ASIC Chief Economist, Alex Erskine's, speech is worth a read. He repeatedly highlights that risk management solutions are missing from the housing market:
"In the market-based mindset, there was little incentive for securities regulators to look beyond their legal mandates to the housing and housing finance sector. The finance was largely produced by the prudentially regulated sector and the price of housing, if not 'right', then at least was market determined. The agents involved in housing sales were some other regulator’s responsibility. Bid-ask spreads have been wide, widened often by stamp duties on transactions; little has been done to reduce information asymmetries disadvantaging buyers or to enable households to hedge their house price risks. Housing however played an increasing role in finance, providing the major collateral for credit intermediation and securitisation and forming the major assets and liabilities on household balance sheets. Robert Shiller has been one of the few academics that have expounded the virtues of extending some of the innovations in finance to housing, with proposals for housing price derivatives to allow households to hedge their risks (Shiller 2003)...
The housing market played a key part in the financial and economic boom and bust. It seems set to continue to pose an acute challenge in the recovery period, with concerns over price bubbles and excessive borrowing and speculation in some economies and the consequences of previous excesses still washing through other economies. The housing market represents a problem for securities regulators, as well as for policy makers and other regulators.
Housing appears too important to be regulated on its current typically severely fragmented basis. At present, problems of supply rigidities, tax imposts and subsidies, prudential and other societal pressures favouring borrowing for housing and inherent information asymmetries, high search costs and high transaction costs are typically under the oversight of several agencies, and are not coordinated, leading to the potential for market dislocations. Often no instruments for hedging housing price risk are available.
A better housing market would involve a transparent on-exchange securities market overseen by market conduct regulators, made more efficient by actions to reduce search and transaction costs and centralised data, informed by continuous disclosure and facilitated by risk management and hedging instruments.
Consideration should be given to applying the principles of market conduct and disclosure regulation across all assets (non-financial as well as financial) and liabilities in the household balance sheet, including housing assets and liabilities.
There is a risk that adding more responsibilities to securities regulators can dilute focus on existing responsibilities if resourcing is inadequate. Nevertheless, the ambit of market conduct regulation is gradually being extended, and real estate would seem the next logical step."
