How to stop the property bubble from bursting

One of the nation’s most controversial economists, Professor Steve Keen, has called for a dramatic overhaul of lending rules that would place strict limits on the size of home loans. He suggests that Australia could escape property bubbles if banks were forced to tether housing credit to rental values.
In his submission to the Senate inquiry into banking competition, this economist who is well known for his doomsday predictions, proposed that every mortgage should be capped based on the rental value of the property it was secured against.
He proposed that a lender could only issue a loan worth up to 10 times the market value of the property’s annual rental income.
Professor Keen claims that by limiting the amount banks could lend against each house, debt-driven speculation would be “much less likely” saying “With this reform, all would-be purchasers would be on equal footing”.
“The only way to trump another buyer would be to put more non-debt financed money into purchasing a property”.
Professor Keen, an associate professor in economics and finance at the University of Western Sydney, rose to prominence during the global financial crisis when he forecast a 40% collapse in housing prices within five years. He says Australian property prices are rising in part because “some borrowers are willing to take on more (debt) to trump other borrowers”.
“The increased leverage drives prices up, feeding back into the leverage-price bubble process.”
In his submission, Professor Keen warns against fuelling competition in the banking sector. He says past efforts to improve competition “have exacerbated the main problem in banking: the tendency for banks to fund speculative bubbles”.


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