How low rates killed the affordable housing dream
For a brief, flickering moment, the dream of a generation seemed within reach.
House prices were on the cusp of one of the biggest falls in decades, hit by what was shaping up to be a near-lethal combination of mass unemployment and zero immigration.
After decades of a seemingly unstoppable real estate bubble, the prospect of a sustained fall in housing prices brought a glimmer of hope to those under 35 that home ownership may become a possibility if they could hold on to a job.
Even relatively conservative analysts were forecasting house price declines of 20 per cent and back in May our biggest bank, the Commonwealth Bank of Australia, pencilled in the prospect of a 32 per cent collapse.
But the decline was to be short-lived and far more modest.
With interest rates now barely above zero, plus an effective health response to the pandemic and Federal Government stimulus mitigating the worst of the economic calamity, real estate quickly bounced back.
For the first time in years, housing prices in all capital cities are rising simultaneously and regional real estate is experiencing a sustained lift as workers, having discovered they can operate just as effectively away from the office, are seeking cheaper rural and regional living arrangements.
Housing credit suddenly and unexpectedly has experienced an enormous growth spurt which has coincided with the Federal Government’s Homebuilder grant.
And let’s not forget the Government proposal to unwind responsible lending laws, giving the banks open slather when it comes to home loans.
Owner-occupier home loan commitments hit a record $22.7 billion in October, according to the Australia Bureau of Statistics (ABS) data released last week, up more than 30 per cent from a year ago.
We are not alone. Across the ditch, New Zealand housing prices are on a tear.
They have risen 19.8 per cent in the year to October, igniting talk of a crisis as the idea of affordable housing has vanished in a puff of smoke.
Our leaders love to talk about “affordable housing”.
But they are loath to ever do anything about it.
And almost every initiative they stump up, from raiding your superannuation to finance a deposit to first home buyers grants, usually only serves to further fuel extra demand and push prices higher.
It’s an uncomfortable fact no-one wants to confront. But the only way housing ever truly can become affordable is for prices to fall.
Every time they do, though, the potential fallout on the financial system usually is considered too great a risk, and new measures are invoked to keep the bubble inflating.
Our banks essentially are building societies. Their loan portfolios are dominated by mortgages over property.
So, a sustained property collapse would put the banks and the entire financial system under severe pressure.
Affordability isn’t merely about price, the cost of servicing a loan is almost equally as important.
And with those costs now at historic lows — new loans can be priced at under 2 per cent — borrowers now are paying far less for much greater sums.
That is what is fuelling demand. There is a strong likelihood that interest rates will remain at much lower levels than previously anticipated for a very long time.
But if the turnaround in prices continues at the current clip, the window for entry into the housing market is likely to be brief.
In fact, on current trends, our national housing market is likely to be back in record territory by early next year.
Interestingly, it appears first home buyers have dived in in recent months. As the graph below demonstrates, investors have been largely absent.
The recovery has been driven almost entirely by owner-occupiers.
In 2015, investors accounted for almost half of all home loans.
That now has dropped to around 22 per cent.
But as the economy bounces back and rents improve, they are likely to return in force, given borrowing costs are as cheap as chips.
It’s already turning, as you can see from the gold line above.
How older generations cornered the property market
Younger generations progressively have been priced out of housing for the past 40 years.
And it is a trend that continues even as those generations get on in years.
In 1980, according to federal government research, almost 70 per cent of those aged between 30 and 34 were home owners.
These days, only around 50 per cent of that age group own a dwelling.
And as they age, the rate of home ownership is unlikely to match those of similar age groups in previous generations.
The longer-term consequences of this trend are deeply concerning.
According to former Federal Treasury heavyweight Mike Callaghan, who recently compiled a report into our superannuation system, those who retire as renters face significantly greater financial challenges than those who own a home.
As home ownership becomes more concentrated, pressure will build on federal finances to boost the age-pension down the track.
And it is a stark illustration of the inequalities emerging between generations because of our deeply flawed approach to housing.
How do we stop this?
The gradual decline in interest rates and easier access to finance are the main drivers behind our runaway housing market. But other factors have played a major role too.
Generous tax arrangements for investors, particularly negative gearing and the 50 per cent discount on capital gains tax for investors who hold an investment for more than a year, have encouraged older generations to invest in housing.
Many live in a mortgage-free home and own one or more investment properties. That’s pushed prices higher and first home buyers out of the market.
Winding back those tax breaks, however, has proved to be political suicide.
Former Federal Labor leader Bill Shorten went to the last federal election with just such a policy. That didn’t work out so well.
Then there is our immigration policy. Adding large numbers of extra citizens puts pressure, not just on existing infrastructure, but on housing.
They have to live somewhere and the extra demand drives housing prices higher.
For the moment, the immigration tap has been turned off which should have kept a lid on prices. Clearly, cheap and abundant cash has overridden the tapering of population growth.
Our central bank also has clout when it comes to this area. If you look at the first graph, right up the top, you will see a serious housing price downturn began in 2018 and lasted more than a year, particularly in Sydney and Melbourne.
If you check the second graph, you’ll notice that investors began winding back their purchases around the same time.
This was no accident. The RBA, in conjunction with the banking regulator APRA, engineered the downturn in 2017 by forcing the big banks to make life much tougher for investors.
Worried about the then-runaway real estate market, they knuckled down on interest-only loans and imposed a raft of other restrictions on lenders in a deliberate attempt to cool the market. These are what is known as macro-prudential controls.
But don’t hold your breath waiting for them to repeat that any time soon.
In fact, they have been trying to engineer the opposite. The RBA is hoping that rising real estate values will make us all feel richer, so we spend more money and help drag the economy out of the pandemic induced recession. It’s called the wealth effect.
It might just work. But will the short-term gain be worth the long-term pain?