There is a perception that housing is unaffordable for first home buyers and the fact that there are fewer young people buying houses and are ‘forced’ into renting the place they live in is a bad thing.
This appears to be another one of those spurious fact-free assertions that is probably focused more on first home buyers wanting to live near the city in expensive real estate rather than choosing to live a bit out of the city in a dwelling they can afford to buy.
Let’s get a few things sorted out.
Anyone who bought a house in the last three or four years has taken a pretty hefty hit to the hip pocket, notwithstanding the recent price pick-up. Prices are basically flat compared with the level three years ago, meaning that in real or income adjusted terms, prices are down around 8 to 10 per cent. First home buyers holding off for those three years and buying in recent times are much better off.
The other critical thing to note is that while house prices are high, they appear not to be ridiculously out of whack. According to research in April this year from the Luci Ellis, head of the financial stability department at the Reserve Bank of Australia, real house prices in Australia have risen by around 25 per cent over the past decade (see chart below). Not surprisingly, this has outpaced the net change in prices in Ireland, Spain, the US and the UK.
What is interesting is that real house prices have risen at a much faster pace in France, Norway, Canada, Sweden and New Zealand.
What is also apparent is that the repayments on new housing loans as a percentage of household disposable income is currently around the long run average of the prior 30 years (next chart below). No more, no less.
Since the data in the chart below were produced around six months ago, rising incomes and lower interest rates are likely to have pushed the ratio lower, suggesting that new borrowers are better off now – in terms of their repayment schedule – than the average of the last three decades.
What has happened to make this so is that the burden of a larger loan in recent times has been completely offset by the saving from low interest rates.
Indeed, Ellis noted when referring to this chart that the recent “recovery in dwelling prices makes sense given how much affordability has improved as interest rates have declined”.
Put another way, in the old days, when house prices were seemingly ‘low’, buyers had to confront a debt servicing burden driven by high interest rates – even with a relatively small mortgage. Now, borrowers have a debt servicing burden driven by high nominal debt which is offset by very low interest rates.
So far there is no evidence of a first home buyers’ affordability problem or that renting is inferior in some way to buying.
From an earlier research paper in March 2012, Ellis confirmed that capital city house prices were around 4.5 times average annual household disposable incomes (next chart below). This was a little below the average of the prior decade and down from the peak above 5 recorded in the early 2000s.
In the 18 months since this chart was produced, the ratio of house prices to incomes has no doubt fallen further with house prices flat to only slightly up and incomes rising at an annual rate around 3.5 per cent. In other words, on this measure, it is certainly easier now than at any time since the late 1990s for an average household to buy an average house.
Perhaps the problem with house prices, if in fact there is one, is a lift in the period from around 1985 to 2000 when they rose from around 2.5 times income to 5 times income. But as noted above, this lift in prices was not met with higher repayments or a troublesome debt servicing given the structural lowering in interest rates over that time where interest rates, on average, halved. Indeed, the peak financial stress on mortgages was in the late 1980s when over 30 per cent of household income was used to for mortgage repayments.
There are also a couple of other issues which suggest the first home buyer price squeeze and the pain of rent is more fiction than fact.
Renters have the joy of not paying thousands of dollars a year in council rates, insurance and maintenance. That maintenance alone (depreciation is the accountants’ way of looking at it) is estimated to be around 3 per cent per annum on the building costs which, according to BTM quantity surveyors, is around $5000 a year on an average dwelling. Insurance and rates are at least a few more thousand dollars a year. For renters, that unexpected cost when the hot water system or heater or dishwasher fails, goes to the landlord.
Nice.
Of course, renters do not get the capital gains, or indeed suffer any capital loss when prices fall. While price falls are uncommon over the long run in Australia, the international experience suggests that there can and will be times when prices take a dive. The lucky renters in Ireland and the parts of the US when house prices fell 50 per cent did not suffer when this happened.
