Explaining Australia’s House-Price Inflation: The supply and demand of mortgage credit
With a record 10 consecutive interest rate hikes and the highest rates in over a decade, Australia is susceptible to a housing crash. Prices could plummet, as the cost of borrowing increases, and as unhappy investors and families under mortgage stress look to sell. For Australia, a significant downturn in housing could spell a nationwide economic disaster, because so much debt and wealth is tied up in Australia’s housing market. Australia’s residential property market is worth over $10 trillion — six times GDP, and in June last year (2022) Australia set a record for the highest residential land value to GDP ratio in the world, at 350%. The record was previously held by Japan at the height of their housing bubble, before it burst in 1992 amongst rate hikes aimed at containing the inflated yen.
Australia’s inflated housing market is a serious problem not only because the bubble might pop and drag the economy down with it, but also because inflated house prices unfairly privilege certain parts of the population at the expense of others. So how did we get here?
While Australia’s housing boom garners considerable mainstream and academic attention, there remains a lack of consensus regarding the cause of house-price inflation — a lack of consensus which has hampered efforts to address the problem. Thus, this is an issue that can benefit from our continued commentary and research.
In this paper, I identify mortgage debt as the variable which most accurately predicts Australian house prices, and I suggest that Australia’s sustained increase in house prices over the last 50 years has been fuelled by a sustained increase in mortgage debt. From here, I investigate the causes of rising mortgage debt, by tracing developments in the global political economy and Australia’s local political economy, that have produced the supply of mortgage credit and the demand for mortgage credit.
To summarise my argument: the increase in the supply of mortgage credit over the last 50 years is due to the expansion of global finance which has provided a torrent of credit to Australian banks via wholesale debt markets, and, due to deregulations which have allowed banks to lend more, bigger, and riskier loans. Importantly, banks have been eager to supply mortgages as opposed to business loans, due to the international market for mortgage backed securities, and the relative returns on offer through mortgage interest in the midst of slowdowns in the productive economy associated with neoliberalism and financialisation.
What about the increase in demand for mortgage credit? To start, when banks gradually started offering more, bigger, and riskier loans in the 1970s and 80s, this allowed more first home buyers to enter the market, and allowed home-owners to trade up, which set prices on an upward trajectory. Since the 1980s, demand for mortgage credit has been bolstered by the ‘assetisation’ of housing. After consistent growth in house prices through the 70s and 80s, Australians began to see houses as wealth-generating assets, and started taking on bigger mortgages as a way to generate wealth and build their retirement portfolio. Additionally, investors began to recognise houses as lucrative assets, and began leveraging mortgages to earn quick and easy capital gains. Investors increased their market share drastically throughout the 90s and 2000s, driving up prices significantly. Notably, home-owners and investors have been empowered by favourable tax policies and investor-friendly loans. The housing market has gradually transitioned into an asset bubble, with price rises driving up investment, and then investment driving up prices, in a self-reinforcing process — a process which made possible by an uliminited supply of credit.
Housing demand among Australia’s working and middle classes has remained strong throughout the housing bubble, because low interest rates and consistently rising prices have ensured that taking on an enormous mortgage is still preferable to renting, if you assumed the market won’t crash. Therefore, demand is also underpinned by a widespread belief that prices will continue to rise. This optimism persists today — amidst the current financial turmoil abroad featuring Silicon Valley bank and Credit Suisse (so far), we are being told not to worry about Australian financial institutions — because they are ‘as safe as houses’.
Other factors, such as town planning restrictions, and household sizes decreasing, may have also driven up demand, but the crucial point is that Australian families — who haven’t seen much of an increase in household income, have been willing to take on larger and larger mortgages, and banks willing to offer larger and larger mortgages, to enable these price increases.
Before I draw out this thesis, I will provide some figures on the growth of Australian house prices, point out the negative consequences of inflated house prices, rebut common supply and demand explanations of house-price inflation, and demonstrate the connection between mortgage debt and house prices.
