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RUBY:

From Schwartz Media, I’m Ruby Jones, this is 7am.

Australian property prices have just hit a record high. That’s despite predictions that the market would crash during the pandemic.

So what happened? And what would it actually take for prices to go down?

Today, national correspondent for The Saturday Paper Mike Seccombe on the dubious miracle of the housing bubble.

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RUBY:

Mike, at the beginning of the pandemic, we were told to expect a recession, and that it could even match the scale of the Great Depression and as part of that, many people thought that the housing market would crash. But what actually happened?

MIKE:

Well, in terms of housing, at least, it was nothing like what we expected. The great wisdom of Australian property ownership - prices will go up and up - held. Even a pandemic could not stop prices from going up.

Archival tape -- Unidentified Man #1:

Sydney's housing market is manic. 90 per cent of homes listed were sold at auction. Inspections are up a third and the average house is now $1.2 million.

MIKE:

In fact, it could only slow them very briefly and only in some parts of Australia. I mean, Melbourne went down, Sydney went down. A couple of the other cities went down a little bit. But across the regions, prices continue to grow throughout the pandemic.

Archival tape -- Unidentified Man #2:

Regional prices are galloping even faster than city prices because of the new tide of working from home.

MIKE:

And now, the most recent figures I've seen, in the three months to the end of January, prices in the capital cities were up two point two per cent.

Archival tape -- Unidentified Man #3:

Melbourne property prices are on a post lockdown rollercoaster with five suburbs on the Mornington Peninsula booming.

MIKE:

Even in Melbourne, they were up. And this has taken Australian home values to a new record high.

So they're higher now than they were before the pandemic. And the property market people, the banks, the people like CoreLogic who keep the statistics, they expect the market to keep booming for at least the next couple of years. Just last week, the Commonwealth Bank said that it had noted that the amount being lent had been accelerating already for four or five months. And the bank forecast that prices would rise by an average of 14 per cent - 14 per cent - in just the next two years across the nation's capital cities.

RUBY:

So how is this possible, Mike? How is it possible that this bubble is not bursting?

MIKE:

Well, it does, it seems to defy reality. You know, this is happening despite the closure of international borders, which means, you know, no population growth through immigration. So that driver of prices is out of the picture. It's happening despite sporadic lockdowns in various states, despite the fact that large sectors of the economy and, you know, some regions around the country remain deeply recessed.

And despite the fact that unemployment is expected to remain, you know, elevated, and wages are expected to remain flat into the indefinite future. So, as you say, it's bizarre. It's extraordinary. It's exactly the opposite of what all the experts were predicting a year ago. Of course, our political leaders are celebrating the fact that this proved not to be the case.

Archival tape -- Scott Morrison:

Thank you also for joining us here today. Australia’s response to the pandemic is working.

MIKE:

Two weeks ago, the Prime Minister, Scott Morrison, was at a function with various property and building types...

Archival tape -- Scott Morrison:

Our policies are leading us out of crisis and they're leading us into growth.

MIKE:

...Boasting about his government's success in further inflating the real estate bubble.

Archival tape -- Scott Morrison:

That's a product of confidence. It's a product of the right policy settings.

MIKE:

You know, he said that this renewed boom was a product of the right policy settings, which to some extent it is. I mean, the government's pumped a lot of money into it, but it's a lot more to it than that.

RUBY:

So how did the market not crash? How is it that it does just keep going up?

MIKE:

Well, at its base, it goes back to the basic premise of economics, you know, which is supply and demand.

Demand has outstripped supply in Australia for many decades. And that continues. But, you know, there are many, many factors that contribute to that imbalance between supply and demand.

RUBY:

We’ll be back in a moment.

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RUBY:

Mike, we're talking about property prices because we're in Australia, where everyone talks about property prices all the time. Tell me about some of the politics of this issue, though, the policies that are set to keep house prices high?

MIKE:

I spoke to Saul Eslake, who's an economist, an independent economist these days, but formerly the chief economist with a couple of the big banks.

Archival tape -- Mike Seccombe

You just talk and I’ll jump in with questions as they occur to me.

MIKE:

And he made the point that each year about 100,000 people become home buyers for the first time.

Archival tape -- Saul Eslake:

And up until the moment at which they do, those 100,000 people would like governments to do things to restrain price increases.

MIKE:

But the moment they get a house, of course, they want the opposite. They want prices to go up.

Archival tape -- Saul Eslake:

They join the roughly 11 million people who already own at least one property...

MIKE:

Who also don't want the value of their investments to fall.

Archival tape -- Saul Eslake:

For whom, the last thing they want governments to do is to stop the increase in house prices, or slow it down.

MIKE:

So, you know, the political calculus here is pretty clear. You make your appeal to those people and to their investments rather than to the people locked out of the market. And you win.

Archival tape -- Saul Eslake

The reason is simple political mass.

MIKE:

I suspect in the future this will change it because the number of people being locked out of the market is growing like topsy. But for the moment, that's the calculation.

Going back to the actual drivers - took a trip down the historical time tunnel with Eslake.

Archival tape -- Saul Eslake:

I was the federal vice president of the Young Liberals, who invented the idea.

MIKE:

And he goes back almost 60 years to the sort of turning point, as he sees it, in housing policy in Australia.

Archival tape -- Saul Eslake:

The thing that’s really fuelled it is extraordinarily generous grants to first home buyers.

MIKE:

And that was when the Menzies government introduced the first cash grants to first home buyers. That was after the 1963 election. And it was an idea, as Eslake points out, that was very strongly pushed by one of the rising Young Liberals at the time, one John Howard.

