One of the most talked about things in our communities at the moment is house prices.  For months now we’ve been watching house prices in our local towns rise to levels previously unimaginable. Rents are high too, that’s if you can find a vacancy.

For owners, higher house prices are a good thing.  But for others, high rents are putting a strain on the family budget and high house prices are locking young people out of the market.  I know many who have little capacity to assist their adult children and fear home ownership will remain an unfulfilled dream for their kids.

The housing price boom has been driven by record low interest rates and the expenditure of people cashed-up as a result of the spending restrictions the COVID-19 pandemic has placed on them. Pandemic-induced material supply constraints aren’t helping either. Will the housing boom continue?  I wish I knew but whatever happens, it won’t be government induced.

Indeed, there is little government can do, even if we wanted it to.  It has little control over interest rates or the amount of money chasing housing.  Government certainly can’t set prices, not that we’d want it to. In any case the truth is, government have little interest in influencing prices because that creates losers as well as winners.

During the last election campaign Labor promised to wind back negative gearing laws, reducing incentives for investors who borrow to buy housing stock for rental.  This policy was rejected by the electorate and as a result, we won’t see it again.  In any case as the law of supply and demand tells us, a reduction in construction would further reduce supply and potentially, force house prices even higher. 

Both state and federal governments continue to provide financial assistance to first home buyers but they are of limited assistance in the current environment in which young people face difficulty in convincing a bank it can service a big mortgage.

One thing state and local government could do is to reduce some of the planning constraints on new land releases but in many regions, physical constraints and congestion issues limit what they can do.

Politicians regularly argue we should give young people partial access to their superannuation accounts to help them enter the housing market.  But the answer is in the “young” part.  They are unlikely to have large super balances and a small withdrawal now has a big impact on the value of their account in forty years’ time.  Further, government provides big tax breaks to encourage people in to super.  Early access for housing would amount to tax breaks for housing, creating the same policy and supply-demand challenges already discussed.

So again, don’t expect government to do much.  It’s likely the heat will come out of the market at some point.  We just have to hope any fall ends with a “soft landing” and people don’t get hurt.  While the Governor of the Reserve Bank has been firm in his insistence rates won’t rise for a couple of years, the energy crises in other countries is forcing up inflation in those economies and that could eventually have a knock-on effect on our borrowing costs here.  APRA, the body which supervises and regulates our banks recently insisted they assess the ability of borrowers to service a mortgage at interest rates three percentage points higher than the current prevailing rate.  That’s a sensible move but sadly, it will make the great Australian dream even harder for many.