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RUBY:

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

For decades, house prices in Australia have been accelerating - surpassing expectations, and defying every prediction of a crash.

The pandemic has done nothing to slow down that trajectory, with prices continuing to go up, despite economic uncertainty and slow population growth.

The result of it all is more people permanently locked out of the housing market, facing steep rent hikes and homelessness.

Today, contributor to The Monthly magazine Russell Marks on why Australia’s housing market continues to confound expectations - and what might actually make a difference.

It’s Monday, March 7.

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RUBY:

Russell, house prices right now they’re higher than they’ve ever been. So could you begin by just explaining just how expensive they’ve become - and how we got here?

RUSSELL:

Sure. So over the last 30 years, we've just seen house prices grow and grow and grow, despite numerous predictions of bubbles bursting and all sorts of slowdowns. It hasn't happened. House prices have continued to grow at a rate much faster than wages.

Back in the early 90s, I guess the average house price was about two and a half times the average salary, and now it's about six times the average salary. And what that means, of course, is that Australians are borrowing amounts of money many times their annual income.

Dwelling values nationally have almost tripled over the last couple of decades. It started as something happening in Sydney and in Melbourne, but this really now is a national phenomenon that's even moving to the regions.

And this is having big social consequences. The number of first home buyers who are being permanently locked out of the market continues to grow. Rents are ballooning and homelessness is practically entrenched now for a significant proportion of us.

And when COVID hit, people thought this might change, but it certainly didn't.

RUBY:

Mm yeah I remember that - in 2020, when the pandemic began, there was this sense that the growth in housing prices might actually slow down - because people might not think its good time to make big financial decisions, and also there was no immigration - so in theory, there would have been less demand for houses. But that is not what happened. So what happened instead?

RUSSELL:

Well, that's a theory, isn't it, that we all learnt at high school supply and demand. But it turns out that 2021 was actually the greatest boom year of them all.

Archival tape -- Auctioneer:

“at two million eight hundred and fifteen thousand dollars Are there any better bids?”

RUSSELL:

Capital cities last year, the median house price rose more than 21 per cent.

Archival tape -- Expert:

“Australia wide house price growth was the fastest pace that we've seen in more than three decades.”

Archival tape -- Reporter:

“A typical Australian house has increased by over $130000 in one year. But in some suburbs, almost that type of growth has been achieved in just one month!”

RUSSELL:

That was eclipsed in some cities in Hobart.

Archival tape -- Reporter:

“Inner Hobart, it has hit a million dollar median house price that's double the money since 2016.”

RUSSELL:

House prices rose 26 per cent.

Archival tape -- Reporter:

“Brisbane prices are continuing to skyrocket faster than first home owner buyers can save.”

RUSSELL:

In Brisbane, 30 percent.

Archival tape -- Auctioneer:

“It sells and we are Sold. congratulations, at $2 million 815 thousand dollars…”

RUSSELL:

So a person who bought two years ago, for instance, is now hundreds of thousands of dollars better off than someone who didn't buy, which is great for them. But socially, it does mean that we are embedding two classes which egalitarian Settler Australia eschewed for for much of its history.

RUBY:

Mm so essentially Russell, what happened to the housing market when covid hit is actually the opposite of what you might expect! So why is that?

RUSSELL:

Covid obviously showed that things are a bit more complicated than supply and demand. We've known the answer to that question for a really long time. And the answer is that driving these price increases is a range of policy settings that make housing a really attractive investment and essentially makes investor preferences much more important than the need for people to have somewhere to live. Experts have talked so often about negative gearing and the capital gains tax concession that it's become almost cliched to do so.

So negative gearing, of course, is the policy that encourages property investment by allowing investors to reduce their tax liability by offsetting any shortfall between their loan repayments and their rental income against other forms of income. And there's effectively no limit to negative gearing in Australia, which is partly what's fuelled the housing investment boom in the last few decades.

Archival tape -- John Howard:

“The answer is simple: get rid of it, get rid of the capital gains tax.”

RUSSELL:

And then, of course, in 1999, John Howard's government handed investors a 50 per cent discount on the tax they have to pay on the capital gains they make when they sell property at prices higher than they'd paid for it.

Archival tape -- John Howard:

“It's not a tax on the rich. In the end, it will reduce the superannuation payout of four million Australians. Those four million will all get less superannuation than they deserve. That is why the moment we are elected we will move to abolish the capital gains tax.”

Archival tape -- Ad man:

“The answer is liberal”

RUSSELL:

And the social effects of these policies is to pit first home buyers or prospective home buyers and renters against negatively geared investors are boomers and tradies and doctors who are buying their 3rd or their 5th properties as part of their investment wealth creation portfolios.

RUBY:

Right - and so the policies that have landed us here - negative gearing and changes to capital gains tax - are either of those likely to change?

RUSSELL:

The short answer is no. Not in not in the foreseeable future. There's simply no political will to change these policy settings. Labor had a go when it was led by Bill Shorten, who has no investment properties.

Archival tape -- Bill Shorten:

“We want to create a level playing field for people who are buying their first home, with investors who are subsidised by taxpayer funded subsidies.”

RUSSELL:

Labor went to the 2016 and 2019 elections, famously promising to limit negative gearing to newly built houses and to claw back half of the capital gains tax concession.