Australian Housing Prices and Associated Problems
From 1880 to 1970, real (inflation adjusted) house prices in Australia were relatively stable (Stapledon 2012, p. 293), aside from a ‘catch up’ when price controls were lifted after World War II. Since 1970, real Australian house prices have been increasing, at times rapidly. This long run trend has been observed in other advanced economies, like the United States. Australian real median house prices doubled from 1970 to 2000 (Abelson and Chung 2004: 1), and then more than doubled again from 2000 to 2020, despite dips during the GFC and in 2018–2019 (ABS 2022b). With the money it costs to buy a house in Melbourne or Sydney today, you could buy 5 houses in 1970, adjusted for inflation (ABS 2022b). Meanwhile, real wages have only grown by around 10% over the last 20 years (ABS 2022c). Consequently, median house prices have increased from 3 times median income in 1970, to 8 times median income in 2020 (ABS 2022c).
There are serious negative consequences resulting from Australia’s increase in house prices relative to income. The most obvious issues relate to economic injustice. Property owners have essentially received enormous windfall gains, creating an enormous wealth (and therefore power) imbalance between property owners and renters (Arundel 2017: 175). This has disproportionately affected young Australians, many of whom have been priced out of the housing market, and forced into long-term renting — hindering their ability to accumulate wealth and build up savings (Bleby 2021). Young Australians are facing a situation where property inheritance significantly determines one’s economic outlook, even more so than occupation (Ryan-Collins and Murray 2021, p. 4). This is problematic for a socioeconomic system that purports to be a meritocracy.
Australia’s house-price inflation also has negative consequences for the macroeconomy. First, median earners who take on a mortgage are locked into debt repayments for the majority of their life, which reduces consumer spending, weakens aggregate demand, and makes these households vulnerable in the face of cyclical economic contractions. (Price, Beckers, and La Cava 2019). Additionally, excessive mortgage lending diverts credit away from more productive investments. The use of private debt to inflate asset prices is a way of ‘profiting without producing’, and incurs significant opportunity cost (Lapavitsas 2013). Australia’s long term economic outlook would be better served by investing in the production of renewable technology, or infrastructure, or anything that involves the production of real goods and services. Finally, the fact that Australia’s housing market is an enormously overleveraged asset bubble, puts Australia at risk of a devestating economic crisis when prices eventually crash (Shi, Rahman, and Wang 2020, p. 381). Thus, Australia’s house-price inflation is a problem, whether you are a strict defender of meritocracy, someone who believes affordable housing is a human right, someone who values economic justice, or someone who simply wants to avoid an economic crisis.
How can we make sense of Australia’s house-price inflation? Many have argued that it is a simple case of undersupply: population growth has exceeded property development, driving up prices. Defenders of this view tend to argue that undersupply is driven by development regulations, and/or immigration. This explanation is intuitive, and it has been perpetuated by policymakers, Reserve Bank economists, and government agencies (Murray 2021). However, this explanation does not stand up against the facts. The reality is that there has long been a healthy supply of property development in relation to housing demand (Murray 2021, p. 2). There has been a consistent increase in dwellings per person for the last 30 years, and a sharp increase over the last 15 years with record levels of property construction (Murray 2021, p. 2). There is in fact a surplus of housing in many parts of the country. As of census night 2021, 10 percent of houses and apartments in Australia were unoccupied, and while many of these homes were unoccupied because of normal turnover in the housing market, many more are perennially unoccupied dwellings like are holiday homes and empty investment properties (ABS 2022e).
Furthermore, we can see that Australia’s population grew much faster in periods during the 1960s and 1970s, without driving up house prices, and, during the COVID-19 pandemic population growth ground to a halt and housing prices soared (ABS 2022d). Even when we compare Australian cities, high population growth relative to property development does not strongly correlate with higher house-price inflation (ABS 2022d). Murray’s comprehensive 2021 study concluded that Australian house prices “are not particularly sensitive to the rate of new housing supply”. Another helpful point raised by Murray (2021), is that if increasing housing supply would bring down prices, then property developers — who lobby relentlessly to decrease the red tape wrapping up property development — would effectively be lobbying for policies that will quash their profits. This seems unlikely. Lastly, if Australia’s house-price inflation was driven by supply side problems, then we would expect to see rental prices skyrocketing alongside housing prices. This has not been the case. The median rent to income ratio in Australia was been stagnant at around 20% from 1995 to 2020 — a period which saw Australia’s most dramatic house-price inflation (ABS). Rental prices have been rising for the last few years, which may indicate an undersupply of dwellings in capital cities, however this is recent phenomena which doesn’t reflect market trends over the last 50 years.
