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Hey boomer, first home buyers and all the fuss

There’s been a lot of angst-ing about house prices over the last few months. It’s more difficult to start for first home buyers and APRA's announcement that it will tighten lending standards is intended to prevent a ‘bubble explosion’.

We don’t think either of the issues are really supported by evidence.

There’s no doubt house prices have had a go-go year. UBS published its annual Real Estate Bubble index last month and Australia has put in a world class performance this year. Sydney’s price increase (17% above inflation) is the third highest of the 25 cities it surveys (Moscow was no 1 with 22%). But over a five-year period, Sydney’s real price increase of around 3% was well below average, and on other affordability measures, Sydney is more affordable than most of the other 25 cities.

Prices versus servicing

We agree with Saul Eslake (see his Firstlinks article) that first home ownership is an important social construct, and we constantly read headlines about how difficult it is to get into the market (compared to when Boomers were young). The data doesn’t support this. Much of the commentary about the lack of affordability looks at the Price to Income ratio but this ignores the effect of lower interest rates on servicing burdens.

We’ve constructed the chart below which shows the cost of an 80% LVR (loan-to-value ratio), 25-year P&I (principal and interest) loan based on home prices and as a percentage of income since the 1970s. We are using ‘averages’ (full time male Average Ordinary Time Earnings - AOTE - and median Melbourne house prices to 2002 and weighted median house prices since then) and we accept all arguments that it’s not a perfect set of assumptions. We suspect the story is much the same if you use your own assumptions.

In a nutshell, we all know that house prices have gone up exponentially since the 1970s, which is the major reason why the house Price to Income ratio has increased. But so have wages (at a rate of inflation+) while interest rates have fallen.

In the simple terms of how much of your income you devote to paying your P&I home loan, it’s not a lot different between now and those sunlit uplands we all read about. Plus houses are better now, so maybe it should be more expensive.

The societal group we should feel most sorry for is that cohort who bought in the late-1980s/early-1990s when interest rates were 15% as they spent their 20s living on three-minute noodles and drinking at cheap pubs so they could afford to service their home loan.

Is APRA really worried?

APRA announced tighter restrictions on lending for new borrowers by requiring higher minimum interest rate buffer on new loans, citing growing increasing financial stability risks and an acceleration in borrowing. This only applies to new loans and the simple chart below demonstrates how incorrect this is.

We’ve stratified the total number of Australian homes by tenancy types. The number of households with mortgages (the dark blue segment on the left side), is around 35% of the total number of households (around 10.7 million) and most of the mortgages are old or low LVR.

In the right side of the pie charts below, we have taken the total number of mortgages and slivered out the loans at risk i.e., the number of new loans in FY20 and FY21 at an LVR of >90%. There are around 90,000 of them.

We can’t see existential risk for the Australian financial system arising from less than 1% of the households having marginally increased their risk appetite and maybe borrowed too much. If you look at the number of >80% loans over the past two years, it is 360,000, or just over 3%. Therefore, 97% of Australian mortgage lending is in bulletproof territory.

But what about interest rates going up?

So maybe APRA’s concern about a housing market with increasing prices is that it will create problems when rates increase, and rising defaults and low affordability will result in a death spiral for the housing market and Australian economy. We can’t see any basis for that either.

To put our argument in simple terms: except for the group that have bought over the last few years, everyone else has a loan based on the price when they bought it (say, seven years ago) and rates have halved since then, and there has been income growth.

The parameters are this:

  • Only 35% of Australian households have mortgages.
  • Only 3% of homes trade per year. The average Australian stays in the one home for over 20 years. We’ve assumed that moving house is the prime driver for increasing or decreasing a mortgage. We also assume that any home equity redraw is offset by others overpaying their mortgage. Clearly younger people move homes and increase mortgages more quickly but you can assume an average seven-year turnover and still come up with unscary numbers.
  • Interest rates have fallen materially over the past decade.
  • Wages/household income has increased over the past decade.

