my name is Nick and I'm from Sydney, Australia.

In the last 5 years, our big cities such as Sydney and Melbourne has experienced rapid property price growth, they went so high and so fast that Sydney has been catapulted to top 5 least affordable cities. This rapid price growth has been accompanied by the extremely high quantity of mortgages issued by the various private banks, in fact, Australian banks are the most profitable banks in the world and currently, their main assets are home loans. I'm wondering of the correlation between high quantity of bank home loans and property prices.

As well how the inflation is influenced by the bank credits? Can the bank borrow more money in example from the overseas and therefore increase the money supply without increasing the actual production and purchasing power and driving the inflation upwards? Can same be applied to the property prices?

Are the prices rising so high as a result of increasing amount of affordable loans or vice versa, the demand for property has driven the supply of cheap loans?

As I understand this is actually a problem of the central bank (not corporate banks) not increasing the interest rates, they are at record level low right now. Actually, because the wages are as well at record level low as a percentage of GDP and stagnate the central bank afraid to increase the rates because people won't be able to repay the mortgage.

Regards, Nick


1 Answer 1


This is a big question. I will just comment on one aspect.

Are the prices rising so high as a result of increasing amount of affordable loans or vice versa, the demand for property has driven the supply of cheap loans?

We know that people can pay for a house in a few ways:

  1. Use proceeds of the house that they are selling.
  2. Use savings from wages and salary.
  3. Sell other assets (e.g., equities) and use proceeds.
  4. Get a mortgage.

Unless the other sources of cash (1-3) rise enough to cover higher house prices, mortgage lending has to rise. One can try to do a lot of statistical analysis, but the usual relationship is that mortgage borrowing rises at the same time as house prices going up.

Returning to the part of the question I highlighted above, one could argue either way.

One argument is that house prices rose (for some reason), and so mortgage borrowing has to rise in response. In this view, the amount of mortgage loans is not a driver of anything, it is just a mechanical response to higher house prices.

Going the other way is possible. However, we need to remember that mortgages are inanimate objects - in what sense can they drive behaviour? It is safer to say that some humans have changed their behaviour, and the rising loans is a consequence of that behavioural change. The driver is the behaviour change (a possibility not covered in the question.)

The likely suspect is that the behaviour of bankers has changed. Their "effective lending standards" have changed for any number of reasons, and so households can borrow more. (One possible factor is lower interest rates; although formal lending standards may not have changed, the same household can qualify to borrow more under the existing standard.) This extra mortgage borrowing capacity allows households to bid up the price of houses.

I do not think I have fully answered the question, but this discussion may help you rethink how to pose the question. This website has a difficult time with extremely broad questions, so you may get more responses if you ask a few very specific questions.


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