Another explanation for house prices is interest rates. Australia’s house price inflation has been accompanied by low interest rates, and when rates drop, prices rise — as we saw during the COVID-19 response. While this is true, interest rates alone cannot explain Australia’s growth in house prices. As we see, low rates on home loans in the 1950s and 1960s didn’t boost house prices nearly as much as comparable rates did in the 2000s and 2010s.
So what has driven up house prices? The answer is glaring, when you consider that real wages have grown only modestly over the last 50 years, yet house prices have ballooned out of control. How is this possible? There is a simple answer: Mortgage debt. If we look at who is paying for houses, we can see that it is in fact banks. As of 2022, the median Australian mortgage is nearly $600,000, which equates to 88% of the median house price (ABS 2022a). If we look at the trends graphically, we see that the sustained increase in Australian house prices corresponds to a matching increase in mortgage debt. Economist Steven Keen has illustrated this relationship clearly. He has also shown that the same causal relationship between debt and house prices is observed in the US.
It is clear that there is a very strong relationship between mortgage debt and house prices. But we should not stop here. If we really want to understand Australia’s house-price inflation, we need to consider what has driven the sustained increase in supply of mortgage credit and demand for mortgage credit over the last 50 years. Let’s start with the supply. To answer this, we must retrace the growth of global finance.
The Growth of Global Finance
The growth and globalisation of financial markets has been the most significant development in the international political economy since the 1970s. From 1944 to 1971, a period known as ‘Regulated Capitalism’, and ‘the Golden Age of Capitalism’, international currency exchange was governed by the Bretton Woods system. Under the Bretton Wood system all currencies were pegged to the US dollar, the US dollar was pegged to gold stores at Fort Knox (it couldn’t deviate by more than 1%), and capital controls protected these pegged exchange rates (Lapavitsas 2013: 793). Under this system, finance was strictly regulated, and financial institutions mostly functioned as intermediaries that mobilised savings to invest in capital to grow the (productive) economy (Chomsky & Waterstone 2021).
Bretton Woods began to break down in the 60s, as the US failed to meet monetary demands. Excessive spending in the Vietnam War and President Johnson’s Great Society programs which overvalued the US dollar, along with pressures from the booming Eurodollar market, eventually lead the US to abandon their gold peg in 1971 (Chomsky & Waterstone 2021). The US went to fiat currency, and increased money supply rapidly. This changed the world economy forever, as it opened up foreign exchange (FE) markets, along with derivatives markets insuring against exchange rate fluctuations (Till 2015: 4). Several layers of secondary markets emerged, in which these insurance products were bundled into securities and traded, with more derivatives markets emerging for these securities (Till 2015: 4).
In the following two decades, under the banner of neoliberalism, US and UK financial markets were progressively deregulated. Deregulations included relaxing restrictions on interest rates, debt-to-equity ratios, and leverage trading, integrating commercial and investment banking, and deregulating the London Stock Exchange (Sherman 2009: 1–2). This drastically increased the frequency and volume of financial flows around the world in currency markets, debt markets, derivatives markets, share markets, and asset markets. Large institutional investors such as investment banks and pension funds emerged and took centre stage dealing in these financial markets. Over this same period, the US, UK, and other developed nations including Australia shipped manufacturing to emerging economies in East Asia. This created large current account surpluses for these countries, and these surpluses were invested back into the global financial system and recycled as credit for consumers in deficit countries. Essentially, the savings of families and businesses around the world, began scouring the globe via financial markets, in search of returns — and this meant Australian banks had a new source of funding. Australian banks could now issue debt securities in wholesale debt markets (including bond/money/repo markets) to raise as much liquidity as they need to fuel their lending desires.
