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What's left unsaid in Australia's housing bubble

Basic economics taught at school and revisited in first year economics at university, is overlooked when explaining the failure of Australia’s housing market to work effectively for Australians.

The current difficulties confronting both monetary and housing policy partially stem from the explosion of mortgage debt. Therefore, what follows is my view on one of the least discussed but fundamental causes of the housing price bubble in Australia - and it flows from an understanding the basics of market price theory.

Supply and demand obviously dictate the price of housing, but housing policy aimed at addressing affordability, needs to consider the perverse impact of debt. In particular, the availability and the cost of debt (mortgages) has fuelled a house price bubble.

Low interest rates, low deposit requirements and therefore the provision of excessive levels of mortgage debt have, over time, added to driving housing prices higher. Today, Australia has the most expensive houses in the world when measured against income. House prices have become unaffordable for many – particularly young families.

I am not suggesting that debt and its cost is the sole cause of our great housing price bubble, but there is a lack of acknowledgement of their role. The lack of regulatory intervention in the mortgage market exposes the failures of the RBA, APRA, and Treasury. Indeed, have any of these bodies acknowledged that our housing price bubble poses a serious risk to long term financial stability, social cohesion and if unchecked condemns future generations to a declining standard of living?

Whilst the liberalisation and deregulation financial markets was a necessary policy initiative 40 years ago, it has surely contributed to Australia’s housing price bubble of today.

My view is that deregulation of financial markets has been excessively unconstrained. A thoughtful appraisal, during the last 40 years, of the consequences of financial deregulation has not been undertaken. There has not been a review or analysis to identify the point at which deregulation went from supporting wealth distribution to causing wealth dislocation. At what point did it cause a greater divide in the distribution of wealth by fuelling asset price inflation? Further, has there been adequate analysis of the flow-on effect of quantitative easing (QE), the driving down of interest rates (negative real rates) and the creation of excessive debt in Australia’s mortgage market?

An interesting corollary is the analysis of the government debt explosion across the developed world. It is observable that low interest rates and QE, have been used to fund governments that have failed to address the demographic challenge (aging populations) that was well predicted at the turn of the century. This is clearly on display in the United States where a government debt explosion has accelerated since Covid.

Ageing populations with low birth rates have combined to cruel government budgets that have tried to sustain basic social needs but are now confronted by poor wealth distribution. QE has been used as a ‘go-to default mechanism’ to drive down bond yields so that governments could run deficits and increase debt without suffering higher interest payments. The likelihood is that it will need to be reintroduced because governments cannot balance their budgets.

In Australia, we do not have a government debt problem (ex Victoria) and have a strong budget position (as shown above). However, we have a large amount of household debt (100% of GDP) concentrated with just a third of homeowners. Those households that have bought in the last 5 years have large debt balances and they need sustained lower interest rates to service their debt – just like many developed world governments.

Basic market theory explains how debt pushes prices

Below I have produced two simple tables to explain how the creation of debt (leverage) pushes the price higher in clearing the housing market. From that, I will show as to how low interest rates compound the effect of leverage.

The theoretical market clearing price, where purchasers of a house have no access to debt, is shown in the simple table below. The price that buyers are willing or can pay is limited to their savings or capital. A supplier or seller of a house merely decides or agrees to sell at the price bid. The graph logically predicts that a house builder will surely supply more houses if the price rises because their development or profit margin will increase. Market theory at its simplest.

The chart below shows the effect on market clearing prices when debt is accessible to the buyer. The first push higher is the effect of normal debt (added to the savings) with normal interest rate settings – i.e. debt set at a margin above inflation. The second push higher may be described as the effect of low-cost debt. More debt can be accessed (borrowed) if the cost of servicing that debt is low. A buyer can afford to pay more for a house. This particularly describes what occurred in Australia at the end of Covid when our cash rates were cut to 0.1% and remember the RBA predicted that they would hold them there till 2024.

Market theory therefore reflects reality by predicting that the market price for housing is set by a willing buyer who can pay more by accessing debt. A willing seller will benefit from a market price inflated by debt.

Theory to observation

The chart below shows the correlation between housing prices and household debt. The more that mortgage debt can be accessed, the higher the ratio of house prices to disposable income.

This leads to the observation (noted earlier) that Australia’s housing prices are the highest (and least affordable) amongst our international peers.

The surge in the price to income ratio illustrates the effect of relatively low interest rates. The decline in the ratio seen in New Zealand is explained by the adoption of higher interest rates and the onset of a recession. Elsewhere, there is a broad observation of rising ratios over the last 30 years that suggests that asset inflation has occurred with easy financial conditions and liquidity creation adopted by world central banks.

