Thursday, January 20, 2005

Stay grounded. House prices haven't hit the floor

So you think the slump in real estate is over? You are in good company. On Tuesday the research chief at Australian Property Monitors declared house prices might have "finally reached their floor". A day later real estate agent Ivan Bresic said the market looked "set to come back strongly in 2005".

They must be talking to the agents I've been talking to.

For six months my wife and I have been searching for a house. We sold and then rented while we talked to agent after agent. They all seemed to be decent people. None of them lied about the state of the houses they were selling. But when we asked about the state of the market they began to babble.

Prices were just about to pick up. They could sense it. They were getting more inquiries. Some confided that they believed prices were already moving up. This was at a time when Sydney prices were relentlessly falling and when the agents themselves were coming back to us with progressively lower asking prices...

If the agents had their heads in the stratosphere when it came to prices, the economists I met at an annual forecasting conference in December could not have been more firmly grounded.

Each year the executive of Australian Business Economists (ABE) presents its forecasts for the 12 months ahead. On the committee are Australia's leading private-sector forecasters, among them the economic chiefs at Westpac, Qantas and Macquarie Bank.

Not a single member of that committee expects an increase in overall house prices during the next 12 months. The committee's forecast is for a fall in prices of between 5 and 10 per cent. And it says there's no sign of a pick-up beyond that. There won't be a "meaningful" increase in prices until the end of the decade.

So who are you going to believe? On one hand it must be said real estate agents are pretty personable, and that until recently they seemed to have had a good grasp on the way prices were moving. On the other, it must be said that economists, while less impressive socially, tend to get the difficult forecasts right.

The past year was extraordinarily difficult to forecast. When it began, prices were still soaring. And yet the ABE's forecasting team correctly picked that there would be a downturn and got its magnitude about right.

And I have another reason for throwing my lot in with the economists. It's the broad sweep of real estate history.

Professor Peter Abelson, from Macquarie University, has done anyone interested in house prices a huge favour by putting together reliable data for each Australian city going back to 1970. It wasn't easy. Much of what has previously passed for good data has been suspect, depending on the sales the agents themselves have chosen to report.

Abelson got around this by using state Land Titles Office data where he could and also the work of a clerk in the Tax Office who compiled figures for Hobart as a hobby.

When adjusted for inflation, Abelson's data points to four distinct house price booms in Australia, each separated by years of stagnant or falling prices. The first thing to note is that each of the first three booms was short. Beginning in 1971, 1979 and 1987, each lasted two to three years. The most recent boom is the exception. It lasted from 1996 to 2003.

The second thing to note is that after each boom collapsed it took five to seven years for Sydney prices to crawl back to their previous real level. And Abelson believes the true story on prices is even grimmer than those figures suggest. That's because houses are getting bigger. New homes have typically 40 per cent more floor space than they did 20 years ago. And existing homes are continually being extended at the owners' expense.

If a house that used to sell for $400,000 now sells for $700,000 but has an extra bedroom and a living room and a deck, it didn't really increase in price by $300,000.

Comparing like with like, Australia's house price booms have been shallower than is widely believed and the slumps between them have lasted even longer: some for the best part of a decade.

If you are an owner who still wants to feel optimistic about the decade ahead, or perhaps an agent, you are perfectly entitled to declare this doesn't matter. History won't repeat itself. Sydney will be spared. But you would need a good argument. The ones that I have heard don't stand up.

One is that Sydney prices move differently to those in the rest of Australia. Abelson's figures show prices in all Australian cities move surprisingly closely together, with the recent movements in Sydney particularly closely tied to those in Brisbane and Melbourne. Only in Perth and Canberra have prices at times shot up on their own: in Perth's case because of a mining boom, and in Canberra's case following the election of Labor governments.

Another argument is that Sydney is becoming an international city, accepting the bulk of new migrants. It is true that Sydney takes in more new arrivals than any other Australian city, and that once here they typically stay here. But that puts less pressure on the NSW population than you might imagine. Migration pulls in about 40,000 people each year. But at the same time about 30,000 locals move out, mostly to Queensland and Victoria. As a result Sydney's population is actually growing more slowly than either Brisbane's or Melbourne's.

None of this need disturb real estate-obsessed Sydneysiders. If you own a house you've enjoyed a spectacular capital gain. On Abelson's figures, since 1980 the real value of your home has more than doubled. Even allowing for the money you have spent on improvements it has increased 75 per cent.

But savour it while you can. That gain will shrink if, as the economists expect, real house prices head down.