Australian Banks could utilise this new supply of credit to increase their lending, thanks to bank deregulations. Prescribed asset ratios were reduced from 70% to 40% by 1978, in 1982 credit controls and portfolio restrictions were lifted, in 1983 Australia abolished the distinction between savings and trading banks, in 1986 the exchange rate was floated, capital controls were lifted, and interest rates controls on home loans were lifted, and in 1992 restrictions on foreign banks entering the Australian market were lifted (Battellino 2007; Debelle 2010). Also during this period, a number of building societies and credit unions converted to banks so they could expand their capital base and increase their lending (Debelle 2010). The result was the Australian banks could increase the quantity and size of their mortgages, and, crucially, they could access wholesale debt markets to raise the transaction cash to pay for these mortgages. Banks did just that. Australia’s increase in mortgage debt has been enabled by an increase in borrowing from wholesale debt markets. Running perennial CADs, Australia’s gross foreign debt rose from 12% of GDP in 1980 to 64% of GDP in 2000, to 94% in 2010, and to 131% in 2020. Around three quarters of Australia’s offshore debt is held by our banks, who use this credit to fuel mortgage lending. Well illustrated in the graph below, we can see that bonds issued by banks grew from practically zero in 1980, to 40% of GDP in 2011. Today, banks get half of their funding from wholesale debt markets. The middle graph below shows the bonds issued by Australian banks as a percentage of GDP.
Before I continue — an important point about credit and bank lending. As I have mentioned, banks go to wholesale debt markets to get ‘transaction cash’. The money that banks get from wholesale debt markets is not the money deposited in your account when you get a loan. This distinction is essential for understanding how banks operate. When banks issue mortgages and other loans, they do so through a process called ‘double entry accounting’. Essentially, when you are getting a $500k loan from the bank, what happens is that the bank electronically adds $500k to your deposit account. This money is created ‘ex nihilo’. The bank then records your deposit as a liability on their balance sheet — it is money they owe you. At the same time, the bank records the loan — the money you must repay — as an asset on their balance sheet. The deposit is thus created against the loan. There is definitive empirical evidence that banks operate in this way, most notably, papers from The Bank of England (2014) and Bundesbank (2017).
Using this accounting tool, banks can essentially issue as many loans as they want (barring regulations), because they are balancing out each liability with an asset. Now, wholesale funding comes into the equation when people actually want to use their money that is appearing in their depositing account, for example to buy a house. The bank needs liquid assets to make the transaction, and if they have lots of customers wanting to use their deposits, they may not have enough liquidity to make the required transaction. When this happens, banks can go to wholesale debt markets to cover their shortfall. It is important to note that low interest rates greased the wheels of these markets.
Why Housing?
The emergence of wholesale debt markets, deregulations of banks, and low interest rates, explains how banks have been able to supply more credit for the last 50 years. However, it doesn’t tell us why banks have been so eager to supply mortgages, as opposed to other loans. From 1990 to 2020, in Australia, “loans to firms for investment and working capital — the textbook role of the commercial bank — has increased only slightly from about 38% to just over 40% of GDP” (Murray and Ryan-Collins 2021: 12). Meanwhile, mortgage lending rose from 15% to 80% of GDP over the same period (Murray and Ryan-Collins 2021: 12). So, why did banks prioritise lending to homebuyers? One reason, is that returns on investment in working capital have become less and less attractive over the last 50 years, with the financialization of non-financial corporations (NFCs). As a response to decreasing returns to capital in the 60s and 70s, and growth of the financial sector, many NFCs have been remodelled to maximise short term shareholder dividends. CEOs have abandoned their business strategy that saw significant gains in the post war boom, moving from a strategy of ‘retain and reinvest’ to ‘downsize and distribute’, freeing up more income to spend on share buybacks and other financial investments (Lazonick and O’Sullivan 2000: 19). This drastic change in NFCs has helped make asset bubbles a more attractive investment than real businesses. Bank lending shifted further from businesses to property after the early 1990s recession which saw banks lose big on business loans, while mortgages were fairly resilient (Debelle 2020). Importantly, banks are continually reassured by the fact that mortgages are collateralised against the real property, so as debt increases, collateral value increases (Murray and Ryan-Collins 2021: 6).