Archival tape -- Bill Shorten:

“Mr Turnbull loves to say there will be less bidders. There might be a couple of less bidders, but the point about it is there'll still be competition for housing prices. It's not going to ruin the housing market. What it'll do is reduce the heat in an overheated housing market…”

RUSSELL:

But those policies, after a couple of election losses, have been ditched under Anthony Albanese, who coincidentally owns two investment properties, and the coalition will absolutely not look to change these policies.

But I guess the thing that could change all this is changes to interest rates.

RUBY:

We'll be back in a moment.

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RUBY:

Russell, what exactly is the role that interest rates play in determining house prices in Australia?

RUSSELL:

So in really simple terms, when you get a loan from a commercial bank, you have an interest rate, which is how much interest you pay on your loan and it's how the bank makes money.

So the interest rate the bank sets for its customers is linked to the cash rate that the Reserve Bank of Australia sets at its monthly monetary policy meetings. If the RBA increases the cash rate, your mortgage repayments will go up. If the RBA decreases the cash rate, your repayments generally should go down, though, as the cash rate was on its downward slide during the decade until late 2020, there were frequent stories of commercial banks failing to pass on the rate reductions.

But right now the cash rate and therefore the interest rates are historically extremely low.

RUBY:

Hmm. Exactly how low are they at this moment in time, Russell?

RUSSELL:

Well, they couldn't really get any lower. The cash rate is almost zero per cent. It's 0.1 per cent and the cash rates been that low for over a year. That's essentially, we're told, because economic growth has been what economists like to call sluggish.

Archival tape -- Philip Lowe:

“On the inflation and wages fronts, there are also significant uncertainties, and these partly stemmed from the uniqueness of the period that we've been living through.”

RUSSELL:

So the Reserve Bank has been trying to encourage spending and investment by keeping interest rates low. That's made it much easier for people to borrow to buy a house, which is another reason why prices are increasing.

Archival tape -- Philip Lowe:

“We still can't be sure how the pandemic will evolve, and we can't be sure how people will respond to further outbreaks. We can't be sure how they'll spend that more than $200 billion they've accumulated.”

RUSSELL:

Everybody who has bought a house in the last decade has bought in the context of interest rates getting lower and lower. Lately, there's been a lot of speculation that the Reserve Bank may increase the cash rate. The governor has said that the Reserve Bank won't be moving on the cash rate until at least 2024, but inflation is well and truly on the rise and the speculation continues. This speculation has already caused the commercial banks to raise their interest rates a handful of times since late last year.

RUBY:

Right ok, banks are already starting to raise interest rates and it's really only a matter of time until the Reserve Bank raises the cash rate, so when that happens, what does that mean for the housing market?

RUSSELL:

Well, I guess you've now got a significant proportion of households that are hocked in debt up to their eyeballs. And as interest rates go up, it's going to be harder for those people with huge mortgages to pay back their loans.

In practical terms, the amount of money home owners pay back to their bank every month will go up, and that could have a big impact on the rest of the economy.

Forget government debts and budget deficits, which the neo liberals have so successfully convinced us to fret about. Australian households are now amongst the most indebted in the world as a proportion of GDP, and we are far more indebted than Americans were before the global financial crisis, which was of course, sparked by over indebted households. So I guess you could say it's not looking good.

RUBY:

Right, so the situation, as I understand it then, is that Australians have a lot of household debt. Some of the biggest rates of debt in the world. They've got large mortgages, and that's happening at a time in which their repayments might stand to go up when interest rates do so. So there does seem to be this risk, then that people could actually start to lose their homes.

RUSSELL:

There is that risk. I was speaking to a furniture removalist over the weekend who does a bit of work for sheriffs in Adelaide, and he was telling me that he's been told by the sheriff's department to make sure that he's more available over the next 12 to 18 months as banks are expecting people to default on their mortgages.

RUBY:

Right ok and so are we likely to see this happen at a large scale?

RUSSELL:

Every prediction over the past few decades has failed to come to pass, so if history is the best predictor of future outcomes, we could suppose that the housing bubble, so to speak, is potentially still too big to fail.

The number of home owners in Australia continues to be larger than the number of people who don't own properties, so presumably policy settings will be found by governments desperate to placate existing home owners. And effectively, people who can't buy their homes are in a position where they have to continue to rent.

So you have the middle class continuing to or increasingly competing with people who rely on the rental market to have a place to live. Rents continue to go up.

That, in turn, puts more pressure on social and public housing, which of course has been systematically undermined by neoliberal governments over the course of 30 to 40 years, to the point that the housing stock public housing stock has dramatically reduced.

I think it's halved compared with the figure in the 90s. And people are really, really struggling.

RUBY:

Hmm. There's no doubt about that. Thank you so much for your time, Russell.

RUSSELL:

Thank you, Ruby.

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RUBY:

Also in the news today…

Ukraine’s deputy prime minister has said that Russia violated a temporary cease-fire agreement that would have enabled civilians in the Ukrainian port of Mariupol to flee the country safely. Instead, Russian troops attacked civilian targets and continued shelling the city.

Doctors Without Borders said that the humanitarian situation in Mariupol is “catastrophic” and that it is vital civilians be evacuated.

The numbers of Ukrainians fleeing the country has set off what the United Nations calls the fastest-moving exodus of European refugees since World War II.

And as the cleanup efforts as a result of the floods in NSW and Queensland continue, Queensland Premier Annastacia Palaszczuk has announced that the state government is launching a flood appeal with $2.1 million. She asked Queenslanders to dig deep and donate to flood-affected families.

It comes as the extent of the damage starts to come to light, with the Premier revealing that more than 26,000 hardship grant applications had been submitted so far.

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