The Australian housing market: A social disaster and a financial crisis in the making
... Excerpt
By Nick Beams—SEP Senate candidate for NSW
14 August 2013
The Reserve Bank of Australia (RBA) cannot carry out the kind of “quantitative easing” currently being undertaken by its counterparts in the US, Japan and Britain. Nonetheless, its own version of the same program—the lowering of official interest rates—is having a significant effect.
The official rationale for the policy is that it will stimulate investment by businesses, creating more jobs, and encourage consumer spending, thereby boosting the economy. But the series of rate cuts—some 2 percentage points over the past two years—has had no effect in either of these areas. Investment is coming down and the latest figures on retail sales are the worst in 50 years.
Rather than boosting the economy, the RBA policy is fuelling a growing social crisis for young working-class families seeking to buy a home, and inflating a financial asset bubble.
With official interest rates at record lows—the RBA last week cut its cash rate by 0.25 percentage points to 2.50 percent last week—the resultant decline in mortgage rates has driven a further rise in house prices, already among the highest in the world.
According to the Australian Bureau of Statistics, house prices rose by 2.4 percent in the June quarter, the largest increase in more than three years. They are now above the record levels attained in 2010.
The rapid price rise is being driven by cuts in mortgage rates charged by the banks which, while providing some limited relief to existing home buyers, have resulted in a flood of investor finance into the housing market, bidding up prices.
As a result, young families, seeking to purchase their first home, are either being shut out of the market or confront increasing financial hardship. If they manage to secure a loan, it is often for a house in the outer suburbs where they face great difficulties in travelling to and from work and where social services are either under-resourced or almost non-existent. Because of the size of the mortgage they have taken out—the average loan size has more than doubled since 2000—they potentially face steep increases in repayments as a result of only small increases in home loan interest rates.
The scale of these problems received graphic expression in one of the auctions held in Sydney over the weekend of August 3–4.
A rather modest house in the working-class suburb of Matraville, in Sydney’s south-east, sold at auction for almost $1 million. It was not an unusual occurrence.
The Australian Financial Review reported: “In Sydney, homes priced under $1 million are drawing hundreds to … inspections, and multiple bidders at auctions. An unrenovated Matraville house (more than 50 years old) sold for $996,000 after eight bidders took the price to $30,000 above the reserve.”
One real estate agent cited by the newspaper predicated a further “flurry of activity” in the market for properties under $1.5 million as “buyers try to jump on the property ladder before it further strengthens and stock levels become even tighter.”
Following the latest interest rate reduction, an analyst from the UBS bank told the financial newspaper that record low rates meant that the “ingredients are now in place for another bout of house price inflation in Australia and Sydney in particular.”
The Labor government hailed the rate cut as being good for home buyers and businesses. In fact, it was the outcome of a worsening economic situation which has seen finance capital seeking to gouge out profits through speculation, especially in houses.
The escalation is being assisted by the taxation system. Investors often take out interest-only loans in anticipation of further rapid rises in house prices. They can write off their interest payments against their tax liabilities, in a process known as “negative gearing,” then sell at a profit.
As a result, ordinary families face a wall of investor money pushing them out of the market when they try to buy a new home.
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