The result is that the ‘average’ are not at risk of financial stress if rates increase materially.

We’ve quantified the numbers in the chart below. The results are the P&I mortgage payments as a percentage of Adult AOTE wages. We’ve assumed that all mortgagees bought their home in 2008 and every year after that 5% a year sold and reinvested in a new home at the next year's median price. We’ve used the actual LVRs for the year of the new purchase. So, in 2020, around one-third of the original 2008 owners are still in their houses, paying a mortgage based on 2020 interest rates and 2008 house prices, and earning a 2020 wage.

The analysis shows that the ‘average’ mortgagee can easily absorb increases in interest rates without posing a systemic threat to the economy or the banking system.

The result is consistent with National Accounts data which shows that households spend around 3% of gross income on household interest, down from 6% in 2008.

Further evidence of the lack of kryptonite in housing lending are the lack of realised losses by lenders. Major bank housing losses over the past three decades are a very small rounding error. Even mortgage insurers, who are the most exposed due to banks requiring borrowers needing an over 80% LVR loan to be mortgage insured, suffer small losses. Average paid losses for Genworth Australia since its IPO are around 30% of the premiums they charge. And they get the worst mortgages as well.

What does it all mean?

We’re a long way from housing price movements causing systemic issues.

Maybe APRA has more data that indicates that issues with the ‘marginal’ homeowner/buyer create outsized problems or maybe APRA thinks that shouting at people creates an effective precautionary firebreak to discourage growth in speculative home borrowing.

In any case, we expect that housing lending will continue to be a profitable and relatively risk-free activity for banks.

On a broader societal issue, APRA should be loosening borrowing standards for some of the population, rather than tightening them. There are still 30% of the population who rent and who would benefit from more certain housing outcomes. Clearly some of them will never be able to own homes, but there are others who just can’t quite get into the market and are marginally higher risk. And building new homes is the best solution to too many renters and high prices, so maybe lending for new home building should be incentivised.


Norman Derham is Executive Director of Elstree Investment Management, a boutique fixed income fund manager. Both Norman and Michelle Morgan are Business Development Managers for the Elstree Hybrid Fund (Chi-X:EHF1). This article is general information and does not consider the circumstances of any individual investor.


Tom Taylor
October 31, 2021

People could not afford to purchase their lunch every day. Take away comprised of the occassional friday ( once a month) fish and chips wrapped in paper the outer layer being old newspapers. There was a stock market crash in the late 80's and the Victorian state bank failed as well as a number of building societies Pyramid being the largest in 1990's, it was a scary time. Women were paid a hell of a lot less than men for the same work. My wife and a girlfriend of hers had teamed up a few years before I met her and had tried to purchase a small 2 bedroom flat. You had to have your deposit with the bank for two years to get a loan. Because they were both females and didn't have a male partner they were refused because they might get pregnant!!!! The furphy is with all the government hand outs today's generation think times are tough as they sip on their latte and live from one paycheck to the next. My generations grandparents and parents had it much tougher than my generation. They went through the first world war the 1918 influenza pandemic where one third of the world's population 500 million were infected and 100 million died, then there was the 1929 & 1932 stock market crashes that then brought on the great depression and followed up with the second world war. Progress is when each generation is a little better off than the previous. The living standards today are light years ahead of where we were back in the 50,s,60's, 70's and 80's. But hey don't let the facts get in the way of a good whine.

October 30, 2021

Key issues overlooked are 1. Mortgages started pre 2010, were deflated quickly by wage rises. This was extreme in the 1970s and 1980s. This no longer occurs due to wage stagnation. 2. Interest rates have been falling since 1990. Mortgagees have borrowed more and more as banks shoved out money as fast as possible to grow profits. Borrowers have been put to the pin of their dollar to meet repayments even at minimal mortgage rates. 3. That will not happen again, in fact rates will rise from here and borrowers will have very little spare capacity to absorb rate increases, thus setting in motion a chain reaction of falling property prices due to forced sales, reduction in the amount of bank borrowing, with banks increasing margins, and rates, to compensate. 4. Recent entrants to the negative gearing game, and we have seen massive borrowing due to FOMO and the delusion that property only goes up in price. Many of these do not remember the 1990s, when property prices flat lined for a decade from 1988 to 1998 in Sydney. That was a period of great mortgage stress and mortgagee sales, and resulting marriage breakdowns. That was triggered by a rise in interest rates. The outlook for property from here is not good, in fact it is very worrying. As a nation, we have borrowed to our eyeballs, leaving less and less to spend on the necessities and pleasures in life. We are asset rich but income poor.

