The Australian House Party Has Been Glorious - But the Hangover May Be Severe: Reforms to Mitigate Some of the Risks

Abstract

The scope and efficacy of regulation around mortgage lending in Australia is critical, not just for the health of financial institutions and financial stability, but also for the financial position and wellbeing of Australian households. The biggest risk presently is complacency. Banks are likely to continue to lend to residential property owners because the existing capital rules and returns encourage it. Similarly, Australians are likely to continue to invest in housing, with tax incentives to do so and a dearth of other savings opportunities that provide a reasonable return. However, the housing party in Australia will inevitably end at some point and the severity of the hangover will depend on the nature and scale of advance action taken by law makers and regulators. The further house prices rise above normal trend lines and economic fundamentals, the more severe the potential corrections and adverse consequences are likely to be, particularly on highly indebted households. Some housing related policy adjustments have been made over the last year, but further action is called for.