Archival tape -- Saul Eslake:

Howard was New South Wales president in 1963, and somehow managed to persuade Menzies to introduce them after the ‘63 election.

MIKE:

So before that time, home ownership rates were similar among rich and poor Australians, although, you know, obviously the standard of accommodation differed. But, you know, if you're a poor Australian, you had a pretty good chance of owning a home, as if you're a wealthy one.

But that decision on homeowner grants marked a point where everything began to diverge.

Archival tape -- Saul Eslake:

And that roughly marked the beginning of the fundamental shift in Australian housing policy away from boosting the supply of housing, which had been the policy under the Chifley and Menzies government, to one of inflating the demand for it.

MIKE:

Before then, government policy focussed on the supply side - that is, building houses. Governments built houses. After that, policy shifted to pumping up the demand side by giving grants to homeowners, which often just went into bidding up the price of existing houses, and giving tax breaks to property speculators, which did the same thing - bid up the price of housing. So that’s where it starts

Archival tape -- Saul Eslake:

So homeownership peaked at 72% per cent in the 66 census.

MIKE:

And as Eslake points out, Australia's peak rate of home ownership, which was 72 per cent, was recorded in the first census after Menzies changed direction on policy.

And home ownership rates have been trending down ever since then.

So that's one factor. Another factor is restrictive local government laws about planning, you know, which also affect supply, Eslake has his own term for these. He calls them banana laws.

Archival tape -- Saul Eslake:

Banana planning laws, as they’re sometimes called, and that is building absolutely nothing anywhere near anyone...

MIKE:

These contribute to urban sprawl. They contribute to us not having very dense housing. And they add an awful lot to costs. I've seen estimates of a couple of hundred thousand dollars going onto the cost of a house in Sydney because of the cost of just the land and that relates to planning.

And then a third big factor, which is more recent, is just floods of money. The deregulation of the financial markets. Over the past decade or so, enormous amounts of money have poured into the property market and that has just been capitalised into high house prices. So that's a big one. And that, I might add, is not unique to Australia. As this has happened, it's had an effect on property almost all around the world.

RUBY:

And so what are the outcomes of all of this, Mike? What does it mean for our economy?

MIKE:

Well, it means that a lot of money goes into housing that might otherwise go into other things. A recent survey of nearly 90 economists found that there was pretty widespread concern that overinvestment in housing and the rising debt levels in households that go with it were actually weighing down the broader economy. You know, that this was a drag on productivity, it was a drag on growth, and it was a potential threat, an incipient threat, to economic stability.

You know, witness what happened with the global financial crisis: that all began because of housing demand being pumped up in the United States and very nearly wrecked the world economy. So there's a lot of danger there.

And I might add, it's not only governments and private banks that are fuelling this sort of endless property boom. Much of it comes down to the actions of central banks over more than a decade, essentially since the GFC, where in order to try and get economic activity happening again, in order to try and get a bit of inflation into the system, they've cut interest rates to record lows and they've pumped enormous amounts of money into their economies. And the result of this has been the same everywhere.

You know, in New Zealand, property prices up, I think, around 19 per cent in the past year. Canada, Britain, the United States, all around the place, we've seen a big increase in asset prices generally and housing prices in particular as a result of these extraordinarily low interest rates.

And so the outcome of this is that the coming generations are increasingly locked out of the property market. More and more people will rent throughout their entire lives and will retire without the security of home ownership. And that's a big deal because all our pension system, superannuation system, etc, are predicated on this sort of understanding that people will own a home by the time they retire. It's going to be a big, big problem into the future.

RUBY:

So what do we do, Mike? It feels like that's always the question that we ask at this point in property stories.

MIKE:

[Laughs] What do we do?

RUBY:

What do we do?

MIKE:

Well, there isn't one answer. I mean, I suppose we have to acknowledge that more and more people are going to be renting. So greater rent assistance would be a big one. A lot more public housing would be a big one. Amending tenancy laws for greater security of tenure would be a big one to acknowledge the new reality.

Other measures would be things like increasing the supply of land. You know, changing some of those restrictive planning laws. Plan for greater density of housing, so we don't have so much urban sprawl. And that would also help with a lot of other issues, you know, like traffic congestion and so on.

And in particular, do something about the tax breaks that encourage speculation on property, you know, which is negative gearing and capital gains.

So there's a lot that could be done and a lot that hasn't been done. You know, there's been failures at multiple levels of government for decades and things have to change.

RUBY:

And so Mike, these changes that you're talking about, are any of them actually likely to happen?

MIKE:

Well, I'd make this point. At the last election, Labor was so sure that it would win, it actually took on a couple of the big issues. It promised action to win back tax breaks on negative gearing and capital gains tax. And guess what? It lost.

And the Morrison government is implementing policies to further pump up the price. So I think so long as the electoral calculus is that rising real estate values are attractive to the punters, nothing's going to change.

RUBY:

Mike, thank you so much for your time today.

MIKE:

My very great pleasure.

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RUBY:

Also in the news today...

The federal government has announced a $50 a fortnight increase to JobSeeker payments, when the coronavirus supplement ends in March.

That rise is equivalent to an increase of just under $4 a day, and welfare agencies say it isn’t enough.

At the same time, the government has also announced the creation of a new hotline for employers to report people who refuse a job offer.

And Coalition backbencher Craig Kelly has quit the Liberal Party and will now sit on the crossbench.

Craig Kelly has been repeatedly sharing misinformation about Covid-19 on social media in recent months.

I’m Ruby Jones, this is 7am, see you tomorrow.