- Australia’s $8.1 trillion property market demands a Royal Commission and subsequent intervention, a new research paper claims.
- A special report compiled by UNSW found that soaring prices present a “triple crisis” to the Australian economy that risks worsening inequality, undermining growth and threatening stability.
- Almost 90 experts weighed in on a report that has described the market as a “time bomb” threatening future prosperity.
- Visit Business Insider Australia’s homepage for more stories.
After repeated policy failures to arrest runaway prices, Canberra is being urged to wrest the the housing market back under control, lest it destabilise the entire economy.
Surging prices demands “a Royal Commission be established to investigate how to defuse the time bomb and create a more effective and equitable market for all Australians”, researchers from the University of New South Wales argue in a new paper published on Tuesday.
“Policy makers must pay greater attention to the economic fallout created by housing market distortions,” lead author and UNSW professor Duncan Maclennan said.
“The Commonwealth Government’s policy actions are boosting inflationary pressures and the RBA has effectively washed its hands of responsibility for house prices, arguing higher prices are good for the economy. But when people are paying more and more for rent and to service their mortgages, they have less and less to spend on other goods and services.”
It comes as many Australians are priced out of the market altogether, with ownership among the under 35s having “collapsed” as prices outstrip incomes.
House prices have jumped by more than 10% in the last 12 months, as $1 billion of property sells each and every day, while forecasts point to a rise of 14% in the coming year. But while the most recent run higher has been dramatic, it is only part of a much larger problem.
“Media coverage is rightly sounding alarm at recently booming house prices that are locking more young people out of the market, but this is far from a short term or cyclical issue,” housing economist Saul Eslake said.
“It’s a structural problem that’s been building for decades. And it’s one that won’t be solved by policy initiatives that just tinker round the edges.”
Eslake, the former chief economist at ANZ Bank and a current advisor to the Parliamentary Budget Office, was one of 87 experts interviewed by Maclennan and his team.
They concluded that all levels of government are required to fix the current market, namely by increasing market supply and building the underlying infrastructure required to service it.
Instead successive governments have focused instead on artificially increase demand, via programs such as loan guarantees, which have only helped inflate prices further.
Eslake said it’s now high time that policymakers “step away” from the strategy or risk tempting more than just a price correction, with the sector now presenting a “triple crisis” – worsening inequality, threatening instability, and undermining economic growth.
“A system that raises housing costs for all Australians, that raises instability and lowers productivity does not serve the nation well. And as for rising housing wealth, it is not like the wealth created from effort and innovation, for that creates gains for all. Rather, it makes some Australians, the affluent and older, better off by making younger and poorer Australians, and also future buyers, worse off.”
The UNSW team concluded the $8.1 trillion property market, which represents more than 50% of all household wealth, has completely skewed Australia’s economy, incentivising property speculation via quick capital gains rather than genuine innovation in other fields.
Perversely, the larger that bubble grows the more pressure there is on policymakers to maintain and even grow it further. Separate data published earlier this year found that with a majority of voters being homeowners the likelihood of reforming policies such as negative gearing were slim.
A Royal Commission could present one option to get around opinion polls, with greater responsibilities to fall to other regulators, like the Reserve Bank of Australia (RBA), an avenue to prevent further price dislocations.
With almost three out of four experts agreeing that sky-high mortgage debts present a threat to financial stability, it makes sense that the central bank would take more of a leading role in maintaining “a well functioning market”, with some commentators expecting an intervention later this year.
New Zealand’s equivalent, the RBNZ, has already gone down that route, cracking down on investor loans after prices jumped 20% nationally last year.
Closer to home, RBA Governor Philip Lowe has disclosed the Bank is keeping an eye on eye-watering debt levels, but that prices are outside of its remit, and quite possibly its control anyway.
But with the risks serious and mounting, the research appears to largely agree that someone needs to take responsibility before it is too late.