house of cards housing

The true driver of housing prices is cheap money, promiscuously lent by banks under the irresponsible oversight of regulators egged on by lazy governments keen to buy votes. Population and immigration has very little influence on it at all if you observe the hard evidence.

Where do house prices come from? Well, like all market prices they do reflect the balance at any time between supply and demand. I have never argued otherwise in this column or anywhere else. 

However, “demand” is not need and only becomes “effective” via the availability and price of liquidity – access to cheap cash. Access to supplies of money and its cost shape prices. So, if housing supply stays constant and the access to cheap money increases then house prices go up. 

It should be pretty clear now that this is what has been behind both Australian and global house price inflation: cheap money, promiscuously lent by banks under the irresponsible oversight of regulators egged on by lazy governments keen to buy votes, has fuelled the explosion in property asset prices we have been through. 

The fact that we are now seeing house price inflation deflate to some degree also proves my point about the centrality of credit.  

The evidence is in – prices can fall significantly as demand rises strongly 

Since the peak of the market in Sydney in late 2017 prices have dropped by perhaps 10 per cent while population has increased by over 100,000. That’s right, “demand” for homes meaning “need” for homes, went up significantly but effective demand expressed through finance, went down because the regulators and governments finally got around to tightening up on access to credit. 

I’m sorry to labour this as it’s been obvious to me since the GFC when I happened to be the main ministerial advisor on housing in the UK (timing is everything). 

Then we saw housing delivery collapse between 2006 and 2009 to perhaps 40 per cent of what it had been in 2005 while the population grew 4 per cent in that period. 

That’s right, prices went down when the supply went down. And by the way, the same thing is happening in Sydney now – a mirror image of what happened in the years before peak housing delivery at the end of 2017 when housing numbers increased as house prices increased. 

It’s a business model for developers – you release more housing when prices are high, reduce it when prices go down.

Why anyone would be surprised at the business model of developers – to release more housing on to the market when prices go up and to reduce delivery when the go down – is a mystery to me. 

It’s a sensible model which safeguards a stable return on capital. What it doesn’t do is meet “demand”, by which I mean need. 

In market conditions, it’s impossible for them to do so and I think moralism on this is beside the point. 

Other housing models are required in order to meet housing need, including more public housing, social housing, private rented and indeed homes for sale.

Although it is clear now that reality is helping make my point – the credit crunch combined with less Chinese investment is reducing prices while the population increases dramatically – I have had difficulties getting some politicians and bureaucrats to grasp that you cannot in our housing market reduce the price of homes by building more of them. Which developer wants to build more when the price comes down? 

The problem of house price inflation has too readily been seen as a supply problem when it is mostly a demand problem: governments have stoked up effective demand for housing as an asset class not as shelter and also skewed the benefit to existing homeowners who have out bid those wishing to enter home-ownership. 

This bribery of part of the electorate has dulled our understanding of what causes any kind of inflation. Conventionally defined as “too much money chasing too few goods” we for too long forgot the first bit and sought instead to soak up excess liquidity through housing production. 

Now that tightening credit has moderated prices the question becomes for how long this effect will continue and whether governments and regulators get spooked about it.

In this context, the recent banking inquiry was a missed opportunity. 

Banking in Australia and property inflation had become intimately entwined. 

House prices internationally and here track access to mortgage finance much more than to population growth despite what anti-migration ideologues think. 

The problem is worse here than almost anywhere because so much of bank finance goes into property: 80 per cent here versus less than 50 per cent in Germany where banks, amazingly, lend to SMEs (small to medium enterprises) to support business development. 

Low lending standards and inflated bonuses for originating mortgages based on ever rising values are core features of our banking system, have diverted investment away from more productive activities and created a growing divide between the asset rich and the rest. 

This is all far more anti-social on a bigger scale than dodgy “wealth management” fees for services never actually delivered, however bad that was.   

Dr Tim Williams is Cities leader for Arup in Australasia and chairs Open Cities which advocates for next-generation infrastructure.

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  1. Hi Tim, Ross King at Melbourne University did some excellent research supporting this argument in the late 1980s. He documented the housing boom arising from the change in banking policy to recognise dual incomes and increased lending limits and the subsequent jump in house prices. At the risk of repeating your argument, if housing affordability is not currently linked to either demand or supply than many of our housing policies need revisiting.

  2. This is why the Banks agreed to the terms of the Banking Royal Commission – exposing a couple of dodgy deals by te bansk, maybe a few fines – no problem. But what the BRC should REALLY have investigated was the macroeconomic implications of the NG, CGT Rebate, artificially low interest rates, and reckless lending practices, and how it has DESTROYED the Australian economy while the governments (Labour and Liberal) were fast asleep at the wheel.

  3. Great article Tim,

    In my life previous bursts in house prices in Australia were when equity redraw products were first made available, and before that when government abolished credit rationing and interest rate controls.

    Same situation where there was more money available to chase supply, which can only increase slowly. Individuals had to choose to borrow to ‘keep up’, or to hang back and see their relative wealth fall behind…