After years of suggesting that the housing bubble was a myth, the regulators and the corporate press changed their tune somewhat last month declaring that it was now in fact a major issue. In addition to the RBA, ASIC and APRA, the IMF and the UN all sounded alarms about Australia’s property sector.
The warnings came on the back of figures showing that annual price growth had surged, especially in Melbourne, where it was 16%, and Sydney, where it stands at 19%. While house prices have skyrocketed, wage growth has been miniscule. After both denying and feeding the problem for years, authorities are now concerned the conditions are being created for an all-out crisis.
Until now the bulk of commentators have suggested that the surge in prices stemmed from a lack of demand. That is a fallacy. There are more than enough dwellings in existence to house the population. Instead you have had investors buying properties as a form of passive investment, leaving them empty rather than leasing them out. That the government itself is now looking to stem this practice is an admission that the bubble is in fact debt-fuelled.
It is clear that house prices are well detached from both incomes, and the actual costs of the bricks and mortar. Cheap and easy access to credit, along with pro-developer government policies, have fuelled the bubble so much that household debt relative to income is now at a staggering 189%.
In many cases the banks have allowed people to take out huge loans on the basis that they hold a significant asset in the property. But if there is a correction of prices, that will have the potential to leave people with debts worth more than the value of their house.
Some economists have suggested that if the bubble was to burst prices could drop by as much as 40% – 60%! Even a more modest drop would leave many people in an untenable situation with millions of owner-occupiers, as well as investors, unable to service their debts. A social crisis is teetering on the brink.
Banks at risk
That type of a situation would also have a huge impact on the banks. They have $1.65 trillion in mortgages which accounts for more than 60% of the major banks assets. That makes the Australian banking system more exposed to house lending than most others around the world. It goes without saying that if a bursting of the housing bubble led to even one bank collapse it would have far reaching consequences for the state and the entire economy.
With all this in mind the Reserve Bank has ongoing worries about what to do about interest rates. Ideally, they would raise rates to discourage even more risky borrowing, but this would only increase the possibility of piercing the bubble. Similarly leaving rates where they are does nothing to improve the situation. Authorities have announced some tighter lending restrictions on the banks, but this is widely seen as too little, too late.
Recognising the potential for the housing sector to blowout, and that no other sector of the economy is experiencing real growth, the Turnbull government is preparing a housing package as part of May’s budget. While it will be framed as a suite of measures to improve housing affordability in reality it’s an attempt to mitigate a crash. At best this will only delay the inevitable.
The situation is past the point of no return and requires a major intervention rather than just tinkering at the edges. In fact, some of the suggestions raised, like first home buyers being allowed to dip into their superannuation, could make things worse. At the time of writing the government had not announced changes to negative gearing and capital gains tax, which are some of main policies that are adding fuel to the fire. Other proposals like encouraging private investment into ‘social’ housing are no substitute for much-needed investment in state-owned public housing.
The root cause of Australia’s housing crisis is the profit-driven nature of the sector. While the big end of town has made billions of dollars from the housing boom, they will not be prepared to bear the brunt in the event of a crash. The only way for ordinary people to avoid the pain is to organise housing on a different economic basis. We desperately need socialist housing policies where the profit motive is removed and a roof over your head is seen as a fundamental human right.
Editorial comment from the May 2017 issue of The Socialist