I am pleased that you have provided a submission to the Productivity Commission explaining the importance of applying real options thinking to housing and land markets. It is amazing that so few economists in places like the Productivity Commission and other government departments and institutions have not applied the real options thinking of Avinish Dixit and Robert Pindyck (Investment Under Uncertainty, 1994) and Mason Gaffney (Extractive Resources and Taxation, 1967) to analysis of housing, land, and natural resource exploration and extraction issues.
PC people picked it up from my writings in PC reports 35 and 10-15 years ago in relation to exploration and extraction, but clearly that work has been missed/forgotten by the current crew and/or they did not realise that real options thinking should be applied to land use as well as exploration and extraction.
My only concern with your PC submission is that some parts of it could have been explained more clearly. I understand the real options thinking of Gaffney and Dixit and Pindyck, but still had trouble with your wording in some places. It either could have been expressed more clearly or my understanding is lacking or both. I will read it again.
It will be interesting to read what the PC has to say in its report.
That's a fair comment, Ken. Keep an eye out for future FET articles where we try to explain these ideas as clearly as we can for the broadest possible audience.
For utility planners having a good forecast model of housing formation is essential. Two key parameters are population growth and housing occupancy. Behind these are economic parameters such as GDP per capita, mining investment growth (a WA thing), factors that could influence housing affordability. The big issue is there can be a lot of forecasting error in all this. So planners tend to overestimate the requirements because underestimating can be more costly- at least politically. This could be a source of why we perpetually have housing shortages.
Just a comment about your Dwelling stock per capita graph Cameron and Tim. Average household sizes declined from 1997 to 2025, so that means more dwellings per capita in 2025, but any assessment of housing need/demand has to consider households rather than population. Unfortunately, by definition the number of households equals the number of occupied private dwellings, so households tend to adjust to fit the available dwelling stock, excepting a small proportion not in private dwellings, including some without a built home. It is the latter in particular, as well as those in overcrowded dwellings and those paying too much of their low income in rent, that reflect unmet housing need. I have tried to address some of these issues with measuring dwelling demand, and need, in my paper 'Measures of dwelling demand: Making sense?' at https://www.landsupplyinsight.com.au/insights .
However, my key point in the context of your paper is that it is misleading to talk about dwelling stock per capita as a measure of housing adequacy when it is the number of households that determine dwelling demand, not population as such.
Cameron and Tim
I am pleased that you have provided a submission to the Productivity Commission explaining the importance of applying real options thinking to housing and land markets. It is amazing that so few economists in places like the Productivity Commission and other government departments and institutions have not applied the real options thinking of Avinish Dixit and Robert Pindyck (Investment Under Uncertainty, 1994) and Mason Gaffney (Extractive Resources and Taxation, 1967) to analysis of housing, land, and natural resource exploration and extraction issues.
PC people picked it up from my writings in PC reports 35 and 10-15 years ago in relation to exploration and extraction, but clearly that work has been missed/forgotten by the current crew and/or they did not realise that real options thinking should be applied to land use as well as exploration and extraction.
My only concern with your PC submission is that some parts of it could have been explained more clearly. I understand the real options thinking of Gaffney and Dixit and Pindyck, but still had trouble with your wording in some places. It either could have been expressed more clearly or my understanding is lacking or both. I will read it again.
It will be interesting to read what the PC has to say in its report.
Ken Willett
That's a fair comment, Ken. Keep an eye out for future FET articles where we try to explain these ideas as clearly as we can for the broadest possible audience.
In the meantime, this is our best attempt
https://www.fresheconomicthinking.com/p/explainer-markets-efficiently-delay?utm_source=publication-search
For utility planners having a good forecast model of housing formation is essential. Two key parameters are population growth and housing occupancy. Behind these are economic parameters such as GDP per capita, mining investment growth (a WA thing), factors that could influence housing affordability. The big issue is there can be a lot of forecasting error in all this. So planners tend to overestimate the requirements because underestimating can be more costly- at least politically. This could be a source of why we perpetually have housing shortages.
That is, the housing shortages exist mainly in the Planning Minister’s mind. Easy for property developers to exploit the anxiety that goes with that.
What even is a housing shortage in a market in which the quantity of ‘housing’ demanded is able to adjust as the price changes?
Makes no sense.
It's interesting how housing affordability problem is 'a priori' framed as housing supply problem
A productivity commision would have easy task to solve housing affordability by the fixing the demand side but that is not even an option.
Housing may be cheap at times in terms of a multiple of rent, however rent is at historic highs in absolute terms?
Yes, nominal rents are at a record high. But so are household incomes. The first chart here is useful to get a proper read on what has been happening to incomes compared to wage prices https://www.fresheconomicthinking.com/p/three-housing-charts-that-will-make
Just a comment about your Dwelling stock per capita graph Cameron and Tim. Average household sizes declined from 1997 to 2025, so that means more dwellings per capita in 2025, but any assessment of housing need/demand has to consider households rather than population. Unfortunately, by definition the number of households equals the number of occupied private dwellings, so households tend to adjust to fit the available dwelling stock, excepting a small proportion not in private dwellings, including some without a built home. It is the latter in particular, as well as those in overcrowded dwellings and those paying too much of their low income in rent, that reflect unmet housing need. I have tried to address some of these issues with measuring dwelling demand, and need, in my paper 'Measures of dwelling demand: Making sense?' at https://www.landsupplyinsight.com.au/insights .
However, my key point in the context of your paper is that it is misleading to talk about dwelling stock per capita as a measure of housing adequacy when it is the number of households that determine dwelling demand, not population as such.
Why don't they " manufacture" houses? Slash build cost? Ikea it
Build costs aren't causing prices.
If build costs rise, we will build smaller homes less densely, but we can still build as quickly as the market wants.
Yes AND free up land