RDP 2006-12: Housing and Housing Finance: The View from Australia and Beyond 1. Introduction

This paper presents a synthesis of the substantial recent work by central banks and other agencies covering developments in housing and housing finance in industrialised economies over the past decade or so. Most countries have experienced waves of financial deregulation, increased competition amongst providers of finance and greater innovation in the provision of finance to households. Together with the effect of lower inflation on nominal interest rates, these developments have increased the supply of credit and supported increased household demand for the stock of housing. Because the supply of housing is inherently slow to adjust, housing prices have risen significantly in many countries. Both sides of the household balance sheet have expanded substantially as a result.

Against the background of these global trends, differences in national features can affect outcomes in a variety of ways. The tax system can clearly have an effect, as can the structure and regulation of the financial system. National housing policy and regulation of the landlord–tenant relationship can affect incentives to hold housing as an investment. These institutional features can vary substantially across different countries, but they can also be changed. Less changeable are geographic features, which could also affect outcomes in particular markets. This means that countries with similar institutions can still have quite different experiences.

Increases in housing prices and household indebtedness naturally raise concerns for policy-makers. They need to assess if either the household or financial sectors are taking on too much risk, and what the macroeconomic results of these developments might be. It is therefore important to ensure that the best available data are used to analyse these issues, particularly as other observers will try to push their preferred solutions. Overall, it seems unlikely that the household sector would spontaneously contract their liabilities and bring about a slowing in overall economic growth. But if a macroeconomic downturn occurs when balance sheets are stretched, the response of highly leveraged households could exacerbate it.

The structure of this paper follows the above discussion. The next section describes the common factors and global trends affecting housing and housing finance, drawing heavily from BIS (2006). Section 3 outlines some of the national and institutional details that can affect outcomes in particular countries. The policy questions and conclusions are discussed in Section 4.