Why does Australia continue to have a rampant cost of living crisis? That’s the $300 billion question. The hard men of Australia’s economic press claim it’s because of inflated wages and low productivity. Yet evidence suggests it’s mainly because of our big four banks.
We have a stubborn “cost of living crisis” as mainstream media reminds us, and it’s all due to the Albanese Government, with the major burden on those with mortgages. The banks take up the biggest part of our weekly wages in servicing mortgage repayments, leaving little disposable income.
Inflation is also a contributor to the crisis besetting householders. The spotlight was recently on the price of commodities sold by grocery majors, Coles and Woolworths, who together control 67% of the retail market. Senate inquiries into the business models of the big two have found predatory methods. Despite these inquiries, the government has not mandated any price controls.
Yet the Senate inquiry allowed Australians to understand that groceries are not a free market. Both major supermarkets, and smaller chains, vigorously deny belonging to a pricing cartel, despite ACCC evidence that their more costly provisions are manipulated. This spotlight on price to consumers has induced the larger chains to increase profits by other means, by underpaying their workers, and by taking from their suppliers, demanding farmers reimburse for any spoilage of perishables on shelves, and by demanding suppliers pay for transport of goods to the regional warehouses, else Coles will not display them. The big grocers act like mafia mobsters with everybody, their suppliers, their staff and their customers, because they realise governments will not stop them.
Yet, the major household cost is housing, whether mortgage repayments or rent. Because of the longer term association of customers with bank lenders or landlords, this market is not understood as a parallel to the grocery market. Yet, the Australian housing market is manipulated by the big banks and their commercial associates.
Most Australians believe we live in a home-owner’s paradise, estate agent fliers in letterboxes report higher value sales (more wealth), and newspapers fill glossy pages with beautiful homes and happy owners. Yet the price of housing, whether for purchase or rent, is lower in most lands other than Australia, including countries with comparable populations and demographics.
Our housing market in contrast is the second most expensive in the world (exceeded only by furiously overcrowded Hong Kong) with a median house price to income ratio of 9.7 across our five largest cities. Australian banks are also the most profitable in the world relative to national GDP, despite being almost entirely focused on the globally tiny Australasian market. Amazingly, even back in 2016, Australian banks earned $35.1 billion, greater than UK banks at $25.3 billion, despite London being one of the world’s major international trade and finance centres, and performing far more banking transactions.
The major income stream for Australian banks also comes from housing! Mortgage interest repayments from home buyers account for almost 40% of their annual earnings. Commercial loans to construction firms for building housing estates and apartment blocks was some $22 billion in 2022. In sum, the major income and profit stream of Australian banks is from the broader housing industry, by a county mile.
How do they get away with it? The banks here chose to maximise housing because it’s a commodity which retains value, unlike our other major expense, cars, which lose value upon leaving the showroom. The value of my house has increased more than thrice its cost in 30 years, despite being more than 80 years old. Old houses now cost almost the same as new ones, yet this constant rise is not a reflection of our wealth as a manufacturing nation, as a producing nation; rather the major sector of our economy is societal service industries (education, health, urban infrastructure, highways, governance, etc).
Why do the public not realise our constantly increasing house prices are manipulated, just like grocery prices in the major supermarket chains? Most home owners think they are becoming more “wealthy”, as house prices raise, this is the psychological trick as participants believe they will ultimately benefit greatly, despite paying larger and larger mortgages.
An established home owner does not feel the rising costs, until a close relative attempts to climb the housing ladder; already many parents now must provide a large loan to a son or daughter just to get them started. And there goes part of any profit they earned on their own house over a lifetime, as well as relieving the bank of interest payments on their gifted savings.
What a perfect storm, yet we are told that housing is a naturally self-correcting market: if there is less money available as disposable income fell and mortgages rose when the RBA elevated base rates, you’d think that house prices would have fallen. But, hallelujah, that’s just does not happen. House prices have continued upwards, barely blinking as the money rushed past. Rather, our banks have made enormous windfall profits over the previous three years of higher base rates.
If you look at the ratio of average home mortgages over average wages for the past 30 years (since John Howard legislated negative gearing on investment property losses), the price of houses has become progressively unconnected to wages earned. Increasingly, it is only the better off who can buy, the rest must rent. And rents are insane too. As commercial house-owners service their higher mortgages, all other house prices follow.
How can banks loan to individuals at 9x their income in 2025, when back in 1989 the ratio for acceptable loan credit was only 3x? Surely the risk to banks is unacceptable. The answer is the change in business model which accompanied the privatisation of Australian banks. Banks wanted to grow profits, and grow them continuously. The population of Australia is increasing, but much too slowly for banks’ desires.
They determined the best way to increase profits was to increase the size of loans to a stable asset class – housing. And they determined to manipulate that market so that mortgage interest increased progressively. This required the price of houses to increase rapidly for an increasingly profitable business. Howard was only too happy to accommodate, he incentivised the commercial housing market, claiming his measures would stimulate house building. Instead, it led only to elevation of house prices, as this tax-supported commercial cohort lapped up existing housing stock for immediate recovery of their mortgages. Banks are happier to loan to commercial buyers too, as default risks are diminished.
The so-called housing market is determined by an unholy cabal of the big banks, estate agents, estate building developers, and the owners of rental property. All four sectors benefit from higher house prices. Rental property holders can out-compete private buyers, giving them the pick of properties, and thus demand higher rents. Estate agents’ commissions increase as house prices rise, and house-builders benefit too. Yet banks earn by far the greatest, as all housing-related loans have increased enormously.
What is the effect of banks siphoning vast profits out of our nation’s pockets? This is money which could be better spent building up other deserving businesses and activities. Australia has traditionally been a nation which required capital inflows from overseas to fund us. How much better could our savings be invested, than needing to support our children raise a deposit just for a home to live in?
Keith Mitchelson has a 40-year experience in academic and commercial biotechnology sectors in the UK, China, and Australia.