My conclusion from the above analysis is that both the access to and cost of mortgage debt has been poorly regulated in Australia and therefore contributed to our housing price bubble. The notion that Australian house prices will continue to rise exponentially will be contested by affordability. We have engineered a price for housing (through a debt explosion) that will cause social dislocation and a severe problem for future generations – if it is not addressed.

Whilst banks and other financial intermediaries have facilitated the rise in house prices in the past, there will be a point where they will constrain the availability of debt when they perceive that the ability of borrowers to service that debt has been reached. That point has been manipulated by the low-interest rate settings. However, a reliance on the market to ultimately and independently constrain the rise of house prices has clearly failed as a social policy.

The future may look like this

Australia will at some point undergo a painful reset of housing prices. However, it will be far better to be a managed process through intervention than a reset caused by a sudden unexpected economic event.

What this requires is an initial admission by the regulators and bureaucrats that they have mismanaged mortgage debt creation and the cost of that debt in Australia. The intervention will require the government – in a bi-partisan approach – to absorb the mortgages that are at risk of falling into a negative security position. The funding of these loans may be managed through our superannuation system with government guarantees.

From that point a national housing policy needs to be formed that builds supply, sets the level of immigration, sensibly manages the amount of mortgage creation, specifies minimum deposit requirements, and appropriately resets the excessive taxation benefits provided to leverage in the housing and investment market.

In the meantime, Australia like most of our developed world peers, will need to hold down interest rates. Overseas, it will be necessary to hold down government interest bills. In Australia, it will need to be targeted to keep many housing borrowers from falling behind on repayments.

As I stated above, the policy most likely to be utilised will be QE. However, QE has the insidious effect of supporting asset price inflation when it is utilised without proper debt overlays.

 

John Abernethy is Founder and Chairman of Clime Investment Management Limited, a sponsor of Firstlinks. The information contained in this article is of a general nature only. The author has not taken into account the goals, objectives, or personal circumstances of any person (and is current as at the date of publishing).

For more articles and papers from Clime, click here.

 

53 Comments
Ric
October 06, 2024

I'm puzzled why every 'Expert' would not be in agreeance with this article.

What changed pre and post covid?
How did we go from having enough houses for everyone at fair rental and purchase prices prior to covid and to having a housing crisis midst and post covid?
I struggle to see the shift.
Did wealthy people buy up all the rentals in regional areas?
I recently enquired about a holiday rental that I used rent 10 years at boomerang beach for $1100 per week, that same property is now $4000 for the week during the same period.
Where are people getting their money from to pay $4000 per week to stay in places like this.
We are living with blinkers on in a false economy.
I have to say John that I entirely agree with you and I believe a serious correction is inevitable, when, I'm not sure but it'll come and it'll wash a lot of wealth off the table.
However, I do think Australia's cost of living damage is irreversible and the country I knew 20 years ago is unrecognisable.
Australia is now the greedy country.

Dudley
September 11, 2024

To illustrate effect of interest rate on housing values through mortgages:

Relationship between mortgage monthly payment, principal and monthly interest rate:

MonthlyPayment = Principal * (MonthlyRate * (1 + MonthlyRate) ^ TermMonths) / ((1 + MonthlyRate) ^ TermMonths - 1)

[ This is the same as: = PMT(MonthlyRate, TermMonths, -Principal) ]

[ Monthly Rate = YearlyRate / 12; eg 7% / 12 = 0.583% ]

Algebraically rearranging to solve for Principal:

Principal = MonthlyPayment * ((1 + MonthlyRate) ^ TermMonths - 1) / (MonthlyRate * (1 + MonthlyRate) ^ TermMonths)

[ This is the same as: =PV(MonthlyRate, TermMonths, -MonthlyPayment) ]

Examples with same MonthlyPayment:

MonthlyPayment $7.752.99, [YearlyRate 7%] MonthlyRate 0.583333%, TermMonths 240; Principal:
= 7752.99 * ((1 + 0.583333%) ^ 240 - 1) / (0.583333% * (1 + 0.583333%) ^ 240)
= $1,000,000

MonthlyPayment $7.752.99, [YearlyRate 10%] MonthlyRate 0.833333%, TermMonths 240; Principal:
= 7752.99 * ((1 + 0.833333%) ^ 240 - 1) / (0.833333% * (1 + 0.833333%) ^ 240)
= $803,401

Jeff
September 10, 2024

Can we see a Q ratio of the market value v replacement cost for a residential property?

