What Happened to Australian Home Ownership Dreams?

In the years after the Second World War, most Australians could own their own homes or dream of doing so. Credit Unions and Mutual Associations gave loans sufficient for the average wage earner to get a loan to buy a place. Credit unions and mutual associations accounted for 70% of the home loan market. Typically, you could buy a home that was 5 times your average salary. Today, home buyers need at least ten times their income to buy a house.

The problem started with the banking reforms in the 1980s, which were intended to open up banks to competition from foreign banks. Competition has dropped, and the big five banks now form a powerful cartel to preserve the status quo.

Banking has become more concentrated. Credit unions and mutual associations have disappeared, and the big five banks have 90%+ of the home loan market.

The reason is that banks lend to buy existing houses rather than to build new assets. The banks outcompete Credit Unions and Mutual Associations because they now use new money created by loans where home buyers pay the banks a capital gain equal to interest on each interest payment. They do this by a sneaky accounting trick that most will call theft.

First, we have to examine how loans introduce new money into the economy and how loans remove money from the economy.

When a bank gives a loan, it does the following.

1. Create a loan account.
2. Debit the loan account with the amount of the loan that the borrower has to repay.
3. New money is credited to the borrower's bank account, and the borrower uses it to buy the house.
4. The bank debits the loan account with interest and fees when interest is due each month.
5. The bank credits their capital account with the loan extension equal in value to the interest. They should credit an account owned by the borrower and the borrower uses the money to pay the interest. The bank “steals” the new money due to the borrower leaving the borrower with an extra debt. The bank calls this a capital gain as they do nothing to deserve the payment and leave the borrower to repay the interest debt.
6. The borrower now pays the interest twice.
7. The first capital gain interest payment is new money that is never repaid, increasing the money supply after the debt is repaid.

Emergent Properties of the Extra Interest Repayment

The banks' total interest payments increase the money supply, which is an unearned capital gain of two or three hundred billion dollars. This is why the Reserve Bank has a two—to three per cent inflation target. The money has to come from somewhere, or the currency has to be devalued.

The bank's capital value increases exponentially as capital gain is not treated as income and is only taxed when realised—if it ever is.

Billion Dollars Capitalisation of Banks and Telstra

The banks have all seen an increase in their capital value even though their work is about the same. Telstra, privatised later than the CBA, has dropped in inflation-adjusted value over the same period. The difference is that the banks keep vast amounts of unearned income treated as a capital gain while Telstra competes with overseas companies.

What can be done?

The government and the Reserve Bank should immediately stop banks from claiming unearned capital gains by requiring them to give the borrower money of the same value when the loan is extended with the interest amount.

This will immediately halt inflation and make more people able to afford homes.

However, the same or similar situations occur with the use of allloans. Under no circumstance should the extension of a loan result in an unearned capital gain.

The other major change is to stop the use of loans to transfer existing assets. New money should only create new assets for local communities where the community is defined as the users of the created assets. The new money should not have to be repaid provided the asset remains owned by the current and future users of the assets.

The government’s task is to ensure that new money is distributed fairly throughout the community. At present all new money goes to those who are already wealthy. The already wealthy should get their fair share but no more while most should go to those who increase knowledge, learn new skills, and pursue activities that do not make a profit but that others need and cannot afford.

These are what we typically call public goods or ‘the commons’.