Features of Australian housing market and mysteries of bank funding

Comments on Jennifer Hewett “Something has to give in housing market”, 17/10/2010, http://www.theaustralian.com.au/news/opinion/something-has-to-give-in-housing-market/story-e6frg6zo-1225939389620
It seems there are some mysteries here.

Why should the cost of funding for the banks have to be higher than that before the crisis, given that in many OECD countries the official interest rates are so low, either zero or close to it? Surely they were not as lows as such before the crisis. The differentials between the Australia and overseas interest rates should be larger now. That is a mystery why the funding costs for the banks are higher now.

The second mystery is the ratio of price to income. Surely, when international comparison is done, there should be some consistency required, including the cases with dual-income households and income from other sources.

One has to take into account some unique features of the Australian housing market. It is relatively small, close to Asia and overseas buyers can have a relatively large effects on demand and price.

This probably means the Australian house price is over valued as far as domestic income is concerned. However, overseas demand can sustain the over valued price and house bubbles in domestic terms may not burst as in other markets in other countries.

That, unfortunately, has some implications for Australians. Their housing is a double edged sword. For high income earners who can afford to buy a house, that is probably not too much a problem, even though the price is high, since the price will be higher in the future when you sell it so the overvalued value can be kept and rising further.

For low income earners, the higher housing costs are a real burden relative their income.

In this context, whether there is anything the government can do to assist them without being too disadvantages to high income earners remains to be seen.

On the other hand, the Australian banks enjoy more profits from higher house price, higher demand and higher lending than otherwise.