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Boosting leveraged demand to make housing more affordable makes no sense
https://www.lfeconomics.com/Blog/boosting-leveraged-demand-make-housing-affordable-makes-no-sense/
by LF Economics On 8 March 2017
In the thrall of irrational exuberance, Australia is experiencing a debt-financed housing bubble. In our two major cities of Sydney and Melbourne, the housing markets are out of control due to the rapid acceleration of debt enabled by lenders issuing remarkable amounts of mortgages.
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Household debt to income ratios for the states of NSW and VIC suggest this to be the case.
Australian lenders are handing out mortgages like confetti – why? It demonstrates banks and non-bank lenders are quite willing to issue risky mortgages to applicants who will not have the long-term financial capability to repay. Lenders are indeed taking on these excessive risks.
Throwing everything but the kitchen sink is today the common approach governments take to ensure housing prices continually rise given their fear of the political and economic damage caused by falling prices. Governments engaged in co-buying and co-owning housing with FHBs stimulates debt accumulation and hence prices.
The VIC government, for instance, is attempting to provide a large gift to current residential land owners and lenders at the cost of FHBs acquiring mortgages they cannot afford to service over the long-run. This is done through the proposed shared equity model whereby the government acquires 25% of the home price. To make matters worse, the VIC government is also cutting stamp duty for FHBs and doubling the FHOB (for new properties in regional areas); both in theory have the effect of boosting housing prices.
The VIC government cannot allow housing prices in Melbourne and the rest of Victoria decline significantly because it will suffer the same adverse impact that Dublin and Ireland experienced last decade. The problems are the same and the end result will be the same. Unfortunately, just like the federal government, the VIC government is stuck.
Implementing policies on the demand and supply sides to reduce land prices will cause a great deal of pain to all stakeholders: governments, lenders, homeowners, investors, including employees – many may lose their jobs if debt growth craters and removes a considerable portion of demand from the economy.
Government has dug itself into a hole but instead of assessing a way out, it simply continues to dig, hoping to kick the can down the road long enough for the next party in power to deal with the problems.
The LNP at the federal and state levels have refused to deal with the issues at hand, and prefer to enslave a generation of Aussies to the most profitable and high-risk banking system in the western world.