Another reason for banks prioritising mortgages over the business loans, is the emergence of residential mortgage backed securities (RMBS). Securitisation involves packaging a bundle of incoming-producing illiquid assets (such as mortgages and other contractual debt) and selling them into financial markets as interest bearing liquid financial assets (securities) (Gorton & Metrick 2013: 2). Following the collapse of Bretton Woods, securitisation of residential mortgages to form RMBS grew in popularity, becoming the largest financial market in the world in the lead up to the 2007 Global Financial Crisis (GFC). The proliferation of RMBS incentivised banks to issue more and riskier mortgages, because they could immediately offload their debt to financial institutions who were eager to package them into RMBS. RMBS took off in Australia in the 1990s, increasing from 3% of bank mortgage funding in 1990 to 25% in 2006 (Ryan-Collins and Murray 2021: 15). The RMBS market crashed between 2007 and 2009, however issuance of securities in Australian dollars regained to pre-crisis levels shortly, and after a few years, investors had forgotten all about the crisis and were all in on housing again (Dalton 2018: 22). Australian banks continue to reassure the international RMBS market by keeping a sizeable amount of mortgages on their own balance sheets, and touting their record of no investor losses on prime RMBS defaults.
So, to summarise, the supply of mortgage credit has been increasing since the 1970s, due to the expansion of global finance which has provided a torrent of credit to Australian banks, and deregulations to allow banks to lend more, bigger, and risker loans. And, banks have been eager to supply mortgages as opposed to business loans, due to slowdowns in the productive economy, the resilience of the housing market, and the emergence of RMBS markets.
Demand for Credit
Now, let us turn to the demand side of the equation. Why have Australians taken on so much mortgaged debt? Well, for a start, some of the demand was already there, it just wasn’t being realised. As banks gained greater lending capacity in the late 70s and 80s, mortgages could be offered to more people — who already wanted to be a homeowner but previously couldn’t access credit. Additionally, established homeowners had greater access to credit for the purpose of upgrading their house, or buying a second house. This set house prices on an upward trajectory. And, as prices rose, and wages stayed the same, mortgages grew in size to sustain demand.
Consistently rising house prices caught the intention of investors, who began to recognise housing as a reliable asset that could deliver generous returns. Consequently, since the mid 90s demand for mortgage debt has been turbo-charged by investors looking to use mortgages as leverage. This includes institutional investors, and middle/upper class who buy investment properties. Once upon a time, after these Australians bought a primary residence, and maybe a holiday house, their demand for housing would stop. Now, wealthy Australians will look to buy 3, 4, 5 houses, as a way to generate wealth. Notably, the assetisation of housing has been helped by several tax benefits for property investors, and investor-friendly loans.
In 1985, the Australian Government introduced legislation to permit ‘negative gearing’, where property investors deduct the losses associated with their investment property from their taxable income. For example, if an investor earns $25,000 per annum from renting out their investment property, and the yearly cost of holding the property (mortgage payments and other expenses) is $35,000, then they can deduct $10,000 from their income for tax purposes. Additionally, in 2001, Prime Minister John Howard amended the capital gains tax, removing indexation, and offering a 50 percent tax discount on houses owned for more than one year. Consequently, “housing investors who speculated on relatively short-term price movements were provided with a major tax advantage compared to those who relied on long-term ownership and incomes from rents” (Ryan-Collins and Murray 2021: 18). Today, capital gains on property can often exceed salaried income for a full-time worker.
Investors were also incentivised by interest-only mortgages, which allow buyers to pay only interest for the first 5 -10 years of their mortgage, before principal payments kick in (RBA 2017). Investors who take on interest-only mortgages can tax deduct their interest payments, maintain a high level of cash to finance their other investments, and sell the property before principal payments kick in to cash in on capital gains. As of 2017, 64% of property investors utilised interest-only loans (Morris 2019: 20).
As a result of sustained growth in house-prices, tax benefits, and interest-only loans, the “investor share of new mortgage lending grew from 10% in the early 1990s to 40% a decade later” (Ryan-Collins and Murray 2021: 14–15). By 2016, property investors owned 27% of Australian residential properties, and held almost half of all mortgage debt (Morris 2019: 19). Foreign investors, welcomed by deregulations, have also joined the Australian property market, putting more upward pressure on house prices. Foreign investment increased from $9 billion in 2009–10 to $72 billion in 2015–2016 (Morris 2019: 20).
Property investment has a multiplying effect. The speculation about capital gains increases the number of investors bidding in the housing market, driving prices and potential gains up further, which drives up demand for mortgage credit, and so on. The investor share of the market has hurt home ownership rates, which have been decreasing since 2006 (Ryan- Collins and Murray 2021: 14).
