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Debt binge main cause of house price rises

Last month I discussed the long-term cycles in Australian house prices and whether prices are destined to keep rising, crash suddenly, or suffer a mild correction and then remain subdued for several years. In the past few weeks there has been an escalation in the national debate over how to make housing more affordable.

Giving buyers money inflates prices

There are two main ways to make houses more affordable - cut prices or give buyers more money. Bringing down house prices would be political suicide. Many recent buyers have so little equity in their houses that cutting prices via savage bank rationing or big interest rate hikes could trigger widespread defaults and a collapse in construction activity causing an economic recession.

Instead, governments have focused on making housing more affordable by giving buyers more money. Simple! Every state already provides free (ie tax-payer funded) gifts to first home buyers and there is a range of discounts and waivers of property taxes like stamp duties. The debate has recently turned to allowing buyers to use their retirement funds to buy housing. There has even been a proposal whereby the government (tax-payers again!) would contribute 25% of the cost for first home buyers. None of this works. Giving buyers more money to spend inflates prices even further.

Address availability of credit

The real problem is credit. High prices are a function of high levels of credit extended by ever-willing lenders to ever-willing borrowers. Bank regulations are skewed toward favouring housing loans over loans to businesses. Even after the massive losses on housing debts in the US, UK and much of Europe over the past decade, banks and their tame regulators still have their heads in the sand in thinking that housing debt is virtually risk-free.

This chart shows lending to businesses and households in Australia as a percentage of national income since 1850.

There is something very worrying about this. The wealth and lifestyles we enjoy today were built by companies, and much of that was funded by business debt. In a healthy economy, household borrowing should not exceed business borrowing. Ever since bank deregulation and the housing-skewed bank capital rules (known as ‘Basel’) were introduced, lending on housing has swamped business lending. Household debt is now double the level of business debt.

After the GFC, companies in Australia and around the world de-leveraged. However Australian households piled on more and more debt thanks to our Reserve Bank’s rate cuts and bankers who keep on lending on ‘risk-free’ housing to keep their bonuses rolling in.

Business lending in the US and Europe has finally picked up, and that is driving their economic recoveries, especially the US. In Australia, it may take another crisis like the 1973-74 credit squeeze or the 1990-91 recession before regulators and banks return to a more healthy and productive balance between business and housing lending.


Ashley Owen is Chief Investment Officer at independent advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

December 10, 2018

Comparing money and debt now to money and debt historically is not apples with apples.

The majority of people are oblivious to the fact there is now almost no gov't issued money in the economy - over 97% of transaction are done by digital "money"

People assume that digital funds are a representation of actual legal tender gov't issued money - eg there is a $ of real money for each $ of digital money in your bank account.

The truth is far different. Money in the modern economy is not legal tender - it is actually a debt.

Banks have been issuing their own digital debt notes nominated in Australian dollars and that is what we are circulating

We now have almost no gov't issued legal tender in circulation. Almost all trade by consumers is carried out with digital "money" issued by banks.

The problem is banks issue that money by lending it - so it is borrowed into existence rather than issued by government on our behalf.

This also means that all "money" created by the banks out of thin air also has interest attached to it.

Now this is where it gets even worse and why our economy will collapse in a pile of fake money.

in order for that interest to be paid there is only one place for those funds to come from - more debt.

They are hoping ever increasing debt will drive an ever increasing GDP and ever increasing wage growth, which in turn will allow an ever increasing supply of new debt at a level which is beyond the nominal interest rate required to service the existing level of money in the economy.

The reality is that the entire monetary system is now built on a false premise that debt can expand exponentially.

You would have thought that someone would have figured out the stupidity of this a long time ago.

Well they did - in fact our forefathers even wrote a section into our constitution to prevent this from happening.

Section 115 - The states shall not coin money, nor make anything but gold and silver coin legal tender in payment of debt"

If only we could get politicians to abide by our constitution.....

April 19, 2017

I totally agree with Ashley’s article that current government policy and bank lending practices are discouraging business investment. It is much easier and cheaper to obtain an interest only loan to buy an investment property than a business.

Business loan conditions are much stricter and interest rates higher, even though most loans to small business are backed by mortgages over owner-occupied property. Banks are willing lend up to 90% on an investment property returning 2-3% per annum (excluding capital gains) compared to less than 60% to purchase a well established business earning 20% per annum.

David J
April 06, 2017

Ashley it would good to understand how 'business lending' is defined. A banks idea of lending a small business money is to take your houses as security for the business loan. Hence, it really just a home loan. So, are the figures even more skewed than the graph suggests??

peter matters
April 06, 2017

I don't understand why reversion to the original taxation of capital gains being based on the real gain is not accepted as reasonable by all political parties and analysts.
Introduced as "simplification" measure, it has encouraged much of the recent property speculation. With very low inflation, "investors" recognized that a 50% CGT discount on a property bought, tricked up and sold in one to 2 years was too good to be missed.
Adjustment of the cost base by the CPI index over the period held is fair and reasonable.
Who can argue differently, besides the greedy ones?

April 09, 2017

Hiya Peter.

I can argue differently, CGT is a purely optional tax,no matter what they do to it.

As I am self-funded I get nothing at all from the govt, in fact in retirement I pay more tax than I ever did when I was working. No pension, no cards, apart from the state card which gives me free train and bus travel.

I don't have any plans to sell anything to pay CGT, but I do comfort myself with the 70-80k I contribute to the govt coffers through pension saving and the tax I pay.

I do use the train, once a week go to the beach and then ride the pushbike 60 klms down the coast. The other days I just do 60 klms on the cycle paths around the suburbs. Trying to keep health care costs down for myself and the govt.

You can call me one of the greedy ones.

April 06, 2017

I clearly remember the "recession we had to have". Every third shop in my local centre was empty, holes in the ground all over Sydney from incomplete construction, Centrelink queues out the door everyday.

Very depressing.

April 06, 2017

Ashley, for those of us who were born after the credit squeeze and / or are new migrants who came here after these two events, can you please give us a short summary of what happened and the outcome in Australia ? Thanks.

April 06, 2017

It explains to some extent why traditional business lender NAB hasn't performed very well over the last 20 years and why CBA, with its emphasis on housing loans, has performed very well.

April 06, 2017

If investment gearing was limited to the income from the property it would focus retail investors on rental returns and cash flows. That's got to be a good thing, as even with these low rates it is cheaper to rent than buy in Sydney and Melbourne.

April 06, 2017

Ashley makes a very good point as illustrated by the charge for business versus housing loans. Business lending creates growth of GDP. But we have lost sight of the fundamental issue that incessant leverage and investor driven price spirals ultimately eats away at equity as loans to borrowers get bigger to accomodate higher pricing. A simple solution exists and has done for years, get the minimum deposit requirement back to 33% and perhaps higher for investors. That will moderate leverage and negative gearing. It will also take out the risk of overstretched borrowers defaulting. What about the first home buyer, yes they need help and should get genuine incentives to assist them to get to a deposit level. All of this would result then in an orderly realignment of prices and affordability. And also perhaps encourage further business lending as investor/speculators turn their attention away from a grossly overheated real estate market.


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