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The Australian housing market has long been a focal point of economic debate. While many blame the affordability crisis on slow construction and rising immigration, another critical factor often goes unnoticed: financial regulations. Restrictive licensing and compliance in the financial sector create an uneven playing field, pushing more capital into real estate and making the crisis even worse.

The unintended consequences of financial overregulation

Over the past few years, the Australian fintech industry has repeatedly urged the government to introduce clear regulations. The current legal uncertainty has led to debanking and slowed fintech development. I’ve personally advised a large financial group against investing in a fintech startup due to the lack of favorable conditions for crypto businesses in Australia.

Australia’s regulatory environment makes it much easier to invest in real estate as the financial sector fails to compete for Australians’ dollars. Around 58% of household wealth in Australia is tied up in non-financial assets (mostly housing), compared to a global average of 46% (according to Credit Suisse). This isn’t just a market trend—it’s a consequence of regulations that limit financial innovation and offer no alternative for capital but to flow into real estate.

However, this issue is bigger than just an imbalance in investment choices. The real economy—production, commerce, and technological innovation—receives far less capital as a result. Shares and bonds are not just abstract financial products; they are the essential gearing mechanism for economic development and growth. When financial regulations discourage alternative investments, businesses struggle to secure funding, and the overall economy suffers. A system that forces capital into property speculation rather than business expansion leads to slower job creation, weaker technological advancements, and reduced economic resilience. A well-documented economic pattern is that investors flock to ‘safe’ assets when faced with uncertainty or high barriers to entry in alternative markets. A study by the Mercatus Center shows that complex regulations stifle entrepreneurship and push funds away from productive uses. 

I recently had a discussion with a businessman who was considering expanding his successful yet still small business. I asked why they tend to choose a franchise model instead of bonds or shareholder capital. While I knew the answer, he just confirmed my opinion. Operation of securities is potentially much more expensive for the business. Financial products and services face extensive regulatory hurdles at every step—creation, market-entry, promotion, and operation—drowning in red tape. NSW Chief Justice Thomas Bathurst said: “An individual should not need a senior counsel, junior counsel, and a small army of solicitors to tell them what the law they must comply with is.”

Unlike financial specialists, real estate investment advisers freely shout from the rooftops with no need to hold a bunch of financial licenses.

High barriers to entry in the financial sector prevent the emergence of innovative financial products that could provide real alternatives to real estate. Instead, investment capital keeps flowing into property, creating a loop where people invest because prices rise, and prices rise because people invest. Nobel Prize-winning economist Robert J. Shiller describes this as a classic speculative bubble. And now, there are signs the Australian government is about to make the problem even worse.

Regulatory changes: Another missed opportunity?

In February 2024, the Australian Securities and Investments Commission, or ASIC, wrapped up accepting responses on its INFO 225 Update proposal to extend existing financial regulations to digital assets, arguing that crypto fits neatly within current legal frameworks. While ASIC’s consultation paper contains other questionable ideas, my main concern is that it failed to look beyond a narrow legal study. The real issue isn’t whether the laws are technologically neutral—it’s that the entire framework distorts the market. A lack of a broader economic vision is discouraging innovation and worsening the imbalance.

The emerging crypto and DeFi industry isn’t just a technological and financial innovation. Leveraging the transparency and immutability that blockchain technology inherently offers, it is an opportunity to cut through restrictive licensing and bureaucracy. It removes unnecessary regulators’ paternalism that micromanages retail investors. The technology already has built-in self-regulating and protective mechanisms. It’s the government’s role to set good standards and ensure the fintech industry follows them. With the right approach, fintech regulations could be far more flexible without sacrificing consumer protection, and as a consequence, could cool down the housing market by offering much more accessible financial options on the market.

But instead of seizing this opportunity to fix the mess, many regulators either don’t want to or lack the vision to see it. Rather than embracing innovation, political leaders are about to sanction expanding the very policies that contributed to the crisis in the first place.