Property has also become an investment for many everyday Australians, who are happy to take on enormous mortgages, pay off what they can over their life, and then cash in on capital gains to fund their retirement. Consequently, houses have come to represent a greater and greater proportion of Australians’ private wealth.
While the assetisation of housing is a large component of the increase in demand for mortgage credit, there are other possible causes. Pundits have argued that increased demand is driven by population growth, a decrease in occupants per dwelling, and sluggish property development caused by builder bankruptcies and red tape. Even if we assume these forces are driving up demand, the point I would like to make is that the only reason that this increase in demand translates into higher prices is that consumers are willing to take on enormous mortgages to match these price increases, and banks are willing and able to issue these mortgages. This is why mortgage debt is the deciding factor.
The willingness of consumers to increase their mortgages to match house-price increases is crucial. Housing demand among everyday Australians is relatively inelastic. Families need somewhere to live, and as long as house prices are growing and interest rates are low, then taking on an enormous mortgage is preferable to renting — because of your capital gains, and the fact that your mortgage payments function as mandatory savings that you can access later on. So, sellers can raise prices without a significant dip in demand. Another reason demand is so resilient to price rises, is that there is strong optimism about the housing market among Australians. This confidence comes from decades of consistent house-price inflation, the RBA’s commitment to low interest rates, and the Australian government’s track record of stepping in to protect the housing market whenever prices begin to drop.
Additional Evidence for the Debt Hypothesis
If Australia’s house-price inflation is debt-fueled, then we would expect to see house prices drop in periods when credit is restricted. This has shown to be the case. In 2017, the RBA and the Labor Party expressed concern that record high mortgage debt was putting households in a vulnerable position, and that banks were engaged in questionable lending practices (Morris 2019: 21). This led to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in December 2017, which found that financial institutions were engaging in irresponsible lending practices, and mortgage brokers were misleading financial institutions about the reliability of prospective borrowers in service of earning commissions (Morris 2019: 21). Following the Royal Commission, the APRA implemented regulations to restrict mortgage credit, including tighter serviceability buffers and restrictions on interest-only loans. As a result, “in 2018, the number of loans taken out to buy a new home or apartment dropped nationally by 18.7 percent”, and there was an 11.2% (inflation adjusted) drop in house prices (Morris 2019: 21). Restrictions were lifted in 2019 and lo and behold, house prices shot back up (Morris 2019: 21). We can see that the flow of credit had the same effect during the COVID-19 crisis. During the pandemic, interest rates dropped, mortgage lending shot up, and house prices soared as the rest of the economy was struggled. The current situation follows the same logic — rising interest rates have made mortgages more expensive, decreasing prices. House prices follow the ebbs and flows of credit, irrespective of other purported drivers of house-prices, like population and housing supply.
Over the past 20 years, as the house prices and mortgage debt have ballooned out of control, Australia’s economy has become dependent on house prices continuing to grow. Knowing this, whenever prices begin to fall, the government refuels the credit train with new home-buyer schemes or lowers interest rates, to prop the bubble back up. The current situation we are in is unique, because the government is fighting inflation, and cannot bail out the housing market with low interest rates and homebuyers grants. Thus, we are confronted with the reality that there is always significant risk embedded in inflated property markets, because there is always the possibility of sharp interest rate hikes brought on by external economic shocks. Such crises are made worse by the fact that our banks cannot turn to money markets to meet their liquidity demands when interest rates are high and the houses used as collateral are losing their value. As helpless onlookers, we can only hope that rising rates don’t lead us to the same fate as Japan.
What can we do?
I have argued that Australia’s inflated house prices are a problem, and that there is a strong relationship between house prices and mortgage debt. While this paper is mostly diagnostic, I do have some preliminary thoughts about possible policy responses.
First, it is clear what we should not do: We should not try to control the bubble by increasing property development in the private housing market (for example by approving more development applications, decreasing red tape, and offering grants to developers), nor by reducing immigration, because house-price inflation is not caused by undersupply of dwellings.
