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House prices in Australia : Ideas and solutions

Addicts sometimes come up with all kinds of weird excuses and solutions for their life problems without acknowledging the core issue of their addiction.

Australia's national addiction is real estate and it's no surprise that policy-makers and politicians are coming up with whacky excuses and solutions around housing affordability that range from the dangerous to disastrous.

First to some of the recent excuses, and it is over to the 'don't scare the horses' Reserve Bank. Yesterday, the RBA's assistant governor economic Luci Ellis offered up a number of reasons why Australians shouldn't be too concerned about the level of the nation's home prices and household debt.

The problem is that many of the countries we are compared to are widely argued to have housing bubbles of their own, such as New Zealand and several large cities in Canada. 
Incidentally, Dr Ellis' own graph shows that Australia's price-to-income ratio is around the level Spain's was at the time of its property market crash, while the fact that we are a little short of Ireland's pre-crash peak surely shouldn't offer too much comfort.

Rich hold debts

Secondly, Dr Ellis argues that Australia's high mortgage debts are relatively safe because the biggest debts tend to be held by higher income households.
"Most of the mortgage debt in Australia has been borrowed by those most able to service it," she boasts.

Superficially, this makes sense. But think about how high some of the debts are for those wealthier households, as well as their generally much larger living expenses, and how safe from default are they?
How many dual income, high earning households are there in Australia who could keep paying their mortgage if one partner lost their job and couldn't find another one for six months or more?

Certainly, the older ones who might have got ahead on their mortgage and paid much of it off would probably be OK (and of course the older age groups are more likely to be in the higher earning category), but what about the younger, recent buyers?

That's not to mention the inequality that Dr Ellis skirts over, trumpeting the fact that most investment property debt is held by higher income households, without joining the dots that this is making lower income families the rental serfs of a landed class.

Relationship status determines housing status

A third argument is that the falling rate of home ownership amongst younger people (25-34 years old) started before home prices really took off in the mid to late-1990s, and is therefore due to demographic change more than lack of affordable housing for purchase.

There's probably truth in this, but it ignores another steep downturn in ownership rates amongst this demographic from the mid-2000s.

It also ignores the fact that ownership rates have also dropped noticeably in the 35-44 and even 45-54 demographics, with a smaller decline for older groups.

It seems common to assume that everyone needs a 20 per cent deposit when they first buy. 
This isn't actually true: although lenders require some deposit coming from genuine savings, it doesn't have to be as high as 20 per cent.

"So it's surprising that as housing prices have risen, the distribution of loan-to-valuation ratios — the converse of the deposit — hasn't shifted up over time."
To someone who used to head the RBA's financial stability department this should be pleasing, rather than surprising.

Perhaps banks have realised that housing valuations have become increasingly stretched and it is prudent for them to have a bigger deposit buffer to protect themselves against losses in case the borrower defaults.

Certainly recent experience in WA and regional Queensland suggests that this is a sensible policy — the values of homes in some mining towns having more than halved as the boom turned to bust, while even Perth has seen many properties fall more than 10 per cent from their purchase price.

Genworth, which provides insurance for the banks against potential losses on low-deposit mortgages, recently posted an 11 per cent profit fall due to these trends.
At least Dr Ellis acknowledges that this caution by the banks has a positive side.
"Because a high loan-to-valuation ratio does imply higher risk both for the borrower and the lender, it might not be such a bad thing [that this kind of lending has recently declined]," she said.

No-deposit home loans a recipe for financial disaster

No such reservations from Nationals MP Andrew Broad, however.
He has floated the idea of no-deposit loans for people who can present three years of reliable rental history.
This is financial lunacy.

The idea of a deposit when buying a home is to protect both the bank and the buyer.

For the bank it means that it is unlikely to take a loss if the borrower defaults — unless the home's value has fallen by more than the size of the deposit since the loan was issued.

For the borrower it means that they have a buffer against going bankrupt if they default on their home loan.

Without a deposit, if the home's value has declined when the bank repossesses and sells it, the borrower is liable for the difference. If they don't have the cash, and can't cut a deal with the bank, they're bankrupt.

For the financial system and economy as a whole, widespread no-deposit lending would probably push home prices even higher and then expose banks to large losses and potential collapse in the event of a real estate crash.

Instead of finding new and ever more creative ways of boosting demand and further stretching Australians' already tortured ability to pay for over-priced homes, how about we look at some ways to start kicking our housing habit?
Capital gains tax discount reduction, negative gearing reform and/or a national land tax could be a start.

After all, increasing tobacco taxes has helped Australia in the battle against smoking, so why not raise property taxes in the fight against non-productive land speculation?



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