house prices
(Image: AAP/Lukas Coch)

House prices are back up. Are you even surprised?

This is Australia, where the family home is as well protected from price falls as from fire. If even the smallest embers of a price fall begin to smoulder in the housing market, the government shows up in its bright red trucks spraying subsidies and interest rate cuts everywhere until the threat abates.

Prices are up 4% in Sydney and Brisbane compared to 2019, and 5% in Adelaide. This is despite a cataclysmic pandemic and the deepest recession since the Great Depression. Perth is up just under 1%.

Even in Melbourne, where the pandemic has been under control for just a few weeks and the unemployment rate is still at 7.4%, prices are roaring back fast to be roughly flat on last year. Auction clearance rates were 74% last weekend as buyers scramble over each other to secure a home before prices go even higher.

Why is this happening?

In a major speech on monetary policy delivered this week, Reserve Bank (RBA) deputy governor Guy Debelle gave the RBA’s version of why settings are as they are.

“[The] aim has been to deliver low borrowing costs for households, businesses and the government,” Debelle said. Business investment drives economic growth and job growth, as we know. However businesses are not actually taking advantage of the record low interest rates.

“Despite the low cost of borrowing, demand for new business loans is subdued,” Debelle admitted. “When businesses become more confident about future prospects, the low cost of borrowing will support their decision to invest.”

Homebuyers have few such qualms about loading up on debt. Owner-occupier credit growth is around 5% — higher than the rate of growth in 2019, albeit not at record levels.

This is not a mistake by the RBA. It has made it clear it thinks raising house prices will help Australia’s economy recovery.

“Asset prices are also supported, which bolsters balance sheets of households,” Debelle said. “All of these channels of transmission boost aggregate demand in the economy and hence employment.”

The RBA learned a lot in 2018-19 when house prices fell. It hadn’t quite understood how much of the Australian economy was tied up in rising house prices and housing turnover. Some parts go straight to the GDP account in an area called ownership transfer costs.

“This little-known part of the [national] accounts measures costs involved with transferring properties such as stamp duties and fees paid to real estate agents and lawyers,” Debelle said at the time.

“Spending on these costs declined by more than 20% over the year to the March quarter and reduced aggregate GDP growth by around 0.4 ;percentage points. We had not fully taken account of this in our forecasts of GDP and it is part of the explanation of why GDP growth has turned out to be slower than we had expected.”

Not to mention the effect on household consumption. Purchases of cars and furniture collapsed too as housing wealth and housing turnover both fell.

One way to interpret all this is that, in 2018-19, the RBA thought it could defray financial system risks without such a hit to GDP by deflating house prices. It was surprised at the size of the hit to the real economy, and now it is determined not to make the same mistake twice.

That means the impact of rate cuts on housing is seen as an unmitigated good thing.

It’s not just the RBA

State government budgets also contain goodies for house buyers.

The Victorian government is knocking 50% off stamp duty for newly built houses up to $1 million for the rest of the financial year. NSW is offering first-home buyers $25,000 to spend on furnishings etc. And of course the federal government has its $25,000 HomeBuilder grant. Housing is propped up from all angles.

But how does a weaker economy with a lower-than-expected population support higher house prices?

One solution — which is likely to find a lot of elite support — is to sharply increase population as soon as possible. Australia has found population growth to be a reliable way to prop up economic growth — in aggregate, if not per capita. And it has the helpful side effect of reducing the role of policy in lifting house prices, which might be necessary.

The question is whether a higher population policy will pass muster with voters who worry about whether our infrastructure keeps up with our population growth.

After all, they’re the ones who face higher house prices, and more and more young people are stuck renting.