The Australian housing crisis is no longer a side issue. It is the defining economic problem of our age. Home ownership, once the bedrock of middle-class life, is drifting out of reach for younger Australians. Politicians debate supply bottlenecks, zoning laws, union practices, energy costs and immigration levels. They all matter. Yet one factor lurks in the background, rarely examined, though it has quietly supercharged the crisis for over two decades: cheap money.
For years, central banks have forgotten their true role. They were meant to guard price stability. Instead, they have become economic baby-sitters, bailing out risk-takers and soothing every wobble in the economic cycle. In Australia, the Reserve Bank has turned into a serial enabler of debt-fuelled property speculation.
This pattern did not start in Sydney or Melbourne. It started in Washington. Under US Federal Reserve chairman Alan Greenspan, monetary policy acquired an implicit guarantee-the ‘Greenspan put’.Whenever markets faltered, the Fed cut rates signalling to investors that risk-taking would be cushioned. Markets absorbed the message quickly: take on debt, gamble on assets, and wait for the central bank to step in. Australia imported this mindset without hesitation.
Since the turn of the millennium, the RBA has played the same game. Rates were slashed during the global financial crisis, cut again during the mining downturn, hammered lower during the pandemic, and nudged down whenever politics demanded calm. August’s cut – despite inflation being within target and unemployment low – is only the latest chapter in a long story. Each intervention soothed nerves in the short term, but over time it taught Australians a corrosive lesson: property prices never fall, and debt is risk-free. You know something is rotten when real estate agents – not economists – correctly interpret central bank policy.
The results are everywhere. Instead of financing new industries, innovation or infrastructure, Australians have been encouraged to borrow more and bid higher for the same suburban blocks as the only effective hedge against inflation. Capital has flowed into existing housing stock, not productive enterprise. The winners are those who bought early. The losers are everyone else.
This is what Friedrich Hayek warned of decades ago: the distortion of investment caused by artificially cheap credit leading to a rapid decline in the real value of money balances. When rates are suppressed below their natural level, they send false signals to investors. Money is lured not to its most productive uses, but to speculative ones. In Australia, that speculative magnet is housing. The productivity gain is zero. The debt load is immense.
The social effects are just as severe. Rising property values have protected existing homeowners from the bane of inflation, but only by shackling the young with unprecedented mortgage debt. Intergenerational equity is eroding before our eyes. Easy money has not killed inflation, only changed its shape. Consumer prices may have stayed relatively calm through the 2010s, despite a long-term average inflation rate of around six per cent per annum, but asset prices soared. Housing prices galloped far ahead of wages, locking the next generation into a lifetime of ‘paying more for less’.
This kind of inflation is uniquely corrosive. It does not just nibble away at purchasing power – it strangles opportunity. When households pour half their income into mortgages, they spend less on everything else: on small businesses, on start-ups, on risk-taking in industries that might actually lift productivity. No wonder birth rates are collapsing and entrepreneurship is stalling. A society weighed down by debt is a society that hesitates.
The Reserve Bank was supposed to be different. It is meant to be an independent institution, tasked with ensuring price stability and full employment. Increasingly, however, it has acted like a political instrument, smoothing every bump in the road and bowing to the expectation that it must never allow economic discomfort, particularly when that discomfort is driven by government policy. In the process, it has inflated bubbles and trained a generation to expect rescue on demand.
The late economist Irving Fisher once remarked, ‘The best way to destroy the capitalist system is to debauch the currency.’ Australia has not debauched its dollar in the classic sense, but its addiction to cheap money has done something subtler: it has undermined prosperity by turning housing into the nation’s most speculative asset.
Of course, supply reforms matter. Cutting red tape, unlocking land, lowering energy costs and streamlining approvals are all essential. But these measures alone will not fix the housing crisis. Unless the monetary problem is addressed, Australia will keep inflating land values instead of building wealth. And the cycle will repeat: cheap money, rising prices, debt burdens, record immigration, and a generation locked out of the dream their parents took for granted.
What is needed is honesty. Interest rates must once again reflect the real cost of capital and not the convenience of politicians, nor the speculative instincts of investors. Pain will come with that honesty. Speculators will squeal. Politicians will panic. But without discipline, the misallocation of capital that Hayek described will deepen. We will keep building bubbles instead of businesses, mortgages instead of manufacturing, inflated suburbs instead of innovation.
Australia is facing a choice. It can continue to indulge in the illusion that prosperity can be borrowed into existence, or it can return to the discipline of real capital costs. One path leads to a society ever more leveraged, unequal, and cynical. The other offers at least the chance of productive growth and restored opportunity.
The dream of home ownership has already been weakened by restrictive planning laws and relentless migration flows. But its real enemy has been decades of central bank indulgence. Unless monetary policy is re-grounded in discipline, Australia will keep mistaking rising house prices for rising prosperity.
Confronting the cheap money and debt addictions will not win easy headlines, but it is the only way to stop Australia’s economic foundation from eroding further. The nation cannot build its future on speculation. As the old warning goes: ‘If something cannot go on forever, it will stop.’
The only question is whether Australia chooses to stop the cycle on its own terms or waits until a bond market revolt makes the choice for it.