Political self-interest will tackle property boom that defied experts and history

There is a growing recognition from all sides of politics that something needs to be done about the property boom the experts didn’t see coming. Self-interest will see to that, writes James Campbell.

It’s the property boom the experts didn’t see coming, one that has turbocharged inequality in Australia. Rewind to 2022 and most pundits were predicting house prices would either flatline or fall in 2023.

At one point, the ANZ had them dropping 8 per cent – NAB reckoned about 10 per cent. It goes without saying they were all radically wrong; instead of dropping, they rose 8.1 per cent. What went wrong?

It seems the real estate gurus were relying on history that told them when interest rates go up, the market stalls or goes backwards.

The reason for that is simple. As the price of money goes up, the amount of interest households need to find to pay their mortgages goes up, which means the amount banks are prepared to lend people goes down.

It’s estimated since rates began rising, the borrowing power of the average household has shrunk by 30 per cent, and 50 per cent for the first-homebuyers. Yet over the same period, house prices have increased by more than 10 per cent.

It’s estimated since rates began rising, the borrowing power of the average household has shrunk by 30 per cent.

According to Carlos Cacho of the investment bank Jarden in 2021, the average household in Australia could afford to borrow enough to buy a $1m home. This year, it’s down to $600,000 to $700,000. How can it be then that property prices have kept rising? One reason is migration at more than 500,000 last year, way above the government’s prediction.

Then there’s the collapse in the number of new dwellings being built, for which there are many reasons, not least because builders keep going broke.

There is an increasing dominance of “the rate-insensitive buyer” – people who have so much money, they don’t need to borrow, or who have such high incomes, they can absorb rate increases. Picture: iStock

But what has fascinated me was admission by financial people I have spoken to that one of the reasons their models didn’t work was because they failed to predict the increasing dominance of what they’re calling “the rate-insensitive buyer” – people who have so much money, they don’t need to borrow at all or who have such high incomes, they can absorb rate increases.

As reported on Saturday, mortgage specialist DFA estimates 45 per cent of all property transactions in the next three years will be made by buyers who don’t need to borrow money, compared with the roughly 25 per cent cash sales in 2023.

They’re also predicting more than half of first-homebuyers in the next three years will have help from the Bank of Mum and Dad.

The profile of people getting mortgages is also an eye-opener. According to the CBA, in June 2019 about 16 per cent of mortgage applicants were made by people with household incomes of between $200,000 and $500,000.

Last year, it was more than 30 per cent. To put this in context, in 2021 only about 23 per cent of households had incomes higher than $156,000 a year.

It’s hard not to agree with demographer Bernard Salt, who said to me last week that he thought, as a country, we might put up with the current situation for “one year” or “maybe even a decade”.

But “if it becomes a way of life and people start to realise they have been excluded because of the job they do or the family they have been born into”, it will breed “resentment that could then bubble forth in the 2030s”.

What’s the solution? There’s no shortage of ideas: build more houses, cut immigration, abolish negative gearing, abolish stamp duty and replace it with a land tax, ease planning controls – the list goes on and on. How much difference each of them would make is debatable.

What is certain is all of them are either politically difficult, if not impossible, or would have unintended consequences. Which isn’t to say there isn’t a growing recognition from all sides of politics that something needs to be done.

Self-interest has seen to that. Labor folk know they need to do something because if they don’t, they risk haemorrhaging votes to the Greens, while smart Liberals have worked out that unless something changes, they won’t have a future at all.