Cost of land rising, building costs and planning costs ….all rising faster than market value of the home me and surrounding commons?

Peter taylor
September 10, 2024

60% of the houses are owner occupied.
They will not be happy voters if house prices fall.
The goverment is addressing affordability by bringing in immigrants that can afford to pay higher prices.
No shortage of buyers even at these prices.
Uncharted waters. When it will end is unknown but not everyone will be a winner

GeorgeB
September 11, 2024

Spot on Peter, people only want house prices to fall until they enter the market as owners/purchasers, then they want them to go up to boost their equity/wealth. Owners/purchaser also vote so the government is in a bind if they apply the brakes to house prices.

Lara
October 04, 2024

Immigrants earn less than the average Australian. If my $1,000,000 house falls to $500,000, the $2,000,000 house I want falls to $1,000,000, meaning I now only need to borrow $500,000. High prices are good for speculators, banks and the real estate industry.

Alan
September 09, 2024

Great article John, & Wildcat & others covered many of the good points as to why heightened land (& construction) costs have drastically impacted affordability.

What would be really useful is a follow up article comparing our housing & mortgage debt structures / controls (or lack of) with those other 5 countries where affordability has not blown out.

Learning from what has actually worked better in other countries seems like a good place to start when developing our plan to fix the problem.

Keep up the great work


Tim
September 09, 2024

There is a paradox when you use house prices to demonstrate the unaffordability of housing: the high prices used as proof are only achieved because people can afford them.

Also the other logic flaw which concerns me is that in a market, suppliers are supposed to respond to high profit opportunities. If house prices rise because of cheaper debt* but the cost of bringing a house to market remains unchanged,.more suppliers will enter the market and the competition suppresses prices. Why is this not happening? After all, if tomorrow, the govt passes a law saying that eating green apples cut your tax by 15% there will be a surge in green apples demand and prices ... But prices will quickly moderate as farmers grow more.

* This also shows the weakness of using price to measure affordability. Banks buy houses, house owners only need the cash flow to manage the repayments.

John Abernethy
September 09, 2024

Hi Tim

I explained in the blog that housing is a inelastic good whose supply cannot quickly respond to price moves. Further, the cost of building a house has actually risen faster than the average market price since Covid. Note the number of builders that have gone bankrupt since covid with fixed priced contracts a cause.

Yes - the market price of houses is set by willing buyers with access to debt. I also explained that access to debt has moved the market clearance price higher than it would have without access to debt.

The definition of affordability is greatly determined by the availability of debt and the cost of that debt. Neither are fixed over time and nor are they over generations.

Pradeep Agrawal
September 10, 2024

Hi John and Tim,
I support what Tim has said. It is not an issue about quickness in fixing it. There are many other products where supply takes time.
Your theory about debt is correct but it is one part only. The cost of building new supply and maintaining existing ones has gone up substantially due to excessive regulation and government taxes at every stage. Rents have gone up but landlords are not making money.
Affordability must also be fixed by allowing lesser quality but safe housing for those who can use them. Government subsidized rent will only go so far.

Tony M
September 09, 2024

Demand for housing in a few key markets where jobs and services/lifestyle are available has been the starting point followed by limited space in these key markets. Young families prefer the modern version of the quarter acre block to a unit and so you have demand for a product that outstrips supply.
CGT/Interest rates/taxes etc are all exasperating this core problem but until supply catches up, prices will rise.
NSW govt is doing its best to do infill but land shortage is a problem which can only be resolved with better/faster public transport to the ever spreading outskirts of the larger cities where land at reasonable prices is available.
It is not a short term problem fix but it needs a fix for the sake of future generations.

Goronwy
September 09, 2024

The reason for exceptionally high house prices relative to income in Australia is not a deregulated financial market. Many countries (just about every country) with lower interest rates than us have cheaper housing relative to income, which disproves your theory.
The solution is simple. Apply CGT to the family home. Keep the CGT discount, it is the same as for every capital investment. Include the family home in the pension asset test. This will reduce the return on investment for home buyers which will reduce demand and therefor cause prices to fall. Unfortunately for our young people it will never happen, we show time and again at elections that we prefer “painless” fairy tales than solutions.

John Abernethy
September 09, 2024

Thank-you for your thoughts Goronwy but you have forgotten the causes of the GFC. You also are ignoring the flow on affects of the GFC on many of our peers - notably QE.

Overseas experience with deregulation of financial institutions and poor regulatory oversight clearly and directly led to the GFC.

