offer curve at a market exchange—all the sellers line up with the price they would accept to trade. This is why, with the same stock of homes, you can have a market boom or a market crash depending on supply (willingness to sell in a period) and demand (willingness to buy in a period). Saying that a price change is due to supply and demand is not an explanation but a tautology. The explanation needs to answer the question of why sellers and/or buyers changed their willingness to sell and/or buy. As Brian Albrecht has explained, supply represents the demand from the current owners of the product being traded. While we often think that supply is independent of demand, it really isn't. There is no such thing as an independent supply. I'll do my best to talk about the stock of dwellings, the growth in the stock or the rate of new housing production, and other specific terms. Though it is hard to escape the word supply and I might just use it at times to mean the rate of new housing production. Now, back to the frustrating topic of confusing density and the rate of new housing production. You will find an abundance of examples of this in housing debates.Here is an especially clear example from the New South Wales Productivity Commission (NSW PC). They wrote a report asking about how much lower rents would be if all new buildings were denser but with the effect of assuming that dwellings were built faster. About 1,500 new apartment buildings were built in Sydney between 2017 and 2022. These buildings averaged seven storeys and contained ten dwellings per storey (NSW Productivity Commission, 2023a). If instead we had permitted modestly denser development—for example, if apartments had averaged ten storeys instead of seven—then an extra 45,000 homes could have been provided, all without using any extra land and with minimal effect on neighbourhood character.The additional 45,000 units would represent a little over two per cent increase in Sydney's private dwelling stock. Typical rules-of-thumb suggest this extra supply would have lowered apartment prices and rents by 5.5 per cent, all else being equal (Saunders & Tulip, 2019). In dollar terms, this is a saving of about $35 a week in rent on the median apartment – or $1,800 a year. For a median-income earner, this is equivalent to a 2.75 per cent increase in their real purchasing power, similar to a typical year's wage rise.Here's a replication of this approach for Vancouver, and you can see in this plot the counterfactual “extra” homes marked for the five years 2019-2023 due to an assumption that more density is a faster rate of new housing production.I want to make it very clear here that density and the rate of new housing production per period are different concepts, different dimensions, with different units of measurement. Confusing them is one of the most common problems in the analysis of housing “supply” in both academia and popular commentary. Does this diagram help?I am a visual learner. Maybe the below diagram of density and the rate of production on a two-axis chart will help you too.The vertical axis is density, shown here going from 25 dwellings per hectare to 100 per hectare. The horizontal axis is the rate of new housing production, going from 4 per year to 8 per year at each density. Notice the units of measurement are different. * Density has the unit dwellings per area (or per project given its fixed area). * The rate of new housing production has the unit dwellings per period. Another way to think about this is that housing comes from many different projects with different densities, and the production rate of homes (supply) is the product of projects and densities, or:Supply (dwellings/period) = Density (dwellings/project) x Projects (projects/period)Property owners don't choose a density to maximise their return but then choose to build so many projects as to minimise it. If the density of a particular project is limited by regulations (rather than limited by market prices) at that location, you can adjust the number of projects to meet a rate of production that overall maximises returns. Notice that being strict about the units here resolves any confusion. It also shows that since the planning system doesn't constrain the number of projects, we need to understand how that affects supply—don't projects filter too? The diagram also makes it clear that you can have fast low-density new housing production (bottom right corner), or slow high-density new housing production (top left corner). Can you see why I find it problematic when I hear things like “we are getting more housing built by upzoning near train stations”? Does more mean a higher density or a faster rate of housing production?The NSW PC made this exact conceptual mistake. They assume that the extra dwellings per land area (i.e. higher density) must be delivered within the same time period and is hence the same as a faster rate of new housing production. They simply assumed that a fixed number of sites are developed each year, and therefore if each was developed to higher density more homes would be built each year. But the number of sites developed is a market choice. Sites are not developed as soon as it is feasible—there is undeniable empirical evidence that most sites that can feasibly be developed or sold at a profit are not (and we call this land banking). And for that matter, town planning regulations don't limit the rate of housing production, only the density at certain locations.Here's what the NSW PC did. Instead of shifting vertically to higher density but at the same rate of housing production, they effectively shifted diagonally to the right by assuming that a 20% increase in density must result in a 20% increase in the rate of supply. But you don't need more density for a faster rate of supply. You only need to exercise the option to develop out of the pool of feasible sites more frequently. I hope this is clear. Please comment if it is not. To recap, density (dwellings per land area) is not the same as the rate of new dwelling production (dwellings per period). Only increasing the second these and bringing them to market (increasing the willingness to sell) can affect the overall price level of homes under conditions of constant demand. But town planning rules don't regulate the speed at which housing is developed, only the density—yet too many people who participate in housing debates cannot differentiate the two. Paid subscribers help me share my ideas and analysis widely and elevate the quality of policy debate. Here's a recent interview with John Brockhoff published in New Planner. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This week Konrad Michalski chats about his foray into the world of political satire— how does he as an outside observer decipher the many stories we tell as we fight over the gains from our economic system. Follow Cameron and Jonathan on X/Twitter. Buy The Great Housing Hijack here.Please like, comment, share, and subscribe.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.fresheconomicthinking.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.Two chapters will be released weekly over the coming months.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0

This is a free preview of a paid episode. To hear more, visit www.fresheconomicthinking.comPaid Fresh Economic Thinking subscribers can enjoy the audiobook version of The Great Housing Hijack via their favourite podcast app.Two chapters will be released weekly over the coming months.Theme music: Happy Swing by Serge Quadrado Music under Creative Commons Licence CC BY-NC 4.0