Professor Philip Lane:

As the Senator has said, there is an important distinction between the conditions facing individuals who want to buy a home versus funding for the construction industry. An important lesson that has been learned from the crisis is that the role of debt financing for construction must be in proportion with equity finance. We cannot have a situation where the construction industry is overly reliant on bank debt. That causes a problem especially when the retained earnings of many construction firms have been wiped out by the crisis. There is a financial problem but the answer is not for the banks to lend more money without equity. The answer is that we need more sources of equity funding for construction and we have seen that through the entry of large construction firms, which raise money on the stock market. It is welcome to have more equity funding coming in. This is the genuine reason the housing supply response has been slower than in the past. The answer is not to make bank debt financing easier. The answer has to be, in part, more equity financing.