Jim Lane
October 30, 2021

Chris nailed it from the start. Figures and statistics can tell any story we wish to portray but I'd wager the authors haven't had a first home buyer in the family trying to enter the Sydney property market in recent times. Sure, low interest rates and skewed ratios have enabled some buyers to carry inordinate debt today, but as has been acknowledged by Firstlinks writers previously, the belief that we'll never see 80's interest rates again ignores the reality of left fields, blue moons, black swans and "good old double brick".
Note to author, an easy way to remember: "The mortgagor is the one that's poor"!

Anthony Asher
October 30, 2021

Not sure “ building new homes is the best solution to too many renters and high prices, so maybe lending for new home building should be incentivised.” Investors are displacing the residents as owners. And tax and the law give the investors more relative power than in countries like Germany. Investors should be looking for ways to ensure that the economy is adapting and growing not pushing land prices up and treating tenants like pawns in the process.

October 30, 2021

Interesting article with some good points to consider. However, it is surprising that the authors misunderstand such a basic concept as a mortgage. The house owner is the mortgagor who gives the debt holder (bank) an equity claim as mortgagee. This is usually as security for a loan contract to fund the mortgagors house.

While more minor than above there is also a typo in the household by mortgage status left side diagram where the same figure has been used for the number of renters & the mortgage free.

Graham Hand
October 30, 2021

Thanks, Michael, we have requested the authors correct that chart.

Campbell Dawson
October 31, 2021

Hi Michael
The same figure is a result of our source data ( which shows without mortgage and renting both at 32% of total houses. We then applied that to the latest number of houses (ABS) and came up with the same absolute number. Obviously it would be different if there were more decimal points

October 30, 2021

I bought a house and land package for $395,000 in 2001. Based on nearby house sales, my property has increased in value at the rate of $5000 per week........ for 20 years.

October 30, 2021

So your 395,000 house is now worth $5,595,000??--wow(5000 per week= 260,000per year)
Or should it be "increased at rate of $500 per week for 20 years?

David Hellstrom
October 30, 2021

I belong to the “silent generation as I am 87. My first house was built on a block of land at the northern beaches for £1,400 ($2800) and the little two bed house cost another $8,000 to build. Borrowing rates were around 6%.
After two years I moved to the North Shore And bought a nice block for £2,000 ($4,000) I had built a little three bed double brick house for a further £6,000 ($12,000). Many years later in 2007 ( having done major improvements on the house) I sold ( 1.1 million) and bought a three bed unit at the station for around the same. Just recently I sold that (2.8 M) and bought into an old folks home which left me with a sizable pot to place into my retirement savings (which have since shown a 10% cap gain plus dividends).
I have certainly lived through the lucky years

Tom Taylor
October 28, 2021

We bought our first home in 1985 and just got under the the government cap of 13.5% before the new rate came in for buyers after that date who were then were looking at a mortgage rate of 18-22%. I knew of one individual who was on a huge salary who lost his home because he could not meet the 22% home loan interest rate.
Back then we never ate out, we'd have friends over and everyone would bring a plate of food. We didn't eat meat it was too expensive. When we moved in we had a choice a dinning room table second hand or a bed. We chose the bed and the wife knocked up a makeshift table. We had two kids during those lean times and it was the best time of our lives.
Today kids turn their noses up at second hand furniture and have coffee and eat outs regularly and acuse the baby boomers of being greedy. Go figure. Both our kids have purchased homes in inner melbourne with their partners at the age of 29, how? They still have a good time but are frugal with their money and were prepared to work at an extra job like we did. Its not rocket science just common sense which for some people is not common.

