Why the Banks Need to Keep Property Prices Up
Australia has learnt a lot form the American Banking experience. The staggering number of foreclosures, plummeting property prices and overdevelopment leading to an oversupply of housing in the United States, massively contributed to the collapse of banks and insurance companies. If prices were to dramatically fall in Australia the Banks and insurers would stand to lose hundreds of millions or even billions of dollars, given the number of loans that were written requiring little if any deposit.
The American experience has terrified Governments and developers around the World. In Australia there appears to be an undersupply of housing as development approvals never reached the heights of those in the US. This will help steady pricing but it will not push prices up anytime soon, especially given the pending interest rate increases.
If properties in Australia were sold for less than was owed to Banks the shortfall would need to come from somewhere – from insurers or be written off by lenders. This scenario has not escaped the attention of our politicians. They have not publicly announced this concern but their actions are showing that they realize there may be a problem.
When the Government extended the first home owner grant (FHOG) it was not to help first home buyers but to covertly assist the Banks, giving them time to reorganize and prepare for life without the grant. The Government is aware that buyers are overpaying for properties under $500,000 and that the (FHOG) has added to the housing affordability crisis rather than acted to solve it. The real reason the grant was extended was to help the banks – not the first home buyer.
The Government is hoping that China via its enormous stimulus package will maintain demand for our resources and more importantly help to maintain national employment. If unemployment significantly increases, the bad lending practices of our banks would be exposed and require enormous Government intervention. Neither the Government nor the Banks want property prices to plummet.
The Government does not want property prices to increase either, because that would create a whole new set of challenges. Firstly housing affordability is already a major problem and infrastructure projects have been delayed or ignored for over a decade. These projects would have greatly assisted housing affordability by allowing people to live in affordable areas and rely on quality, fast trains to quickly and efficiently get them to and from work. So instead of addressing the problem the FHOG was a band aid solution when the problem needed radical surgery.
We elect our politicians to solve problems and provide solutions to improve our lives, standard of living and access to facilities. This has somehow been lost along the way. Rest assured property prices will not collapse in Australia – this is good news but we certainly shouldn’t be thanking the Government or the Banks. Just don’t expect price increases anytime soon.