Australia, narrowly avoided the financial calamity of the GFC - the result is that our regulators did not learn from that event. The result is a unregulated ballooning of mortgage debt that could have been so better managed by appropriate credit controls and regulatory oversight.

CC
September 09, 2024

Nonsensical to add CGT to the family home. It is investors who are getting all the taxation benefits in Australia currently. Negative gearing exists almost nowhere else in the world. In the USA home owners, but not investors, are allowed tax deduction on mortgage interest payments ( up to a certain limit ).
You say to reduce demand for home buyers, but people must have somewhere to live. They don't need multiple investment properties with huge taxation benefits. Your priorities are wrong.

Trevor
September 10, 2024

“It is investors who are getting all the taxation benefits in Australia currently”

Not at all.

Investors pay CGT, land tax and aren’t eligible for the age pension.

Sure they can receive a tax deduction but only if they are making a loss on their investment. It’s the PPR owners who are receiving all the tax benefits. .

Alan
September 08, 2024

Comparing household debt and house prices in the 1940/50s and now is like comparing apples and oranges. In the 1950s we first bought an old weatherboard/ fibro two bedroom shacks with outside dunny. Husbands only worked, 60 hour weeks was the norm, and if wives work they were poorly paid. Mortgage interest rates were always around 7%. Contrast with today. Gen Z want to buy a two storey mansion, husband and wife work, and lifestyle is more important than working hard etc etc. Gen Z have never had so many opportunities to educate themselves. Government debt may be low but is being spent on welfare and very little is improving productivity. Lowering bank borrowing rates only encourages excess borrowing and makes the value of money near worthless. The solution is financial and life skills education in schools and universities!!

Peter Taylor
September 08, 2024

Goverment asset sales and rising debt along with the availability and falling price of money has assisted in avoiding a recession which traditionally resets the economy
Ramped up immigration expensive housing and tumbling consumer service are simply the price of avoiding recession.

Nic
September 09, 2024

Alan you are absolutely correct. 60+ years ago, the workers house were the terraces in Newtown, etc...... As you described. Simple houses, two bedrooms, a dunny at the back and about 80m2. Nowadays a house must have at least three bedrooms, a couple of bathrooms, and circa 150m2 (or mote). The true workers houses are now apartments. We must acknowledge that due to increasing land shortage and distances to commute, we need to learn that today's affordable housing are... apartments. AS an example I just sold a 2bd with absolutely excellent position in Meadowbank. It was brand new in 2007. The market has been slow since the start of Covid. I sold it in Aug. Selling price was $685K. Purchase price was $465K. Capital Increase 2.3% pa which is less than total CPI since 2007.

Wildcat
September 08, 2024

NO PROBLEM THIS COMPLEX HAS A SIMPLE SOLUTION

I don't disagree with most of the article. It's also a common theme across international markets but we are the winners (losers) in the house appreciation game in Australia. Why? It must local matters, not just the cost of debt.

In a land sooo large, why is land expensive? The multifaceted but single source origin is government of all levels, especially local councils. It's also not one policy but a combination.

1. Restriction of land release
2. Over regulation driving up construction costs
3. Excessive taxation on building supply
4. Pushing infrastructure development onto developers which is then translated into the cost of new housing
5. Poorly managed immigration rates
6. Really bad aged pension policy (i.e. don't take away a little old lady's pension who sells a 4br house if she puts it in a gov't bond. The money can be used to build social housing to on sell to tenants without profit margins).
7. Get rid of or massively reduce stamp duty to remove turnover friction. Alternatively increase rebates for first home buyers and remove entirely for qualifying downsizers.
8. Governments of EVERY level TOTALLY abdicating their responsibilities for social housing. The nutjob Greens then go and blame the only landlords left, the private ones. We used to house 20-30% in social housing. I don't know the official stats (if you'd believe them anyway) but I think it's getting down to single digits. This puts MORE demand onto the remaining housing stock and drives up rents.

You used to be able commence construction in 3-4 months, now it's 18 months and 15 compliance certificates later, all of which costs thousands each.

All this government ineptitude has driven the replacement cost so high that it would stymie house price falls even if you restrained the supply of capital with interest rate/debt access policies.

So yes when you look at supply and demand curves it right to look at the supply of capital (housing demand) but you must also look at the supply of housing. On this point anyone who would think that using super for house purchases is NUTS. If you increase supply by low cost/easy access to debt, what will the supply of yet more capital do. This is doubling down on insanity.

