How housing killed Australia’s productivity

The Australian’s Robert Gottliebsen has written an interesting article, based on research by former ANZ Bank director John Dahlsen, explaining how Australia’s housing obsession has diverted resources from the real economy and is stifling the nation’s productivity:

In the decade before the 1987-89 crash banks poured vast sums into business credit but they were enticed by property developers and the 1987- 89 crash triggered heavy losses…

Twenty years ago, around 2001, housing credit became greater than business lending and it has never looked back. It played a big part in the latest house price boom. But the gap is not sustainable particularly as we are way out of line with the rest of the world. Residential mortgages represent well over 60 per cent of Australian bank balance sheets — more than double the US and UK and much higher than similar countries.

To restore at least part of the balance requires an understanding what caused the imbalance.

In his paper Dahlsen isolates a series of them:

  • Business banking is much more complex than home lending…
  • APRA deems home loans be far less risky than business bank products, so substantially less capital is required to fund home purchases…
  • Interest rates have been lowered to record levels to boost demand for housing and there has been extensive money printing…
  • There has been significant increase in the amount of home lending on each dollar of borrower income…

Any further house price inflation will greatly worsen the fundamental community divide that has been created with adverse social implications…

Superimposed on these massive social challenges is the need for more bank lending for business. But the banks’ institutional shareholders love the high capital returns that come from housing and the relatively low risk…

The Federal government and the regulators have vital roles in the required transformation which must includes a massive rise in cash flow lending to business.

I have written extensively on this issue since the formation of MB.

For decades, resource allocation has been channeled away from the tradable sector and infrastructure investment towards the financial sector, as home buyers have taken on ever-bigger mortgages as they chased house prices higher.

This distortion in resource allocation is evidenced by the strong rise in housing lending compared with business lending, which has starved productive sectors of the economy of credit.

In the early 1990s, Australia’s banks lent nearly two-thirds to businesses, with the balance split between housing and personal lending. However, after the mid-1990s explosion of housing values, these ratios have reversed, with housing lending dominating at the expense of businesses:

The finance and insurance industries – which are dominated by mortgage lending – have in turn grown at around twice the pace of the rest of the economy since financial markets were deregulated in the mid-1980s:

Land is also a key input cost for most businesses. So when costs are inflated, it reduces the competitiveness of industry, making it harder for Australia to compete abroad. The associated higher housing costs also reduces households’ disposable income (other things equal).

The explosion of housing credit has driven residential land values to their highest level on record as a share of the economy:

One can only wonder how Australia would have looked if the billions of dollars of excess capital that had been poured into pre-existing housing had instead been funneled into businesses as occurs in places like Germany. Instead, Australia has been left with non-mining companies that are struggling to compete and stillborn productivity growth:

Would Australians be worse-off if the median capital city dwelling price was $375,000 instead of $750,000, mortgage debt was 70% of disposable incomes instead of 140%, and the banking sector was smaller, less profitable and more focused on businesses?

The answer is obviously no. Lower debt loads would make Australian households better-off, whereas the broader economy would benefit from the productivity-boosting effects of lower land prices, increased business lending (investment), and a more balanced economy.

Unconventional Economist
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