The end point is that housing is somewhat expensive, but no more than at any time over the last 15 years or so. The debt servicing of a mortgage needed to buy an average house is about where it has been over the last 30 years, so no issues here. What’s more, there is nothing wrong with renting. One third of the population do.
As about one third of households are saving to buy a home and one third have no mortgage in owning their home, I think it is reasonable to say that the final third with a mortgage is responsible for most of the household debt.
Therefore that 150% on the gdp debt chart can be multiplied by 3 to give 450%, take off 50% to account for borrowings on cars etc for the renters and homeowners without mortgage, leaves 400%.
Of this third of households having 400% debt to disposable income! you only need a very small number of defaults to cause a housing crash, and increasing unemployment will produce that result as we move further into this world-wide depression.
An arrogant and sneering article, notable for the Kook's open and indeed emphasised contempt for renters. Amongst his cherry-picked “facts”, he omits the landlord’s invariable use of negative gearing, and Residential Tenancy Acts that allow very quick action against non-compliant tenants.
The Kook’s perception is that housing is affordable for first home buyers and the fact that there are fewer young people buying houses and are ‘forced’ into renting the place they live in is not a bad thing. He dismisses it as first home buyers wanting to live near the city in expensive real estate rather than choosing to live a bit out of the city in a dwelling they can afford to buy.
Nice.
If no-one is “choosing to live a bit out of the city”, where are all the new suburbs coming from? Congestion, and travel costs generally, are a very real issue - for ordinary people anyway.
In one of his January articles, Kook “mused” that house prices could rise by around 10% this year; “a bullish call in house prices”, with implied revulsion at the thought that we could have “a never before seen three straight years of falling house prices in Australia'.
Big Property is determined to increase property prices without regard to the social or economic impacts. Their morality is that of drug dealers, working (like Big Gambling) to increase addiction so that they have a guaranteed source of rising revenue. Capital city housing is unaffordable for the average household, not just first-dwelling buyers.
you only need a very small number of defaults to cause a housing crash, and increasing unemployment will produce that result as we move further into this world-wide depression.
you may not like the way we are moving to avoid a potential recession (fwiw i reckon it's a bit of a cop out) but to suggest we are in a depression is way off the mark
First home buyer lending has dropped to its lowest point since April 2004, according to the Australian Bureau of Statistics.
The proportion of first home buyers being lent money has dropped to 13.7% of borrowers for August, down from 14.7% in July.
The Real Estate Institute of Australia says this is far lower than the long-run average proportion of 20.1% despite eight interest rate cuts since November 2011.
“In large part, this drop can be attributed to State Governments withdrawing previous levels of support for first home owners buying established dwellings and it is established dwellings that 80 per cent of first home buyers prefer,” REIA President Peter Bushby says.
“With the proportion of first home buyers remaining consistently below the long term average, despite the latest figures incorporating all the interest rate cuts, this and a review of inefficient state taxes such as stamp duty, need to be a high priority issue for the new Government.”
In trend terms the number of owner-occupied finance commitments rose by 0.6%, the lowest monthly increase, since January.
There were increases in trend terms in all states except Western Australia with the largest increase in the Northern Territory, up 2.3%.
House price rises are ahead of income growth for first-time buyers, making it more difficult to save deposits as the slump in new buyers falls to its lowest level in a decade.
The proportion of home loans offered to first-time buyers has fallen to its lowest level in nearly a decade, despite record low interest rates, high demand, growing market confidence and strong prices. Underlying supply problems have been exacerbated by fear of unemployment, continuing nervousness over economic problems in Europe and the United States, and difficulties saving deposits.
“But the most critical element that is driving the low take-up rates is directly linked to the relative ratio between house prices and first-time buyer incomes,” Mr North said.
“House prices are running ahead of income growth for first-time buyers, and this means that unless they can get assistance from family, or have saved long and hard, they are unable to enter the market,” he said.
“We need a significant increase in the supply of affordable property to slow house prices, and further cuts in interest rates will not help to address the price/income imbalance. It’s a chronic, long-term, structural issue in our housing market,” Mr North said.
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