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Australia’s housing crisis is rooted in financial deregulation and debt-driven banking. This article explores structural reforms—from lending controls to equity solutions—to restore affordability and social cohesion.

It is no longer possible to avoid the realisation that Australia’s absurd property bubble is damaging the social fabric and creating huge divisions between those who own their own home and those who are either burdened with large mortgages or have little prospect of ever being able to enter the market. The situation is especially damaging for young people who want to start a family, with obvious demographic implications.

What can meaningfully be done about it? Initiatives like first home buyer grants only have an effect on the margins for the few it helps get a mortgage. Overall, it only makes matters worse because it tends to drive up prices.

Deregulation

Many believe that the Government should “step in and do something”, but this is not possible under the current institutional configuration. The financial deregulation of the early 1980s under the Hawke-Keating governments – a policy that mimicked what was happening in many Western countries at the time – meant that the federal government effectively ceded control of the quantity of money in the system to private banks. This has allowed the major banks to create extreme asset inflation in housing.

Deregulation also meant that there was only one way left to maintain control over the cost of money, the interest rate, which was outsourced to the Reserve Bank (RBA). This did not afford an ability to control house prices, especially as the RBA showed no interest in doing so.

RBA governor Michele Bullock recently dismissed claims that low interest rates are the primary cause of high Australian house prices, arguing that the main reason is instead a fundamental supply-demand imbalance – a shortage of housing relative to demand for housing. She said that the focus of the RBA is to manage consumer price index (CPI) inflation. Asset inflation, including soaring house prices, is not considered.

In theory, the government could constrain bank lending through the Australian Prudential Regulatory Authority (APRA) and there are hints that it may be moving that way. APRA in 2014 and 2017 imposed controls on bank lending, ordering the banks to limit the amount of interest-only loans. The regulator is currently considering debt-to-income limits to constrain lending, especially when 40 per cent of new loans are going to property investors.

The biggest problem, though, does not even rate a mention. APRA has a 35 per cent risk-weighting on lending to housing, while it has a 100 per cent weighting for business loans. The deck is massively stacked in favour of home mortgages. Mortgages account for more than $2.3 trillion in loans, compared with $1.14 trillion in business loans.

Decentralisation

In theory, at least, there are other options. One is for governments to work with the banks on infrastructure projects in public private partnerships (PPPs). This would perform two roles: it would partly draw the banks’ attention away from housing; and it could be used to improve housing supply by boosting regional areas and the outer suburbs of major cities. Moreover, it could aid the decentralisation that Australia badly needs to take advantage of the vast property outside the major cities.

At the very least, it would expand the banks’ expertise, which is now almost exclusively restricted to managing housing loans. Before deregulation, banks were skilled at funding commerce; now they are not.

Australia’s big banks can and do lend to infrastructure projects through various mechanisms, such as syndicated loans and project finance, underwriting debt for projects through the bond market and PPPs.

Another way to diversify Australian banking is to create an industry bank, like a development bank, whose task is to boost local industry, especially manufacturing.

The underlying capital for such a bank could come from bonds issued to Australia’s super funds, which manage over $4 trillion in capital. Or it could be publicly owned, along the lines of the UK’s British Business Bank and the Development Bank of Wales.

Economist Steve Keen proposes three other initiatives. First, is a government policy designed to put a lid on prices, that limits bank lending to a ratio of a property’s rental income, an approach known as a “property income limited leverage” (PILL).

Second, is the establishment of an affordable housing authority (AHA) that would create money and lend it, at a discounted interest, to buyers whose incomes are below the national average.

Third, more improbably, is what Keen calls a “modern debt Jubilee”, whereby the government creates interest-free money and gives it to mortgagees who can then cancel or reduce their debt. For it to be equitable, non-mortgagees would also have to be compensated. It would mean that the government would take back some of the control over money creation from the banks – perhaps the very reason why it won’t happen.

Equity

Another option is part-sales of house equity, which would require the creation of a new type of financial market. Equity in Australian property (the market value minus the debt) is a large source of unrealised wealth, but it is typically only actualised when the owner dies.

Total lending by banks for housing is estimated to be about $2.3 trillion. The total value of housing is about $9.2 trillion, meaning that there is almost $7 trillion in net equity.

People who own their own house, about one-third of the population, often find themselves in a position of being asset-rich and income-poor. If there were a suitable mechanism that allowed them to sell a percentage of the equity in their house to investors, it would unleash a large amount of capital into the system that is not debt. It would be analogous to reverse mortgages, except no debt would be involved.

Investors would get their returns when the property is sold. A secondary market, whereby investors could trade the equity they acquired, would most probably develop, in much the same way that investors trade bonds rather than hold them to maturity.

Part-sales of house equity would have to be made at a significant discount to make them attractive, which might help suppress property prices, improving affordability. It may also aid intergenerational transfer. Older parents who are concerned about the situation of their children might want to pass on cash derived in this way to help the next generation pay down mortgages or get a deposit.

Equity is never considered because discussion of modern finance tends to see the options as entirely binary. There is debt (or credit) which has an interest rate on it and accounts for over 97 per cent of the transactions in the system. This type of money is necessary to keep the system functioning; the challenge is to stop it from getting out of hand. Cash is interest-free.

The third type of money is equity. It does not have an interest rate on it, producing returns in other ways, and it is mainly a store of value. It cannot be used for ordinary transactions; you cannot pay your grocery bill with Telstra shares. Yet as a store of value, it turns out to be well over twice all public and private debt in Australia ($4.83 trillion). Finding ways to leverage it would reduce the nation’s dependence on debt.

The Tide is Turning

There are several other proposals to improve housing affordability, some worthy of consideration, some ridiculous. This year, the Federal Government introduced the Key Apprenticeship Program, offering up to $10,000 to apprentices commencing or recommencing their careers in the housing, construction or clean-energy sectors. Boosting the workforce to increase housing supply is an important initiative.

At the same time, governments should be easing government charges and excessive building requirements, which together make up about 40 per cent of the cost of building a new home.

Many criticise negative-gearing policy, which is unusually favourable in Australia compared with other English-language nations. The treatment of capital gains, whereby the amount of tax payable falls by half if the asset is held for more than a year, has also been attacked.

Wholesale changes to those policies are very unlikely, though, because of the political risks. A less perilous option could be to limit the number of investment properties investors can hold, which might reduce the buying pressure. About a fifth of Australia’s taxpayers (2.24 million) are in possession of 3.25 million investment properties, and they have been receiving about a third of total housing finance.

Other suggestions are more questionable. A proposal to tax the family home is the definition of political suicide. Similarly, the idea of having a third-bedroom tax was silly, but it does point to how severe the crisis is seen to be.

The Western world is experiencing a painful end to what is called financialisation: allowing banks to profit endlessly by making money out of money in a relentless spiral of debt.

It has reached its limit, and in the United States in particular, an attempt is being made to shift banking more towards increasing industrial output rather than monetary profiteering.

When a bank like JPMorganChase, one of the worst exploiters of the financial merry-go-round, launches a $US1.5 trillion Security and Resiliency Initiative to boost critical industries, you know that some­thing is changing. Australia’s leaders need to understand that the tide is turning and to act on it by putting policies in place to expand strategically important industries and the associated supply chains.

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Republished with thanks to News Weekly. Image courtesy of Adobe.