This article addresses the issues of supply of capital. And in a free market and open economy some measure supply of capital restraints is possible but it also dangerous as most new rules from governments create unintended consequences, especially some of the very poorly thought out legislative initiatives of recent years. Bureaucrats in Canberra are singularly useless in crafting solutions for complex problems.

Instead lets look to remove the government imposts by removing rules, reducing over taxing, shifting government liabilities onto developers, reducing red and green tape and employing social initiatives that encourage turnover.

This will dramatically increase the supply of housing, will allow the capping of future rises (much less painful and more electorally sustainable), give younger people a chance over time and let granny release her 4br house. Let's not forget Granny is now living 10-15 years longer than she used to 40 years ago. This also restricts supply through delays.

There is only one govt policy (ironically from a labor premier) and that is the high density construction zones around major transport infrastructure by the Minns govt in NSW. By ripping the anti NIMBY control of councils off of them. It still may cause issues, my biggest concern is inadequate parking for the higher density areas, but its the first attempt by any govt to increase the supply of housing instead of the supply of capital. All federal initiatives have had the opposite of the stated outcome, true Yes Minister type work here!!

The problem is much more complex and nuanced than the article suggests but the blame is simple, Government ineptitude. There doesn't appear to be many alternatives to the current set of muppets so I'm sure progress will be made in the near term. Here's hoping anyway.

Note if you've read this far, I am not a developer, never been involved, I'm just a finance person that, unlike a Canberra Bureaucrat, has real world training and experience.

Dudley
September 08, 2024

"must also look at the supply of housing":

Succinct and correct. In the absurd extreme; no supply = infinite price.

Existing housing is inefficiently used. There is some elasticity in occupants per home.

A purely financial solution, increased bank deposit rates, can make saving competitive with borrowing, increase occupancy rate and reduce home prices relatively quickly.

Andrew
September 09, 2024

This is not quite correct. If demand is less than supply, then the price is not infinite but zero. It's spurious of course, but is semi-close to what occurs in Japan. If the population was not increasing, the need for increased housing would only be for changes in household preferences (apart->shared house-> house and so on).

It is laughable that housing is treated as an investment. look overseas -> UK -> legislated against mortgage deductibility, CGT changes for property vs other assets.

And lastly -> yes unfortunately, every single political solution makes it worse (first home buyer grant, stamp duty exemptions etc). Actually the best for a new buyer would be for a huge hike in rates. The buyer would win by far more than they lose in higher rates (as shown by the fact they have lost far more in price rises than they gained in lower rates previously).

Dudley
September 11, 2024

" If demand is less than supply, then the price is not infinite but zero": If the denominator is 0 then infinite else if the numerator is 0 then 0.

The prospective buyer is assisted by increased interest rates compounding earnings on their savings prior to purchase. Mostly for Slow Savers, not so much for Super Savers as they achieve their savings goal in a smaller amount of time.

The owner who purchased when interest rates were large benefits from house price appreciation when interest rates decrease, 'all else equal'.

Pamela
September 08, 2024

Personally, I believe CGT is a factor in increasing house prices as prices have risen exponentially since its introduction in 1985. As CGT is only incurred only on the sale of an investment property, it’s far more advantageous to use equity and easily available debt to buy more properties than sell and incur a large tax bill. The PPOR CGT exemption also encourages loading up on tax deductible debt for investment properties and using the income to purchase a tax exempt PPOR. The solution may be to abolish CGT to allow property owners to return the properties to the market without incurring such a large penalty.

Dennis
September 08, 2024

I do not invest in residential housing, as homes are not purpose built for income purposes and we need to have low home prices for our young families. Not a generation tied to bank debt unable to contribute to the economy.
Negative gearing on investing in housing is the biggest rod for our young peoples backs.
Why should my personal income tax be used to give to an individual who wishes to leverage into the resi property market. Not being addressed as it's a political hot potato.
Don't tell me that there would be no rental property available, as if houses price came down far enough the rental return required for an investor would meet what a tenant can afford to pay.
Highest property prices in the world is dangerous, no good for our young, splitting our community into haves and have nots.
Stop immigration until you have the housing supply and infrastructure in place.
Need to curb Australia's drooling obsession with residential housing as an investment, there are plenty of alternative investment options which yield a much higher rate and are 100% more liquid.

Randall
September 07, 2024

So whilst I might be able to accept some of this article's assertions that housing is a debt fueled bubble, I think that what is happening is just part of our economic progress in an essentially free market. Thankfully. And at base, I do not accept that this is a problem to be solved socially via some form of wealth distribution or re-distribution via clearly inefficient governments. Our rapid economic growth since the industrial revolution rests in large part from the emergence of property rights in all its forms. The ability of the commoners to trade land and housing has evolved to be not only to provide shelter but also led to more individual wealth. A good thing.