The most direct and effective way to bring down prices is by directly restricting runaway bank lending. This can be achieved through tighter debt-to-income requirements, restrictions on the size of mortgages to a multiple of their rental income, tighter liquidity requirements, and regulation of bank activity in credit markets. That being said, tightening credit will have negative consequences that we should be cautious of. If credit is tightened and prices drop substantially, many mortgage holders will be unable to sell at a high enough price to pay off their debt, jeopardising retirements and inflicting wide-spread financial stress on Australian families. If we decide to tighten credit, we should think about policies that can allow mortgage-holders to maintain as much of their equity as possible as prices drop, such as giving fiat money to households to pay off their mortgage debt — a strategy proposed as part of Keen’s ‘monetary reset’ policy proposal (Keen 2022).
Another point to consider, is that if debt-to-income ratios were tightened, then a slew of working class families would be excluded from the housing market, no longer qualifying for mortgages. Meanwhile, those wealthy enough to access mortgage credit would capture new economic rents, heightening wealth inequality. Although, over time, if prices dropped as intended, then the tighter debt-to-income requirements — which exclude low-income earners from borrowing, could eventually be offset by smaller mortgage requirements— which enable low-income earners to enter the housing market.
One way to put downward pressure on prices without hurting everyday Australians’ access to credit, is to place restrictions on property investors. Investors can be targeted with capital gains taxes, harsher stamp duty on investment properties, and pullback of negative gearing and interest only loans. This would hopefully deter investors from treating houses as financial assets. Additionally, making investment properties less affordable would result in owners selling/renting out their unoccupied holiday homes and empty investment properties, pushing down prices.
The most important point to keep in mind when approaching housing policy, is that there is no way to make the private housing market work for the poorest Australians. Thus, aside from any interventions in the private housing market, the Australian Government needs to provide much more affordable public housing for those who are inevitably priced out of the private market. We need to provide free dwellings for the homeless, and we need a public housing developer that can build and sell houses to low-income families at prices they can afford. Singapore’s public housing developer provides a solid model that we can learn from.
Some have argued that our sole focus should be on providing affordable public housing. It is argued that rising house prices are benefiting the millions of Australians who own a home or have a mortgage, so we should leave the private housing market alone, and simply provide public housing for those who can’t enter the market. Win win, right? Not quite. Australia’s inflated house prices are a problem, even if everyone is housed. They are a problem, because having an excessively over leveraged property bubble that dwarfs GDP leaves Australia’s economy vulnerable to a devastating collapse. If interest rates rise sufficiently and the bubble bursts, the economy will suffer mightily. High private debt to GDP ratios are very dangerous, and there is no matter how happy the economy seems.
If we want to cut down on private debt, it is useful to think in terms of market failure. No single borrower or lender is creating a housing bubble when they agree to a large mortgage, but when lots of us increase private debt, we create systemic instability that makes us all worse off. Therefore, we have a standard collective action problem that justified government intervention.
All of this is to say nothing of the significant political obstacles that stand in the way if we want to bring mortgage debt and house prices back down to earth. As it stands, neither major political party acknowledges that there is a housing bubble, both major parties celebrate rising house prices, and Australian parliamentarians are among Australia’s most active property investors — with a vested interest in their asset prices rising. A study of the 2021 parliament found 510 properties were owned by 227 federal MPS — an average of 2.25 properties per MP. More MPs own 3 or more properties than those who own one (Wilson, 2022).
If Federal Parliamentarians owned $500 billion dollars worth of shares in fossil fuel companies, we would be outraged, and we wouldn’t trust them to transition Australia to renewable energy. We shouldn’t expect parliamentarians to make housing affordable when they hold nearly half a billion dollars in property wealth. So, while the technical economic cause of house-price inflation is a sustained increase in private mortgage debt, and therefore the political economic conditions that drive the supply and demand for mortgage credit, we can add that the maintenance of the housing bubble is the result of a political efforts to maintain the supply and demand for mortgage credit, to keep prices moving upward.
Ray Cattoni is a fourth year PPE student at UQ. This is his first article for The Statecraft Review.
This article was reviewed by Professor Shahar Hameiri, a political economist from the UQ School of Political Science and International Studies, and Dr Cameron Murray, an economist and post-doctoral researcher at the University of Sydney’s Henry Halloran Trust. We are very grateful for their time and expert advice.
Thanks to Tom Watson and Joseph Christensen for editing this piece.
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