The solution to fix the housing crisis is simple because it’s a supply and demand issue. We need more houses or less people. More supply or less demand. While the solution may be simple that doesn’t mean it is easy.

The obvious way to increase supply is to build more homes and apartments. But this is constrained by the realities of market forces around capacity, finding workers, the cost of materials, and time. It will take many years to build the number of houses and apartments needed to solve the problem.

Achieving the massive increase in supply needed will address the issue in the medium to long term. It will also play a huge role in the continued growth and prosperity of our country. But increasing supply is not going to solve the housing crisis we face right now.

There are two distinct phases to solving this problem. A short-term solution to fix the crisis and a long-term solution to solve the issue once and for all. The short-term solution will incur economic pain, but it is necessary to avoid a more serious crisis.

The short-term solution is simply to substantially reduce immigration for a period of time, say 12-24 months. Many people don’t like that idea but the rapid rise in immigration is a big part of the issue. I’ve got no issue with immigration levels where they are at, I think it’s great for our nation and the economy more broadly. But you can’t just keep bringing people in if you don’t have enough homes, and at the moment we don’t.

If you owned the only hotel in town and had say 100 rooms and you booked them out to 110 families who are flying in from overseas that weekend, it would be a problem. Not only is it unethical its irresponsible. Your lack of planning or deliberate overbooking is ruining the holidays of many people because you are being either greedy or lazy.

When you bring in almost 550,000 people from overseas annually when you don’t have enough homes, our nation is doing exactly what the hotel operator in my story above is doing. Except what we are doing is even worse. Many of the people coming into our country are relatively wealthy including the students from overseas and can afford to pay higher accommodation expenses.

The people most severely impacted here are everyday Australians who are being priced out of the market. Rents and property prices are being forced ever higher, not because they should be but because of the dynamic we have created by our own poor planning. As with any business or enterprise, you need to ensure you build your capacity ahead of ramping up sales or you will crumble under the weight of the increased demand.

To be clear, I am not suggesting a lower immigration policy beyond what is needed to address the crisis Australian families are facing right now and will continue to in the 12-24 months ahead. There are massive benefits for our country and the economy by opening our doors to people who can contribute to our nation. But right now, we need to take a step back to take the next sustainable leap forward.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

There are dozens of different types of risks and biases that investors need to consider when making investment decisions. Some such as market risk, concentration risk, credit risk, liquidity risk and time horizon risk are easier to quantify and are well understood. Others such as recency bias, confirmation bias and herd mentality are more nuanced and require some self-reflection to mitigate or offset their impact.

Share markets have been kind to investors over the past several months, and our portfolios have enjoyed solid returns on the back of this. However, the recent buoyancy in share markets has not changed my underlying cautiousness regarding the risks that investors face. I still think the world is precariously placed, even though the share market doesn’t seem particularly concerned now. Wars can escalate, inflation may not be over, the list goes on.

Investors have become complacent and seem to ignore any potential for bad news. Rather than factor in risks more conservatively, the share market has taken an attitude that everything is great until it has been proven that it is not. This binary thinking isn’t very smart because it doesn’t account for the reality that there are indeed risks that exist with varying degrees of probability. These risks need to be factored in.

To make the math simple, let’s imagine there are 2 separate global events, event A and event B. Let’s further assume each event has a 50% probability of occurring in the next 12 months and would result in a 20% decline in the share market. Based on the probability of each of the 2 events happening, the following outlines the combination of possible outcomes and their probabilities of occurring:

1. 25% chance that neither event A nor event B occur.

2. 50% chance that either event A or event B occurs.

3. 25% chance that both event A and event B occur.

Unfortunately, investment markets often misprice event risk. Perhaps it is due to complacency or the intangible nature of assessing risk. Nevertheless, in the absence of an event occurring, the default assessment of these risks by investors in the current market seems to be to ignore it until it happens.

This might turn out to be ok in the 25% chance where neither of the 2 events occurred. But that results in a mispricing of risk until that point because there was a 75% chance of a negative outcome whereby at least one of the events occurs. If the events do occur markets need to adjust much more aggressively. In the basic scenario I outlined above, there is a 50% chance that one or the other event occurs, resulting in a 20% fall. While there is also a 25% chance that both events occur leading to a much larger fall in the share market.

In reality, there are many risks at play of varying probability and consequence. But in today’s complex geopolitical and global economic environment, where there are many more event risks than usual, the prudent assessment of risk is imperative. It’s critical to think differently and ensure you don’t get caught up in the herd mentality as markets throw caution to the wind. Consider the way various biases impact your thinking and assessment of risk.

So, while investment markets and many investors seem to have taken a head in the sand approach to considering these risks, I am happy to carefully consider them. It means that we continue to take profit from time to time as share markets go ever higher. We want to be prepared for the day when one or more of these events do occur because eventually, they will.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.