October 28, 2021

Here we go again with another boomer anecdote about how 'back in my day we ate noodles, made more sacrifices, worked harder, took coffee to work in thermostats etc. compared to the wildly profligate youngest gens. The knocking up our own furniture is a new one which gets points for creativity. No facts, no numbers, no context. Just wonderful little stories we tell ourselves.

October 29, 2021

What facts and context have you added to the conversation?

October 28, 2021

Interesting article! The late 80's was the best time to buy as sellers had got to the point where they were scared into believing that 18% was here to stay. Within 18 months of buying , after renting a flop house at very high rent for 2 years, our house price rose by 50% when interest rate moved back down. On APRA it looks like the big banks are in for a home run on that macro-prudential strategy as it supresses demand and forces many to stay in the rental market instead of risking it into the house buyer market thus underwriting the credit risk for the big banks. Also, if as seems likely, small business had copped it in the face during the pandemic lockdowns, rising house prices mean that they can reborrow for their business working capital so get out the way APRA and make the big banks increase business lending to earn profits.

October 28, 2021

"In any case, we expect that housing lending will continue to be relatively risk-free activity for banks." Scary thing is about this assertion is that APRA tends to agree with the risk weightings applied to mortgage assets. This feels like one of those things your hear at the top..

Local corporate bond and hybrid market comprised almost solely of bank debt. Talking of book me thinks..

October 27, 2021

"first home ownership is an important social construct". Maybe in Australia, but what about Germans, 48% of whom rent their place of residence for life, mostly by choice? The major difference is security of tenure, with Germans often renting from corporate overlords (er, landlords), who don't face life events like job loss, relocation, divorce, illness or death that often cause Australian residential investors to sell, leaving tenants floundering. We need to accept that owning a home is now out of reach permanently for many in our major cities. Part of the solution is incentives for corporates to enter the build to rent market en masse and disincentives for fickle mum & dad investors to play in residential housing. Start with removing the CGT discount for new investors. Grandfather current ones. That should cause some pause for thought and discourage existing landlords from turfing tenants to sell, as their next investment property would lose the CGT discount. Gotta be good for tenants.

October 27, 2021

Do today's mortgage payers find themselves depending on the cheapest vegetables at the markets at Saturday noon, always taking a homemade lunch to work, never buying coffee, taking a thermos flask and instant to make their own and picnicking, if going for a drive, checking the specials every week to find essentials that one could afford, never shopping to a recipe - that came after the cheapest buys had been obtained. Phoning for a take-away was always an unaffordable luxury, holidays were bush-walking trips with our own tent, this is how we survived and retained our home. do not complain about "How easy our generation had it", it was difficult and many lost their properties through the increased interest rates making repayments unaffordable.

October 27, 2021

"The only societal group we should feel sorry for is that cohort who bought in the late-1980s / early-1990s and who must have spent their 20s living on three-minute noodles and drinking at cheap pubs so they could afford to service their home loan." Why ? This is a furphy that has been disproved several times in this forum. Do the maths in terms of the average wage versus the average house price, the percentage of the wage versus fortnightly repayments and then (allowing for inflation), compare this situation versus today as a like-for-like comparison, and you'll see that those "horror" 18% interest rates were not so, when compared to similar conditions today. In short, "normal" rates of 7.5% on the same sort of metrics today (percentage of wage versus repayments) are actually comparable to those 18% rates because the denominator today is so much larger, thanks to the amount that you have to borrow. Comparatively, a small increase in rates means a lot more today than it would have done in the past. Also, wages have not kept pace anywhere near the same as house prices, and what you buy today in terms of house quality (the "new" of Hebel bricks, rendered blueboard and polystyrene waffle pods vs the "old" double brick) is absolute rubbish and not worth good money.


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