Professor Philip Lane:

The Senator has identified some of the issues there. Clearly, we have two sets of rules. One is the loan-to-income ceiling. The other is the loan-to-value ratios. What has happened over the past year or so is that the loan-to-income ceiling has started to bite. Essentially, people may have deposits, but the three and half times income is limiting their ability.

One point to make is that we recognise that that kind of ceiling should have exceptions to it. In the case of a younger person starting off in his or her career, for example, he or she could make the case that his or her income in five to ten years will be higher than today, so perhaps that person can afford more than three and a half times his or her current income. That is reasonable and that is why we have the system of allowances.

In the end, the thinking behind the loan-to-income rule, which is an anchor of the system, is to avoid a situation we had before where house prices depart from income. In the mid-2000s, the ratio of house prices to income climbed a lot higher than that. The three and half times income is an average over a long period of the historical relationship between mortgages and incomes.

It is biting and that is maybe the point, which is to ensure that house prices do not go too far above incomes. I will qualify that by saying that this is only in relation to those who have the income levels needed to compete for the house prices we are seeing. It is not a commentary on the fact that there is an affordability issue here. Many people on middle or lower incomes are unable to buy houses in the range that they could afford. I share with the whole system a concern about the availability of affordable housing. As the Senator knows, there will be a mix of more social housing through different channels. As the amount of house building increases, I hope more houses will be built in that category to satisfy the provision of starter homes for regular people in the community. There are more houses being built this year than last year and there are more coming on stream for next year. The affordability issue is a concern. The fact that house prices are stabilising or coming down a bit because of the rules shows the rules are having an impact.