No room for complacency on housing bubble

House prices have been unexpectedly strong, coming out of the worst and most disruptive economic and social circumstances since World War II, and are projected to continue to rise for at least the next year or so.

Part of this has reflected an increasingly strong demand against restricted and sluggish supply.

There has also been a significant and unexpected increase in many regional property prices, as the pandemic has encouraged important shifts in lifestyles, work and travel practices.

Weekend auction clearances have pushed towards record levels.

Household debts are again rocketing up - near the highest (relative to GDP) in the world, and approaching 200 per cent of household disposable income.

The Morrison government has wanted this, to drive our recovery from the pandemic, and especially in the run-up to what will be an early election later this year.

It has pumped large money directly into the housing sector, and the Reserve Bank has pushed interest rates down to historically low levels - and committed to keep them there for the next three or so years. JobKeeper and other support has boosted many household incomes significantly.

The government is also constantly exaggerating and simply misleading by claiming that we are leading the world in managing the pandemic and in economic recovery.

All this has created an environment where there is a scramble to urgently get into the housing market; many pushing their financial capabilities to the limit and beyond.

The pressures are already manifesting. Digital Finance Analytics recently argued that the number of households in mortgage stress has increased to more than 4 in 10, that's about 1.5 million households.

This situation is expected to get worse as JobKeeper and JobSeeker and supplements expire at the end of this month, and mortgage deferrals are phased down.

This concern has also been expressed by S&P data on mortgage arrears.

In a recent Finder survey of 446 borrowers, one third of mortgages are currently in arrears - about nearly 900,000 home loans behind on their home loan repayments.

Importantly, we are now seeing conflicting initiatives and responses from the government and the Reserve Bank.

Governor Philip Lowe has been saying that restraint on the housing bubble should come from tougher restrictions on lending, while he will keep interest rates at historical lows.

In contrast/conflict, the government is pushing legislation to wind back responsible lending laws, ignoring the recommendations of the Hayne Banking Royal Commission and the serious concerns expressed by consumer groups.

Recognition of the reality of our economic situation is crucial here.

Even with very strong growth rates in the last two quarters, we are still behind the pre-pandemic level of GDP, and have an output gap of some 10 per cent, with GDP less than it would have been if pre-pandemic forecasts had been met.

Quarterly growth rates for this year can be expected to be less than the last couple of quarters that were coming off the low base of the recession, and the what was about a 17 per cent of GDP injection of financial support from the government.

Moreover, the true unemployment and underemployment situation is yet to be recognised as JobKeeper is removed, insolvency provisions are restored and the flexibility in interest and debt deferrals terminated.

Job insecurity is likely to emerge as a major issue and constraint on a sustained recovery, with the prospect that wages will remain very weak.

Wages growth is currently at an all-time low, and there is little prospect of a significant increase.

Low wage growth was a fundamental reason for our pre-pandemic economic stagnation, which is likely to continue as support is phased out and the government moves to address the longer-term financing of the budget blowout it initiated.

With subdued job security, flat wages and mounting costs of living, the issue of mortgage stress is likely to become even more significant.

The recent strength in house prices might also stall, if not weaken, with further mortgage stress.

Of course, the banks are down playing the likely consequences of a bursting of the housing bubble.

But remember, as Hayne demonstrated, that the banking culture of greed saw them knowingly lend more than they new people could afford before the pandemic.

John Hewson is a professor at the Crawford School of Public Policy, ANU, and a former Liberal opposition leader.