"Low interest rates, low deposit requirements and therefore the provision of excessive levels of mortgage debt have, over time, added to driving housing prices higher. Today, Australia has the most expensive houses in the world when measured against income. House prices have become unaffordable for many – particularly young families. "

I think that the above sentences can be challenged as interest rates do vary over time, deposit requirements can be overcome by individuals saving more and housing prices will go up and down according to supply and demand.

Of course governments have not been shy to pick off revenue from increasing stamp duties and land taxes. So here in the ACT, for example. We have seen unimproved land values and resultant taxes increase by over 70% in the four years from 2019-2023. If you then add the increasing construction cost of houses to that then you get what seems to be a high capital value. Then whilst nominal housing prices might look like they have increased rapidly over the years, I do not accept that we have a bubble here. The annualised price gains over the last 40 years are not that great.

Think the answer, if one is needed, is in supply and then maybe expansion economically beyond our two largest cities.

stefy01
September 06, 2024

"In the meantime, Australia like most of our developed world peers, will need to hold down interest rates. Overseas, it will be necessary to hold down government interest bills. In Australia, it will need to be targeted to keep many housing borrowers from falling behind on repayments.

As I stated above, the policy most likely to be utilised will be QE. However, QE has the insidious effect of supporting asset price inflation when it is utilised without proper debt overlays."

Your solution is the more of the same as what has sent the whole world to hell.
Surely you jest.

John Abernethy
September 07, 2024

Hi Stefy01

The solution proposed was stated before “In the meantime …..”

In other words - until we develop and adopt the real policies to deal with the housing price problem, the RBA will default ( again) to interest rate manipulation which, as you suggest, will cause a bigger house price problem if it is maintained.for a sustained problem.

Trevor
September 06, 2024

PPR owners enjoy lots of tax advantages that renters and non PPR owners don’t. So effectively the latter two groups are subsidising the first group. Perhaps we should level the playing field for owners, non PPR owners and renters and let the market sort it out. Apart from that I’m not keen on more government intervention given their track record.

Barry
September 06, 2024

Great article.

John
September 06, 2024

As an aside, I have noticed there are many areas where there are houses sitting empty most of the time. Or perhaps a sole Boomer residing in the house. Especially such as the Gold Coast and Sunshine Coast, and particularly in Noosa. Often they are mansions which are frequently very modern and luxurious.
So there appears to be an incongruous situation with the excessive number of homeless people around the place. Maybe there are some unconventional solutions for this ??.

michael
September 06, 2024

Part of the solution may be fixed rate long term loans. The interest rates are unlikely to fluctuate to the extremes of official interest rate targets.

Making superannuation available to purchasers will make the problem worse. More cheap money pushing the demand curve further to the right.

Dr David Arelette
September 06, 2024

Editor - more of this please - the paper is like being back in second year Uni Economics (great stuff) and all the comments provide much to think about (also great stuff) - it took me an hour to read all this from start to here, more please.

Dudley
September 05, 2024

Get by with a little help from the "Bunk of Dad&Mum".
Save 90% of disposable income for 4 years to buy home without mortgage:
https://www.firstlinks.com.au/financial-pathways-buy-home-require-planning

For the prospective home buyer a crucial number is the ratio of nominal bank deposit interest rates to nominal home price growth rate.
= (1 + NomDep%) / (1 + NomGrow%) - 1
= (1 + 5%) / (1 + 7%) - 1
= -1.87% (- = borrow big)

To reduce the supply of prospective home owners demanding mortgages, the nominal bank deposit interest rate must be more than the nominal home price growth rate by a goodly margin.

Plenty of other variables interacting to create chaos around that ratio, but that ratio is core.
Even a very simple system with two interacting parts can produce chaos:
https://en.wikipedia.org/wiki/Double_pendulum

Having less debt reduces the chaos.

Geoff D
September 05, 2024

Absolutely right. I largely blame the banks for our current situation. 5-6% interest is not very high and is affordable under normal circumstances but the cheap and excessively available finance of the past few years has blown borrowers out of the water today.

What I don't understand is why people borrowed at low rates of interest without acknowledging that interest rates were too good to be true and must eventually rise to a more normal level, thus increasing the level of mortgage repayments. The banks must have understood this but let it happen!

