We can't be complacent about house prices

Some in government are hailing this as the “intended outcome of good policy”, a “soft landing in house prices”, making housing somewhat more affordable, especially for first home buyers who have been seriously discouraged by the persistent increases in house prices over the last decade or so.

The government cites several “policies” - the “clamp down” on investor loans, including foreign buyers, and interest only loans; the introduction of the First Home Super Savers scheme; and the resistance to the ALP proposal to reduce the incentive from negative gearing and capital gains tax concessions.

Sure. But many point out that housing is still unaffordable for almost a generation of young Australians who would need to find almost  $250,000 to cover just a 20 per cent deposit plus stamp duty to buy the average home, requiring an income about double the average to buy in Sydney.

In these terms, government policies still have a considerable way to go to significantly improve housing affordability.

Moreover, there is still a very fundamental question as to whether governments and our monetary and regulatory authorities can actually “fine tune” housing prices.

Is there a risk of a significant collapse in house prices, over and above what the government is aiming to achieve?

There is a lot happening in housing finance now beyond government policy.

The Chinese government has moved to restrict money flowing out of China, working to reduce what has been a significant demand for our housing in recent years.

This will not come back quickly in a world where Trump has initiated a “trade war” against the Chinese, and they are responding in kind. The Chinese are desperate to avoid any significant further falls in the value of the yuan, which would give Trump an additional justification for his tariff increases by being able to accuse the Chinese of “currency manipulation”.

At the same time, there is the more significant risk that if the trade war gathers real momentum it starts to have significant effects on our economy, and perhaps ultimately contributes to another global financial crisis and world recession.

Then there are the activities of our banks. The royal commission process has focused attention on the “sub prime” nature of the mortgage books of the “Big 4” banks where, in simple terms, they have lent a lot of money to people who they knew couldn’t actually afford it. These borrowers are particularly vulnerable to an increase in mortgage interest rates.

Although the Reserve Bank is constrained in being able to raise the official cash rate, as Australia now has the highest level of household debt in the world – at about 120 per cent of our GDP, and nearly 200 per cent of household disposable income – the banks have started to raise their mortgage rates as their “cost of funds” increases, especially as the US Federal Reserve raises its interest rate. This, in itself, offends many in businesses where they simply can’t just “raise their prices” to protect their profit margins, and points to the excesses of “bank culture” revealed by the royal commission, where profits are favoured over customer service.

Despite mutterings from the banks, they will undoubtedly do all they can to preserve this culture.

Also, while falls in house prices are welcomed by first home and other buyers, they also impact on the wealth of all home owners, and these “wealth effects” can ultimately work to constrain household spending which accounts for about 60 per cent of our economic growth.

Overall, there are many factors at work impacting on house prices, and there is a danger that they can easily gain momentum precipitating a very significant correction. 

While most analysts are predicting about a 10-15 per cent fall, it wouldn’t take much, especially if there is another GFC, for this to be significantly bigger, contributing to a serious slowdown in our growth, even a recession – that would be our first in 27 years. 

John Hewson is a professor at the Crawford School of Public Policy, ANU, and a former Liberal opposition leader.