Housing Market Boom or Housing Market Crash Waiting to Happen?
Without a doubt, the cost of housing is rising and it’s rising too fast. Sydney has a unbelievable rate of a 19% price increase while Melbourne has a 16% price increase in tow. The factors vary widely and both sides of politics are arguing their cases but despite the arguing, it is fair to say it’s far too late to make any meaningful change. Lending is surging but slowing down now due to APRA (Australia Prudential Regulation Authority) intervening. It’s hard to tell whether we can get out of this situation by limiting the damage done to the Property Market to make housing affordable once more as we are confined by the current state of the Macroeconomy.
As of now 40% of property ownership stems from Investors, Lending is surging above APRA’s set target of 10% and as of now the current rate nears 30%. People are beginning to either get in the market now by taking out massive loans before prices become far too high and Property has become another Financial Instrument that has formed into a bubble. Without a doubt both are occurring and quite frankly the blame should be placed on both sides of politics for not adhering to the situation sooner. But before we start pointing figures, let’s go into some necessary detail.
It is believed that Banks have been lending to borrowers without checking the requirements of borrowers correctly. This is quite simply a disaster waiting to happen as the worst-case scenario is a Financial Shit-Storm. This kind of lending is what led to the Sub-Prime Crisis in the USA which caused a massive string of defaults that led to a National Housing Market Failure and the collapse of Lehman Brothers and Bear Sterns. If we should thank anyone, thank APRA for beginning to curb lending by Banks lest a similar scenario were to occur here, in Australia. As lending requirements are laxed coupled with a Low Interest Rate, you have an abundance of Cheap Credit that is given out and quite frankly this is probably the reason why Household Debt is 120% of Australia’s GDP.
Now what has also caused such a lending surge? We know that Interest Rates are low and Lending Requirements are somewhat disappointing. Well to explain further, during the good times property prices were growing slowly and risk was quite low, which is good for your Average Australian. Although, government policy has made House Prices surge overtime and it’s beginning to look like a somewhat risky investment. What are these policies? you guessed it, Negative Gearing and Capital Gains Tax Discounting. It really is an idea that is similar to sliced bread which is ingenious in the sense that you can profit highly from a now high-return Financial Instrument while also reducing your tax. Logically if you’re an investor with plenty of liquidity and you are able to make repayments easily on a loan, you would borrow money to no end and invest into housing whereby you would rent and claim losses as a tax deduction. On top of that owning a property for more than 12 months and then selling it will result in a 50% reduction in CGT Tax. Let’s not forget Foreign Investment comes into it as well but it is fair to say that Housing Bubbles within other countries, namely China, have begun to rise thus attracting attention here, in Australia. After all Chinese Foreign Investment makes up 80%+ of Foreign Investment in this Country thus making it impossible to avoid such Capital Inflows.
With these factors of Cheap Credit, Negative Gearing, CGT Discounting, poor lending standards by Banks and Foreign Investment, you have a terrible Microeconomic situation (The Housing Market being the Microeconomy) whereby demand is far too high and supply cannot keep up. As of now we are in a position whereby we cannot move up or down, left or right, we are incapacitated. Sure if we wanted to curb borrowing some more we would have to raise Interest Rates however we can’t do that if inflation is 1.5% and Economic Growth is beginning to slow down. One could say raising Interest Rates would be the final nail in our Economic Coffin and a recession would hit us in the form of being kicked in the face.
With Wage Growth Low as of now, it would be a matter of time before Mortgage Repayments become to much and Defaults surge, if Interest Rates were to increase. Now you’re beginning to see the problem but how can we justify to Australian’s that their entire equity that resides within their homes has to disappear so Younger Australians can enter the Market? After all most of Australian’s Super is tied up in their home.
By identifying the issue at hand what is the solution? Scrap Negative Gearing and CGT Discounting while shifting Tax Deductions elsewhere, for ALL homeowners. These policies are truly unsustainable and the evidence of such is right in front of our eyes. Australian’s need to build their equity so they can enjoy it when they retire. However in saying that I truly fear the day that the Banks fail and we all lose and our savings disappear. But that is a worst case scenario as the government would bail the banks out to ensure savings aren’t gone completely.
This brings me to an idea that if Banks realize that they are ‘Too Big to Fail’ then who cares if they lend money out? Who cares if they turn Property; a safe investment, into a speculative piece of shit with far too much risk. Those who do care are those who suffer the most, the Banks don’t care because they know they will receive a Bailout; it’s all about the Bottom-Line. Due to all of this we may have to press the reset button and that means many sacrifices may have to be made and quite frankly the burden of those sacrifices will fall on Lower and Middle Incomes, as always. Some would complain that people should be able to reduce their tax via negative gearing because they pay too much, which is fair. Nothing is stopping policy makers from creating tax deductibles for Australians elsewhere and both sides need to agree on that because at this rate, we are heading towards ruin.