u/Fanatic-Mr-Fox

I've been thinking through this and I want to stress-test it, because it feels too simple and I suspect I'm missing something - sorry for the long post.

Looking for the strongest pushback.

Many people claim housing costs is a supply-demand issue, but I think they're completely wrong - it's a feature of credit expansion (massive inflation).

Houses cost roughly what banks will lend people to buy them. Demand in any meaningful sense is constrained by borrowing capacity, not by what people "want to pay" ... so when credit expands - through lower rates, looser lending standards, dual-income borrowing, longer loan terms etc - prices rise to absorb it.

The usual response is that house prices have increased dramatically faster than groceries (CPI)- so it can't just be inflation.

I think this comparison is nonsensical - CPI measures goods where the supply can "flex".. for example - if demand for tomatoes rises, we grow more tomatoes and prices go down.

House prices don't "flex" the same way. I don't care if my tomatoes were grown in Toorak or in Toowoomba - but I do care if I buy a house in Toorak or Toowoomba.

A house in Toorak and a house in Toowoomba are not the same product - people don't want to buy a cheap house in the bush, they want an expensive house close to the city - and you can't simply grow more inner Melbourne.

So my conclusion is that viewing housing as a supply-demand issue is misguided.

Two-thirds of Australian bank lending is residential mortgages, so the next logical step is to claim that when the money supply (credit) expands, the extra money mostly flows toward goods with inelastic supply. Premium location housing acts as a sponge for monetary expansion in a way that CPI-basket goods don't/can't.

If credit expansion is inflation, but it flows towards assets rather than the CPI basket - this means central banks have been claiming they can tame inflation while in really they have overseen the largest inflation event in modern history - it's just hidden in the sponge.