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Property insanity is really about lack of other options

6 Oct 2021 7 month(s) ago

Australian property prices are rampant as usual. Too few investment options is the reason.

Australia’s housing bubble has been inflating for the best part of two decades, and the concerns around that have not changed. Nothing much is going to be done about it. So a better way is to see the problem not as a property bubble, but a lack of other investment options in the Australian economy.

There is no diversified way to invest in Australian farming across different geographies and product areas, for example. That is ridiculous in a country that has world class agricultural potential. Overly narrow options, not property itself, is the real problem.

Australian house prices have surged almost 20% in a year in many parts of Australia (Sydney 23%). Treasurer Josh Frydenberg has fretted about the potential for instability and the generational impact. Usual cracked record, in other words.

SMSFs were partly set up to allow superannuants to buy property when they have accumulated enough capital. Trouble is, that has meant buying into the biggest bubble in the nation’s history, which may have some ugly consequences down the track.

The regulators are largely toothless. The reason? Economists can only act on what they can measure. That is easy with consumer price inflation, because the transactions are constant (daily items). But with large assets like property transactions are lumpy and occasional. So inflation in property prices is to some extent a guess, and averaging out of the implications of those transactions that do occur.

That is why Governor Philip Lowe recently said higher house prices are "outside the domain of monetary policy and the central bank", although Assistant Governor Michele Bullock later said: "developments in the housing market (including prices) provide information on the emergence of financial stability risks".

They can’t measure it properly, so they conclude that they are impotent to do anything.

Back in the real world, the generational impacts are enormous. Younger people and families are either priced out of the market or forced to take on ludicrous amounts of debt.

Graham Hand of Firstlinks outlines things that could be done, many of which have been tried before with little long term impact:

– Introduce macroprudential controls,

– Increase the ‘floor rate’ or ‘buffer’ used to assess repayment capacity,

– Tighten lending standards, overhaul planning rules and land availability (the biggest issue bit good luck getting around the self interest of developers who fund the politicians)

– Review the role of the RBA in housing policy (a good idea but you still have the same measurement problem that economists cannot deal with)

– Lightly tap the interest rate brake (it will have to be light considering the debt burden out there)

– Maintain responsible lending rules (strange: I thought the endlessly virtuous, well meaning banks are ‘responsible’ now)

– Examine a wide range of tax and welfare rules that benefit property (of course the halving of capital gains tax has had a big impact).


As economist Saul Eslake says, the political barriers to real change are big and long standing:

"For all the crocodile tears which politicians of all persuasions routinely shed about the difficulties facing those wishing to get their first foot on the property ladder, deep down they know that there are far more people who already own at least one property (and who therefore have a very strong interest in policies which result in continued property price inflation) than there are who don’t, but who would like to (and who would prefer, at least until they succeed in their aspiration, policies which would restrain the rate of property price inflation).

And, sadly, there’s no reason to think that political calculus is going to change. Nor, therefore, are the housing policies which have resulted in created the housing system which Australia has today."

There will be no solution in the housing sector, in other words.

Another way to look at the problem is to see it as an issue with the rest of Australia’s financial structure. There are too few other investment options, a narrowness in the financial markets.

The lack of options in agriculture is one clear gap. Another is the thinness of venture capital. There are many others. That is why property is given so much attention.


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