House prices across the globe are growing at 9.4%, the fastest rate for the past 30 years with policymakers everywhere panicking to make housing more affordable and Australia is no exception. Australia’s extremely accommodating financial conditions and record-low interest rate environment has been conducive for housing prices rising by more than 20.3% in the past year. As global supply chains also come under enormous pressure, the apparent housing bubble has been amplified by a lack of supply of houses and increasing materials prices.
Pursuing higher interest rates would bring down house prices relative to incomes, increasing the cost of servicing mortgages and tempering housing demand. However, monetary policy as a blunt instrument also runs the risk of jeopardising Australia’s economic recovery from the lockdown. Perhaps, more promising would include tightening ‘macro-prudential tools’ such as capital and reserve requirements and direct control over lending rates and quantities to limit the level of risky mortgage lending.
Moreover, lending controls typically make mortgages more expensive for affected borrowers by lowering the level of available credit. So even if houses prices were to dip due to lower demand, houses may not be more affordable. A study of European countries, for instance, shows that average mortgage rates rise when macro-prudential policies are tightened. Over, the past decade macro-prudential
policies, including housing tools, have played a big role in reducing borrowing growth in some countries, making the financial system safer. However, these tools were not designed to address the issue of housing affordability and Australia’s financial regulators certainly have a task ahead of them.