And don't start me on my soapbox subject of the failure to tax capital gains from the sale of private residences! In not having to pay a tax on such capital gains there are more funds available to the vendor to pay a higher price on their next purchase and that just adds to the cost of housing problem. Look at what has happened to Queensland values largely caused by purchasers from Melbourne and Sydney using untaxed gains, often substantial, to push up prices in South East Queensland.

GeorgeB
September 05, 2024

“more funds available to the vendor to pay a higher price on their next purchase”
I think that you also need to bear in mind that buying and selling a similarly located property in the same market is a zero sum game, because any gains made have to be spent again on another property which also gained in value. Taking into account transaction costs (stamp duty, agents fees, etc.) you are actually going backwards at least 8% on each transaction.

Disgruntled
September 05, 2024

What idiot sells their home to buy something similar in the same location though?

Geoff is correct, some regional areas saw significant gains on cashed up buyers from Sydney and Melbourne.

GeorgeB
September 05, 2024

“What idiot sells their home to buy something similar in the same location though?”
The reference to “similarly located property” is there so that you are comparing capital gain on a similar footing (apples with apples) and does not need to be in the same actual location but should be in a location that has a similar median price and appreciation profile. For Melbourne buyers this rules out selling in Toorak and buying in Sunshine and also rules out selling in Melbourne and buying in regional areas because they are completely different markets and are driven by different forces. The example of people moving from the city to the country during covid is a case in point. The appreciation that occurred in some regions was in any case short lived and is being unwound as the reasons for moving there also unwind.

Jeremy
September 06, 2024

Buyers don't see that they have a choice. From where they stand prices keep going up (I've been arguing a major property price crash is due for 30+ years and I'm still waiting.....) From a buyers perspective the sooner they get on the property ladder the sooner they stop falling behind the curve, so they will pay whatever they can get finance for. Banks make money from lending more so they do. They didn't really just 'let it happen', they actively look to lend as much as regulation allows them to. There are no votes in promising to push house prices back down to sensible levels so Governments are actively complicit in keeping the boom going. The crash keeps getting put off - by way of crazy low interest rates, the growing use of the bank of Mum & Dad, government policy and maybe most insidiously by the ability of people who already own property to trade up or buy investment properties fueled with the equity they have accumulated over the course of the long boom in prices. One day it will end. One day all of these sources of fuel will be exhausted, or at least be insufficient to keep the madness going, but I've been wrong for 30 years and counting.

Teddy the wonder lizard.
September 06, 2024

I think your expecting a lot out of your garden variety branch customer service officer ( I still refuse to call them loans officers as they know stuff all about lending). Compensated as they are for sales alone no one should expect any CSO to point out the punters naked position on rising rates…. when the bank across the road makes the application and risk assessment process even easier. I doubt a corpus of people selling loans is that advanced, although they look like geniuses ( genii) next to the ( not just financial) literacy of the borrower. I acknowledge every citizen in Australia is now an expert on banking and the role of the central bank. It would seem.

TonyD
September 05, 2024

If you want to talk about market price you need to also look at the supply curve ...

JOHN ABERNETHY
September 05, 2024

Thank you Tony,

I did make a brief comment on supply in passing but did not delve into it deeply because housing is regarded as a good that is "inelastic". IE the primary supply of houses (not secondary) does not and cannot immediately and quickly respond to market price.

The more critical issue for supply of housing is the development margin. So price may rise but the margin may drop and particularly if the cost of building materials (and labour) rises quicker than the market price.

This has actually occurred in Australia since covid where building housing building cost index has risen by 50% and outpaced the market price of houses. This factor was noted in the charts that accompanied the May budget but it was not highlighted by the Treasurer in his budget speech.

Tony D
September 06, 2024

Thank you John for your response. Yes the supply of housing is inelastic in the short term, and as costs increase the supply curve shifts. Easy money allows the demand curve to move along with the shift in supply. But over the longer term it has been a deep supply shortfall that has pushed up prices, not only the supply of easy money. Any sustainable solution to the housing crisis and runaway prices should include mechanisms to increase supply.

Jon Kalkman
September 05, 2024

I think John has nailed it.
PropTrack’s research suggests that borrowing capacity reduces by around 10% if interest rates rise by 1%. Meanwhile, a 2% interest rate increase will see borrowing capacity fall by 19%.
The reverse is also true.
Consider how borrowing capacity for housing has increased as official interest rates have fallen from 17% in March 1990 to 0.25% in March 2021. This also coincides with a time when we moved from single income households to double income households.

john flynne
September 05, 2024

Why do super funds not assist members buy their own home? This is recognised as the best form for retirement. Why do the pollies ignore this especially people who were advocates of the workers now they advocate becoming landlords of workers. It is a huge change of values that no-one wishes to admit to especially those who represent the ordinary man

Fund Board member
September 05, 2024

Because we'd be breaking the law. That's not the purpose of superannuation, it's another part of people's life experience than saving for retirement. But as a Director of a fund, I'm not prepared to direct money to helping members buy a house if it means I'll go to prison!

