ECON-DIT

Words by George Young and Kyle Scott

The Australian Nightmare Earlier in the year we wrote an article about troubles in the Australian housing market. We outlined some key issues associated with the current housing bubble, notably the restricted supply due to zoning laws/development times and overstimulated demand (encouraged by government initiatives). This is occurring amidst an already tumultuous global market experiencing energy crises and “long-covid” economic fallout. Major bubbles in the last 20 years have been the early 2000s Dotcom boom, 2008 CDOs (causing the GFC) and Crypto. All of these demanddriven explosions came to an end and left millions in the red. The housing bubble has to burst - it is just a matter of time. What happens when it does?

Artificially Inflated Demand The federal government’s first home buyer’s scheme increases access to properties by reducing the minimum house deposit to 5%. This, coupled with up to $10,000 in grants, gives people access to the property ladder who would be unable to own a home otherwise. The scheme intends to be helpful and reduce stress on the saturated rental market. But buying a home on a 5% deposit means the remaining 95% is borrowed from the bank (a highly “leveraged” position) and is exposed to interest rate changes. Although intended to ease housing access, the scheme introduces players into the market that otherwise wouldn’t have been at an auction, creating more competition between buyers and driving up prices. Add to this the delayed expansion of residential areas (slow government planning, low supply of building development, we’ll save it for another time) and you see average house prices rise more than 240% over the last two decades.

Debt Defaults Do Damage At the time of writing the cash rate is 1.85% (the highest in 6 years) and expected to rise amidst growing inflation. 60,000 leveraged first home buyers are about to be smacked with a stiff hike in mortgage repayments, not to mention millions of home owners with pre-existing mortgages. Couple this with a cost of living crisis and wallets start to get a lot lighter. The average wage in Australia accounts for only 6.37% of the average house price. People will have to make sacrifices: pay off my mortgage? Buy groceries? Pay for my child’s education? The recent 5.2% minimum wage rise will help to ease this pressure but eventually costs will be passed on to consumers once more.

What happens if the repayments on your new house become too expensive? You default on your loan. Your credit score gets a black mark, affecting future borrowing capacity, and you are thrown back on the rental spiral once the bank reclaims your house. If the bubble bursts and house prices deteriorate then your property could go into negative equity, where it is worth less than what it was bought for using the loan. To default here would mean you owe the bank the difference in price on top of the loan (that you only contributed 5% to). Negative equity is not a far-fetched concept. When bubbles burst investors engage in a selling run to escape the ensuing crash in prices, cyclically

driving prices down. The last time house prices fell in Australia was after the 2008 US housing market crash (kickstarting the Global Financial Crisis), where growth fell from +10% to -5% in the space of a year.

This predicament is not exclusive to Australia. US Google searches for “sell my home fast” have increased by 2750%. It is easy to throw numbers around and scream bloody murder, but the effects of a housing market crash have very real implications for very real people. Homelessness, malnutrition, poor education, domestic violence, with a heavier impact on women/ the elderly/ minority groups. Super funds could see large losses. Decreased incomes lead to less consumption which disproportionally affects small businesses.

Some Suggestions Who is to blame for this situation? It doesn’t really matter. This has been building for 30 years and pointing fingers at either side of government doesn’t dampen any of the issues that may occur. The only way to avoid the economic effects of a market crash would be to close our borders and return to subsistence farming with a bartering system. In the absence of that, the government and banks must make sure to provide ample information to home buyers so they are sure of the consequences of taking a loan. A strong social support network needs to be in place to help those most at risk if housing prices do slump. Affordable and sustainable long-term housing initiatives would increase the supply of housing and ease prices. In the short term, there is little room for flexibility. In the long term, both state and federal governments have the capacity to learn from their mistakes and create a sustainable housing environment that benefits all Australians.