The good news is that we may be getting closer to the end of the 25-year bull market in property prices: interest rates are likely at or close to the bottom so the tailwind from falling interest rates is fading; strong home building in recent years and the collapse in immigration may lead to an oversupply of property; and the work-from-home phenomenon may take pressure of capital city prices.
However, there are no guarantees. And things could just bounce back on the demand side once the pandemic recedes and immigrants return. A long-term multifaceted solution is called for.
The first thing to do is to tighten macro prudential controls to slow record levels of housing finance. Raising interest rates is not possible given the weakness and uncertainty hanging over the rest of the economy and crashing the economy to get more affordable housing will help no one.
So, a tightening in macroprudential controls to slow lending is warranted.
With housing credit now growing faster than incomes and at a faster monthly pace than when APRA last started macroprudential controls in 2014, and more than 20 per cent of new loans going to borrowers with debt-to-income ratios above six times, up from 14 per cent two years ago, they are arguably overdue.
This time around investors are playing less of a role in the property boom so macroprudential controls should be broader than in 2014-17.
The main options are restrictions on how much banks can lend to borrowers with high debt-to-income ratios and high loan to valuation ratios, and increased interest rate servicing buffers.
Ideally, first home buyers will need some sort of exemption. With the Treasurer supporting action and the Council of Financial Regulators (RBA, APRA and ASIC) expressing concern about household leverage they look to be on the way, although their implementation still looks several months away.
And last decade’s experience showed that they work.
Of course, this is just a cyclical response and more fundamental policies are needed to address poor housing affordability. Ideally these should involve a multi-year plan involving state and federal governments. My shopping list on this front include:
- Measures to boost new supply—relaxing land use rules, releasing land faster and speeding up approval processes.
- Matching the level of immigration in a post pandemic world to the ability of the property market to supply housing.
- Encouraging greater decentralisation to regional Australia—the work from home phenomenon shows this is possible but it should be helped along with appropriate infrastructure and of course measures to boost regional housing supply.
- Tax reform including replacing stamp duty with land tax (to make it easier for empty nesters to downsize) and reducing the capital gains tax discount (to remove a distortion in favour of speculation).
Policies that are less likely to be successful include grants and concessions for first home buyers (as they just add to higher prices) and abolishing negative gearing would just inject another distortion in the tax system and could adversely affect supply (although I can see a case to cap excessive benefits).