Last month I attempted to present the economic and moral absurdity that has become the Australian housing market. You can read the entire post here, but in summary I made the case that the rise in Australia’s house prices has become an economic and moral concern.
But identifying the problem is one thing. It is another to diagnose the causes or offer a solution[i] though this obviously is the more valuable task. And so, this is the matter to which I must turn.
I will admit from the onset that I have no special credentials, secret knowledge, or certitude of opinion. I could (I suppose) thoroughly research and test my hypotheses, but I have four children to raise and a garden to water. In any case, it is far more interesting to present my case and invite any feedback or criticism that might return my way.
Housing for the common good
If housing is to serve the common good, it must be made universally affordable. The 30-year mortgage has traditionally served this function by extending housing to those who lack the assets to purchase a house outright. This mechanism has been of particular importance to young people in society, especially those seeking to start a family.
The 30-year mortgage, has been a mechanism to give a young family a stable and affordable home in which to raise children on a payment plan that accommodates for (most) young people’s lack of immediate cash.
Yet where mortgages become too burdensome upon families, this mechanism ceases to work towards the common good of society instead becoming a predatory device exploiting the need for shelter and stability. It ceases especially to support those young families who raise the next generation and instead becomes a barrier against having children.
The obscene amounts of debt that have become normalised in Australia’s housing market ismade more problematic by a system that places most of the risk of the loan upon the borrower. The burden placed upon borrowers thereby acts to tie them to career and family arrangements made with the mortgage first in mind and becomes a serious risk for these borrowers at least until the capital of the loan is substantially paid down.
Those particularly hurt by high mortgages are families on a single income, below average income, or with large numbers of vulnerable members (children, the elderly, or the disabled).
The economic winners of this arrangement are the banks, those able to downside or with existing property investments, and state governments which derive significant revenues from stamp duties on homes. Ever increasing house prices thus enable the exploitation of those without financial assets by those who own existing wealth.
Framed in this manner, it is clear that mortgages are not some neutral economic instrument, but an arrangement that contains moral implications for society.
Diagnosing the causes
Yet, the evolution of the mortgage from a mechanism that supported the establishment of young families to one which exploits them is not merely a symptom of rising house prices. It is, I will argue, the primary cause.
A plethora of causes have been offered for Australia’s housing crisis from a lack of supply, to taxation structures, to rising land costs. All of these undoubtably play some role, however it is the availability of credit, I believe, that has driven prices more than any factor.
The story, in brief, is thus. Financial deregulation in the 1970s and 1980s combined with declining interest rates in the 1990s and the rise of two-income houses dramatically increased the availability of credit to Australian households. This increase in credit lead inevitably to a bidding war between home buyers on the limited good of well-located housing. As prices rose, buyers became motivated to make family and career decisions that would give them a competitive edge (i.e. decisions that made theim eligible for more credit) and the cycle continued. Meanwhile investors, observing gains in the housing market, flocked to investment properties expanding simultaneously the (small) amount of capital and the (large) amount of credit in the market.
In other words, the housing game is being played on borrowed money. If credit is restricted[ii], then house prices will have to fall.
This is not merely a theory. Though it seems to have escaped the collective memory, there is a recent example of such a restriction of credit in the Australian housing market. In 2017, alarmed by the strong performance of housing in the eastern states, the Australian Prudential Regulation Authority (APRA) moved to tighten lending criteria for investors and interest only loans. The market immediately responded with sustained falls across 2017/18 until the APRA intervened by again, this time loosening lending criteria.
Despite cost-of-living and housing pressures featuring as a key issue in the last two electoral cycles, neither the government nor the opposition have suggested repeating this (successful) experiment. Indeed, it would take a highly courageous government to initiate a bursting of the housing bubble as the subsequent deflation could threaten to bring down the overall economy with it. We have instead (if I may be indulged another metaphor) been kicking the can down the road for a few decades now and all that has changed is the (exponential) growth in the size of the can.
