Australia is in a housing bubble. The market is not merely ‘red hot’ as some experts say but is soaring out of control, becoming increasingly out of reach for average Australians and making up more and more of Australia’s debt and wealth. Government policies are happily contributing to the bubble, dishing out significant funds to inflate ever increasing prices. While the topic has now entered public debate, there seems to be little political will to take the difficult, but necessary, steps to safely deflate this bubble.

Capital city house prices rose almost 8% last year. Sydney recorded gains of 12.4% in 2014, following from the 2013 14.5% increases. Land prices in Sydney rose 512% faster than inflation between 2001 and 2011, while the city’s population only grew 16%. Perth property prices outgrew inflation by an eye-watering 1,094%, with population growth at 28%. In fact, while it initially took forty years (1950–1990) for house prices to double, they doubled again in just fifteen years from 1996–2010.

This surge in prices is seemingly in contrast with the rest of the economy. Real wages have been declining (with a recent increase only because inflation has fallen). Similarly, Australia’s unemployment rate recently rose to the highest level in more than 12 years and consumer spending is slowing. These figures suggest house prices no longer reflect the current economic situation and basic economics warns a future correction is inevitable.

So in lieu of wage increases and economic growth, Australians are taking on more debt to afford rising house prices. The mortgage debt to GDP ratio has risen from 15.9% in 1988 to a record 86.9% in 2014 and the average size loan for owner- occupiers has grown to $346,600. Indeed official figures show Australians owe $1.8 trillion to lenders which, adjusted for inflation is the highest level since 1988 and the equivalent of $80,000 per person. In 2013 Australian private debt was 1.8 times household disposable income, one of the highest levels in the developed world. In essence, more and more households are leveraging themselves to the hilt to afford growing prices. Debt in itself is not necessarily a problem, but warning signs should appear when record high debt levels appear to be a key factor in a housing ‘boom’.

Unfortunately government policies only fuel this boom. Investor and housing tax exemptions cost the Australian taxpayer approximately $36 billion a year. The tax bill for negative gearing in 2012 was an eye-watering $12 billion, up $2 billion from 2010. Assumedly some of this money pumps directly into house prices. Neither side of politics seems willing to become extraordinarily unpopular by robbing Australian voters of such concessions. On a completely unrelated note, Australia’s federal MP’s collectively hold $300 million worth of residential property, so a reluctance for reform is not surprising.

Should our housing bubble burst, the pain would be widespread. Owner-occupied properties are the major asset of Australian households, accounting for 43% of all wealth. And while securing a mortgage is part of the ‘Australian dream’, diversity is key to lowering financial risk. Should house prices fall by even a few percentage points, the shock to the economy would be hugely damaging. The Big 4 Australian banks provide 80% of mortgages and would be faced with ugly balance sheets after a few mortgage defaults.

So how best to tackle this problem? Acknowledging there is a problem is the start. Although stricter regulation on lending and a healthy minimum wage suggests Australia is better equipped to deal with a housing crisis than the US in 2008, the inevitable correction needs to be discussed. The assumption seems to be that house prices will always rise, but this conclusion can’t be applied to any asset, especially when prices are fuelled by debt and public spending.

There is an opportunity for political courage to slowly draw property prices to a sustainable level. The first step would be to slowly decrease or limit housing tax concessions for housing, such as allowing negative gearing only for new builds or allowing investors to write off their losses only against capital gains.

These decisions would be hard, but the default position of extend and pretend can’t last forever. Long-term choices must be made to prevent a very forseeable crisis.

Rachel Poole wishes the mainstream media were a more rational bunch and writes at

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