Wednesday, January 12, 2005

Lessons must be learnt if we are to keep teachers

I grew up in a family of teachers. Around the kitchen table the shop talk used to be about the unending teacher shortage. Many of my own teachers had been flown in from Canada, Britain and the US in a bid to plug the gaps. Others were retirees, barely able to cope, drafted back part-time. My dad had been a lathe operator, drafted without training into teaching metalwork.

And then suddenly, in the middle of the 1970s, the pendulum swung. Instead of a shortage the crisis became one of a massive and growing oversupply. Graduates in teaching were no longer getting jobs as teachers. Teachers who had left the service could no longer get back in. Official projections pointed to a surplus stretching out decades.

Now the pendulum is swinging again. The NSW Education Minister, Dr Andrew Refshauge, has launched a parliamentary inquiry into the recruitment of teachers, with submissions due next month. There's talk of a looming shortage. A big chunk of the teaching workforce is set to retire in the next five years.

What is it about the job market for teachers that makes it swing so quickly from famine to feast? The answer tells us something about politics and a lot about the very unusual nature of the job and the people who stick with it...

First, politics: it is true that the number of teachers needed at any one time depends on the number of students, but it also depends critically on political decisions about the desired ratio of teachers to students.

The decisions are political decisions because state governments make them. The states are by far the biggest employers of teachers.

Beginning in the 1960s, state governments aggressively raised their targets for the employment of teachers per student, even as the number of students was soaring. Class sizes, as measured by the pupil-teacher ratio plummeted. Australia-wide the ratio slid from 26 to 19.

And then in the mid-1970s the politics changed. In the midst of a worldwide economic downturn and a political crisis in Canberra each state government either temporarily halted further falls in class sizes or slowed the process. (By the early 1990s states such as Victoria and South Australia actually pushed up their class sizes in response to financial pressures.)

Looked at this way, our state governments have created much of the teacher "shortage" and the subsequent "oversupply". And they have also created the shortage they believe is about to come. The surge in hiring between the mid-1960s and the mid-1970s produced a workforce heavy in graduates of that time who are now approaching retirement.

But if it is our governments that create the swings in the job market for teachers, it is our teachers that turn them into crises. Here's how.

More so than in most professions, teachers don't particularly like teaching. Consider this: an astonishing 20 per cent of Australian teachers leave teaching within their first three to five years. In some parts of Australia, 50 per cent leave. The University of Sydney's Dr Jacqueline Manuel describes teaching as "the profession that eats its young".

Some of those who leave come back later. In fact, leaving, trying something else, and then returning is common in teaching. Some leave to start families, some leave to broaden their experience, and others treat teaching as a job of last resort.

Until the jobs dry up. When in the mid-1970s the state governments cut back their hiring rates, resignation rates plunged. The fear was it mightn't be possible to get back. Because resignations had typically created the bulk of teacher job vacancies, the hiring rates fell further, pushing resignations down further still, drying up the flow of teaching jobs almost completely.

(Naturally this frightened many would-be teachers and in time they moved away from teacher training courses, easing the surplus. But their decisions took years to have an effect. It takes three to four years to finish a teaching degree. Students who had already started continued to graduation.)

The same mechanism will work in reverse in the coming teacher shortage. The more job vacancies governments need to fill, the more relaxed teachers will feel about resigning, creating even more vacancies to fill, worsening the impending shortage.

If only there was a way to make teachers more serious about staying teachers. The Teachers Federation suggests higher salaries. Surprisingly, it's a proposition not strongly supported by evidence.

Melbourne University's Dr Michael Shields has examined the movement of teachers in Britain. He finds that most teachers who leave go to jobs that pay less than they got teaching, typically 22 per cent less expressed as an hourly wage. The new jobs have longer hours as well. Teachers are prepared to give up money and work longer hours in order to get out.

Shields has modelled the effect of a boost in teacher salaries of 10 per cent. He finds it would cut resignations by less than 1 per cent.

That isn't to say that higher salaries might not be important as part of a broader package of measures designed to get teachers to feel better about teaching. The 2001 Vinson report into public education described higher pay as a "gesture" and said that morale among teachers was so low that no other gesture could substitute for improved salaries.

But by itself higher pay would be wasted. There is something fundamental about the job or the way we ask people to do the job that makes teaching unsustainable for so many of our teachers.

For some it's a love-hate thing. Teachers report both greater levels of job satisfaction than other people and higher levels of stress.

My father told me that teaching was the only job he knew in which every day he faced people trying to stop him achieving what he was employed to achieve. They were called students.