Solutions
The solution to Australia’s housing woes is straightforward. House prices must come down (relative to incomes) by half and (in some markets) by half again. The mechanism to achieve this fall is also, I believe, obvious and implementable within the regulatory powers currently available to governments.
Credit must be restricted, not (to be clear) via interest rate rises, but through a tightening of lending criteria. Exactly how lending criteria ought to be restricted might be subject for debate. One possible idea could be a restriction of the income assessed towards the load (perhaps multiple incomes might be assessed at one and a half times their take home value). Borrowers cannot be permitted in good conscience to loan obscene amounts of capital under the pretence that the familial and working arrangements of a borrower’s twenties will continue to serve their aspirations and responsibilities in their thirties and forties.
What is lacking in Australia’s housing crisis is nothing more or less than the political will to upset an arrangement that has made a lot of people a lot of money across the past three decades. Although, in fairness, I must admit that there would be broad (though I think unavoidable in any case) economic consequences for Australia to reform its housing market to anything resembling affordability.
In the face of government inaction, individuals, communities, churches, and families will need to find their own solutions for those who the housing market has left behind. This has already been happening of course with the so-called “bank of mum and dad” the only means by which many are able to enter the housing market. Yet such support is obviously not universally available and reliance on such support at scale exacerbates existing inequalities and vulnerabilities.
The role of churches
Churches must take on a role here in providing an organisational structure for housing relief and helping to connect capital to young people in need of a leg-up. Churches too have a duty to lead a discussion on the necessity of housing reform and in providing moral guidance for such a discussion. This duty of churches stems in particular from an economic landscape that has made it harder to live as faithful Christians.
In my last article I wrote that “The Catholic Church, in particular, which preaches generosity in having children and against artificial forms of birth control, ought to be alarmed at an economic landscape that positions large families (read more than two children) as an upper-middle class privilege.”
Only a couple of days after my article was published, the Australian Catholic Bishops Conference released its February social justice statement; “The Cost of Our Living: Economic and Social Justice for the Common Good.”
The statement is short and worth reading. Yet, while I cannot decry anything that was written in the statement, it neglects to connect the problem of high cost of living to the Christian calling of marriage and raising a family. This is a missed opportunity. For while the Church undoubtably has a duty to preach to society as a whole where matters of justice are concerned, it has a duty also to support in word and deed the faithful who seek to live their calling in the face of economic adversity.
I have another (but more mild) criticism of the statement in that if offers little in the manner of concrete diagnosis of the problem nor specific solutions. Such statements must undoubtably ‘play it safe’ sticking to the known facts and established modes of discussion. Yet individuals (both lay and clerical) ought not to feel as circumspect.
While the statement cites “excessive corporate profits” as a cause of the cost-of-living crisis, my own inkling is that this profit mechanism (in the housing market at least) is best labelled as the sin of usury against which the Catholic Church preached with regularity until the last hundred or so years.
Defining usury is not a simple matter and whether the housing market can truly be condemned as usurious will need to wait upon another article. My broader point here is that the Church has a long tradition of speaking against economic sins with a critique that has concerned itself not with unjust outcomes but with the just use and teleological purpose of money.
We must recover a conversation that rejects any suggestion that economic systems or arrangements can be morally neutral but instead understands that certain financial instruments might be sinful in themselves irrespective of the apparent prosperity that they might bring. This is however, a conversation for another time.
Three easy steps
My title did promise a solution to Australia’s housing crisis in three easy steps and so I will leave you with the promised tripartite.
- Condemn the existing housing market as a mechanism for exploiting those without access to wealth by those who have access to wealth.
- Initiate a broad and sustained drop of house prices (preferably through a restriction of credit via more stringent lending criteria).
- Support vulnerable populations through investing in social and crisis housing.
[i] Though, as I intimated in my last article, I think we might be past the point where this can be resolved without tears.
[ii] Note that I am not referring to a restriction of credit through increasing interest rates (as the following example will make clear).