JOHN ABERNETHY
September 05, 2024

You make an interesting but somewhat confusing point - Fund Board member.

Whilst home ownership is regarded as an essential plank to having a secure retirement, the utilisation of superannuation, which is for retirement cannot be directly used to fund homeownership to secure retirement.

However, I think John Flynn was probably investigating the concept whereby Australia's vast superannuation funds ($3.8 trillion) could be utilised to build or invest to help supply, fund or refinance housing - particularly for those who are struggling to enter the market.

I do foresee a point where the vast savings sitting inside superannuation are appropriately directly to wards the housing problem of Australia. But it will require a bit of foresight and imagination.

john flynne
September 05, 2024

You at least admit that it is a possible means and can be done by law. Early super funds had 30% invested in Govt Securities and paid tax on earnings above 5% at 50 cents in the dollar. Surely your duty as a director is to look after members in retirement yet you argue against this. Why ?

Fund Board member
September 06, 2024

John Abernathy, if thats what the other John was exploring then it wasnt the question to ask. The original question was "why don't funds assist members to buy their own home?" Not, should the government change the rules?
The law does not allow super funds to do anything except invest member funds and then release those funds when they reach preservation age according to their decisions at that time. If we were to release funds early to help them buy a home before preservation age we would be in breach of superannuation law and the trust deed governing the funds we oversee.
Hence why don't we do it? Because we legally can't. Not sure why my response is so confusing.
As for "members' best interests" that's exactly what we're doing, but within the retirement savings and income element of the system. We aren't involved in other elements of a member's saving and investments that aren't in the funds they have with us.
If John Flynne wanted to explore that then he should have asked "what policy and legal changes would need to be made to allow super funds to support members buying a house?" He didn't ask that so please don't criticise me for not answering that question!

Linda
September 07, 2024

Seems to me that a smsf cannot lend to a beneficiary of the smsf to buy a house.

However, a smsf can invest in a bank that lends to a beneficiary to buy a house.

Whilst a industry or retail fund can’t directly lend to fund members to buy a house, those funds could invest in a externally managed fund that lends to their members ( amongst others) to buy a house. An example is a fund that invests in securitised mortgages. Indeed, a super fund could buy securitised mortgages directly.

It seems to me that super funds can indirectly help their members ( financing a home purchase) but they cannot do it directly.

john flynne
September 08, 2024

I would like to know how much the Fund Board member understands the benefit of home ownership is in retirement . Has his fund got any evidence that retiring not owning a home is not a proper aim for an individual and the refusal to assist homeownership? I noted he did not address my comment about directing funds to Govt Securities which was the rule originally.

Michael O'Hara
September 05, 2024

My first thought was "isn't this stating the obvious"? But no, the trajectory of house prices creates its own mythology and supporting evidence, which does create a need for stating the obvious.

John's solution though, is a difficult one. It involves a very high level of government intervention, and assumes a nuance for government policy vastly different from anything on display today. Given the bulk of wealth is held by the largest demographic slice, it's highly unlikely any wealth-reducing policy will gain traction.

Which leaves us with QE and continued house price growth. And ever escalating disparity in wealth, adding in potential for inherited wealth embedding class structures into Australia's relatively benign social stratification landscape.

Ergo, things will be great and only getting better - right up to the point where they absolutely are not.

john
September 06, 2024

That is a great point where you said "ever escalating disparity in wealth, adding in potential for inherited wealth embedding class structures into Australia's relatively benign social stratification landscape".
At present we have a continuation of what are called 'Dynasties'. Royal family style systems. What is required is more equity and equality for all. All children starting off in life (such as their education, health etc). Often great wealth is handed down generation after generation to the detriment of everyone else.
This where higher inheritances are the way to go as in other countries. In other words higher taxes generally and on such as windfalls (unearned income). Enables a reduction of taxes on 'earned' income.
Doesn't apply for where someone gets ahead through whatever initiatives, hard work etc

John
September 05, 2024

Lower interest rates and the increased ease in obtaining debt is indeed part of the issue of Australian housing being expensive. Excessive migration since 2007 is arguably had a greater impact in the last 17 years and particularly since 2022. We simply can't build enough homes at an affordable cost to keep up with excessive migration.

 

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