Wednesday, January 05, 2005

Dismal failure to count the true cost

The tsunami can only be seen in a positive light by ignoring human values, writes Peter Martin.

It didn't take long after perhaps the greatest natural disaster of modern times for an economist to say what would otherwise be unthinkable.

Fred Bergsten runs the Institute for International Economics in Washington. He is a former assistant secretary of the US Treasury. Three days after the tsunami hit, with at that time tens of thousands confirmed dead, he told US National Public Radio (NPR) that the tragedy might be a good thing for the economies concerned.

He said: "Like any disaster, you get negative effects through destroying existing properties and people's health, but you do get a burst of new economic activity to replace them, and, on balance, that generally turns out to be quite positive."

What on earth could he have meant? How could the loss of so many lives so suddenly, with so many more to come, be "on balance, positive"?...

It is one of the mysteries that first got me interested in economics and economists. I remember hearing at school that it would have been a good thing for Britain, economically, if it had lost World War II and had its buildings and factories destroyed.

Bergsten agrees. He told NPR that after Japan and Germany were flattened in 1945 they experienced economic booms that lasted for the next 20 to 30 years. He said that happened partly as the result of reconstruction spending but mainly because their old factories were replaced with state-of-the-art ones.

Applying that lesson to the devastation wrought on the Thai island of Phuket he says: "When they put up new resort hotels, they'll be more modern, they'll be more attractive. They'll probably bring in more people in the future."

Bergsten isn't alone in his distasteful optimism. Britain's Standard Chartered Bank has told its clients it expects the impact of the tragedy to be "V-shaped". It says that was the pattern with the SARS epidemic, the Bali bombing and Japan's Kobe earthquake: a large dip in economic activity followed by increased aid and government spending, then an economic recovery a year or so later.

It says it expects the same sort of pattern in most of the countries affected by the tsunami, although it acknowledges that the present disaster is far greater and more widespread than the earlier ones. (The bank says the exceptions to its optimistic outlook are Sri Lanka and the Maldives. Each faces severe difficulties, being in bad financial shape before the tsunami and relying on tourism for most of its foreign income. The Maldives collects more than 90 per cent of its tax revenue from tourism-related taxes and import duties.)

Such analyses only make sense if you don't pay attention to the lives that are being lost. They would sound ludicrous to someone whose family had been swept away.

The models of Bergsten, Standard Chartered and their ilk value the production that has been lost with those lives (tourism services, factory output and so on) and look forward to its return. But they don't value the lives themselves. Most of us value human lives above what they can produce.

When one of our parents or children is at risk of dying we find ourselves prepared to pay almost anything to stop that from happening, regardless of their productive capacity.

I say "almost anything" because a relatively new branch of economics believes it has found an upper limit to what we are prepared to pay to save a human life. The most widely quoted American limit is $US6.1 million ($7.83 million), known as "Viscusi's number" after the Harvard University economist Kip Viscusi.

In more than 60 studies Viscusi and his colleagues have tried to determine the monetary value we place on human life by examining our behaviour. If, for example, I demand an extra $610 a year to move from a job which I know is completely safe to a job in which I know there is a one in 10,000 annual risk of dying, they conclude that I value my life at $US6.1 million. They apply the same sort of calculations to decisions about my purchases, such as how much extra I am prepared to pay to buy a car with extra safety features.

The range of values resulting from the studies is wide, from as low as $US900,000 a life to more than $US27 million per life. But the average, $US6.1 million, has acquired an almost mystical status in the US. It has come to be regarded as the statistical value of human life. In 2000 the US Environmental Protection Agency used it to set the permissible level of arsenic in drinking water. Had the Viscusi number been higher than $US6.1 million, the agency would have imposed a less lenient standard.

There are many reasons for believing the number should be higher. One is that most of the workplace studies conducted by Viscusi and his associates exclude women. Recent studies suggest that women typically value safety about five times as highly as do men.

Another is that most of studies conducted in the US examine the value of life only to the person whose life is at risk. But other people value that life as well. In my own case they include my daughters, my son, my father, my wife. If I died tomorrow my own loss would only be the beginning.

The loss resulting from the tsunami is far more than the missing production and infrastructure. And it is far more than one Viscusi number for each of the 150,000 or so people believed to be dead. The entire planet appears to be grieving. We all seem to have lost something.

The economics profession is struggling to find the language to talk sensibly about what has happened.

That it can't yet do it says as much about that profession as it does about the scale of the tragedy.