As for the banks – the problem isn’t the equity/loan ratio. It’s the income/loan ratio. The banks are deliberately enticing people to take out loans that the borrowers won’t be able to sustain when interest rates go up. This is what’s caused the crisis in the prime market in the US. The free-market’s solution to this? Foreclose the loan, sell the house, take what’s owed, and kick the family to the street. Property market depressed so you can’t sell for enough to cover the loan? Well, that’s where it’s handy to own the mortgage processor as well. Heck – drag the process out anyway; the fees add up.

As far as I’m concerned, let the banks go bust. Spend “bailout” funds cushioning the blow – for example, by buying and servicing the contracts, not the business. That way, the US wouldn’t be seeing the companies they bailed out paying multi-million dollar bonuses to their executives for the last financial year.

There is no free-market solution to low-income or first-home-owner housing; it’s an area that requires government intervention to stop the money flowing to the rich, because the consequences of allowing that are too high. The family home is the only significant asset most families ever have – but nearly a third of all households, at current projections, won’t even have that when they hit retirement age. That means that their superannuation will get eaten up by rent – hastening the day that they become fully reliant on government support.

This means that the budget end of the market is extremely tight (to both rent and buy) since there is very little to choose from.

Your points would become moot if councils simply reduced contributions charges (you’d be surprised at how significant they are) so that more land and houses can be created, and (therefore) sold/rented for less.

As for the ‘bank’ problem: other countries have similar lending criteria, and don’t have these issues. Certainly 90%-100%+ LVR loans are pretty ludicrous, but I suspect that (FHOs aside) those are the exception rather than the norm. Regulating the retail end isn’t the solution and is an ugly kludge that restricts banks’ ability to bring new products to the market.

Perhaps higher equity reserve requirements for banks (thereby reducing the chance of them going bust and destroying the economy), and leaving them determine their own risk profile would be the simplest (and almost free-market) solution.