Housing market and Venezuelan toilet paper: What they have in common

Economist and housing market commentator, Leigh van Onselen, has published an opinion piece comparing the Australian property market to the reported toilet paper shortage in Venezuela.

Quoting an article published by The Telegraph recently, which discussed rationing policies put in place by the Venezuelan government which caused shortages in basic household items – including toilet paper – van Onselen says parallels can be drawn between the two situations.

“First milk, butter, coffee and cornmeal ran short. Now Venezuela is running out of the most basic of necessities – toilet paper,” reads The Telegraph article, “Economists say Venezuela’s shortages stem from price controls meant to make basic goods available to the poorest parts of society and the government’s controls on foreign currency.”

Van Onselen says the Venezuelan toilet paper shortage highlights one of the ‘most basic’ tenets of economics.

“When a government implements policies that impede the market’s ability to supply goods, such as price controls or quotas on the quantity of goods supplied, it inevitably leads to a combination of:

• Shortages (or perceived shortages) in the number of goods produced;
• Rises in prices either directly, or via black market activity;
• Wasted economic activity, such as excessive search times or activities aimed at side-stepping the regulations; or
• Speculative activities or hoarding.”

He says shortages in toilet paper brought about by price controls is causing a lot of ‘wasted’ economic activity, with the country’s citizens spending excessive amounts of time searching for the product.

“One Venezuelan has even resorted to developing a smartphone app enabling users to let each other know which supermarkets still have stocks of the tissue. The shortages are also leading to speculative activity and hoarding, as buyers seek to either stockpile toilet paper in order to avoid running out or sell it on the black market at over inflated prices.”

While he admits the mechanisms are different, van Onselen says similar factors are in play when it comes to the supply of urban land for housing in markets where urban consolidation (‘Smart Growth’) policies are in effect.

“Examples of such policies include restrictive zoning, urban growth boundaries, or cumbersome planning approval processes (e.g. precinct structure plans) that place an effective quota on the quantity of land that can be used for housing. When combined with the lack of infrastructure funding and provision, such policies usually result is a combination of:

• Inflated land costs and unaffordable housing;
• Smaller land plots than would otherwise be provided in the absence of such regulations;
• ‘Panic buying’ from home buyers afraid of ‘missing out’;
• Land banking and other speculative activities from land holders ‘cornering the market’; and
• Inefficient ‘leapfrog development’ (aka ‘planner sprawl’) as buyers look further afield for more affordable housing options.”