Australia has a gigantic housing bubble, fuelled by two decades of reckless debt issuances by our deregulated, yet highly protected, banking and financial system. Indeed, the latest international data from the Bank of International Settlements demonstrates Australia has the world’s second-highly household debt to GDP ratio and third-highest household debt service ratio.
Much noise has been made by federal and state government politicians about the housing crisis, but much of it is just plain laughable and a sad indictment of how thoroughly captured they are. Remember, we are taught that young and aspiring home owners are just being lazy, spending their incomes on smashed avocado toast and booze.
Instead, leading government politicians have told potential FHBs that they should get a better job that pays more, move to regional areas, get better, wealthier parents and just stop whining. Manufacturing these absurd fabrications is apparently a lot easier than doing anything of real value.
The housing affordability crisis caused by sky-high prices is focused in the market for owner-occupation, not for renting. Looking back over the last two decades, it is clear house price growth has outstripped household income by a long way, but household incomes have generally matched, if not outpaced, rental price growth. Melbourne is a clear example.
Household income growth outstripping rent growth is the last thing one would expect in a housing affordability crisis. Indeed, the rent to income ratio has fallen in the capital cities since it peaked in 2008 during the Global Financial Crisis. This suggests there is an adequate supply of housing. Melbourne, for instance, has experienced the largest real, quality-adjusted housing price growth of all. Yet during that period from 1996 to today, there has been more than enough dwellings built to house the population, given growth and demographic change.
Despite Sydney and Melbourne having some of the world’s most expensive housing prices, the banking and financial system is continuing to lend at rates above household income growth. This is facilitated by highly questionable lending standards, parental guarantees, interest-only loans, investors using unrealised capital gains in the current property portfolio as a deposit for acquiring the next property and so on.
Instead of attempting to increase demand for housing, government should be looking at ways to curb speculation to lower house prices. The problem with restricting demand, especially in Sydney and Melbourne, however, is that economic growth will take a big hit.
There is an alternate solution to solving the housing bubble without causing an economic downturn. It would require the combination of flat price growth – held in check with stringent macroprudential controls – and strong nominal wage growth over the next decade. Unfortunately, forward guidance suggests this macroeconomic cocktail is all but impossible. The regulators have no interest in implementing strong prudential controls that ‘will’ take speculation out of the housing market and nominal wage growth is the lowest since WW2 and still falling.
With the federal and state governments intentionally doing nothing to address the housing bubble, they have cornered the Australian economy and held society to ransom to save their own political skins in an attempt to ensure that existing speculative property investors and our banking system reaps the rewards of taking excessive risks in the mortgage market. This explains the laughable housing policies now coming into play, especially in Victoria. Shared equity schemes, doubling of the FHOB and stamp duty discounts and exemptions all serve to inflate prices.
It is important for young, aspiring home owners to remember the government is more interested in them borrowing more than they should to purchase their homes compared to taking on a much smaller loan. Why does the government want this? Simply put, to ensure existing homeowners and investors don’t feel the brunt of declining land prices and banks don’t go bust.
This is Australia’s primary housing policy: inflate prices by any means possible, further enslaving new buyers with obscene levels of debt for the benefit of bankers and existing landowners. It is an outrageous set of circumstances politicians, bankers and landowners have forced the economy into. But they are clearly not willing to do anything else given the obvious problems that arise if they do take real action to arrest price inflation.