Thursday, December 12, 2013

Too much money

Many tenants are frustrated would-be owner-occupiers. In the present housing market, this is what they're up against:

(ABS, 5671.0 Lending Finance, Australia, table 8)

There's never before been so much money lent to would-be landlords, and over the past year or so it has shot up fast. That's the case for all of Australia, and for New South Wales.

(ABS, 5671.0 Lending Finance, Australia (New South Wales), table 19)

This great wave of money is not powering the construction of a whole lot of new houses –

 (ABS, 5671.0 Lending Finance, Australia (New South Wales), table 19)

– instead, it's just swelling house prices and swamping would-be owner-occupiers.

We often talk about the problem of unaffordable housing as a problem of not enough money. Certainly, that's how it will appear to frustrated would-be owner-occupiers, particularly those on low- or moderate incomes (and, we might add, our low-income-earning state housing authorities). And all too often politicians will propose that the solution lies in giving them (the would-be owner-occupiers; not, sadly, the state housing authorities) more money, in the form of First Home Owner Grants.

There's another way of looking at the problem of unaffordable housing: as a problem of too much money burning through the pockets of some sections of the population. Too much borrowed money, facilitated by low interest rates, and sent barreling by our tax policy settings (particularly in relation to capital gains tax and negative gearing) into our housing markets.

What to do about too much money? 

The last thing this problem needs is a First Home Owners Grant. You can lever that grant several times over into more borrowed money to pay for a house, but in a fast-rising market those would-be landlords can lever their own earlier-acquired housing wealth into even greater purchasing power. 

Higher interest rates? That might work, but it would also mean less money for other sectors of the economy that really need it, and a higher price for our already costly dollar. A national housing debt ceiling? Well, maybe something a little like that.

(ABS, 5609.0 Housing Finance, Australia, table 12)

Our finance sector regulators could implement policies of 'macroprudential regulation', which more precisely target the specific problem in our housing markets than interest rates can. These policies might include limits on the size of loans relative to the value of the property to be purchased (ie the loan to valuation ratio, or LVR) – or even relative to the market rent for the property. These policies would restrain the amount of money lent for housing investment. And of course, we should reform our tax regime, to reduce the preferential treatment of housing that incites so much borrowing for housing.

More and more commentators are turning on to macroprudential policy; so should our political leaders.

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