Interest Rates and Affordability

Greg Jericho has written an article about how housing affordability has changed during Glenn Stevens's tenure as governor of the RBA.

Even with further rate cuts, new home buyers will have historically high debt | Greg Jericho

According to figures in the article, the average new mortgage for an established dwelling has risen from $220,400 ($1,682 per month) in September 2006 to $370,500 ($2,263 per month) in July 2016. Factoring in inflation, and the 2006 monthly repayment in $2,106 in today's money.

The piece doesn't compare the relative buying power of the 2006 and 2016 mortgages, which would have been an interesting analysis. Sydney and Melbourne have doubled (in nominal terms) since then, but growth has been slower in other capitals.

Jericho comments that high rates probably won't happen anytime in the next twenty years, as they'd "absolutely kill the economy", so don't expect any big hikes soon, but also that cuts are unlikely to stimulate things much.

 

Rates will need to increase for housing to become more affordable.

 

+1

 

True, but I see the government playing the numbers

When you sit back and look at it, Govco actually "want" property prices to be high, and interest rates low

As this encourages Mr Joe Average who has some equity to Upgrade/Change/Move home (as he thinks he can afford it)

All the while Govco are rubbing there hands together over the revenue stream called "STAMP DUTY"

When I look at the number of "SOLD" dots on RE.com in any given area for the last 6 months I am gobsmacked at the literally MILLIONS in revenue generated for a rubber stamp and mouse click by Govco

(I don't see them forming a "Royal Commission" into this any time soon.......... )

 

The relative buying power would look substantially worse if median land price/sqm was taken into account.

Residential land costs keep rising

 

Keep in mind I said 'affordable', not necessarily 'cheaper'. I also think that manipulation of interest rates isn't really going to help anything, neither housing nor the economy at this point. Here's my thinking...

At this point, dropping rates doesn't make lenders change how much they're willing to lend. It's commonly known that lenders use an assessment rate, but that assessment rate has a minimum value and we passed through that about 2 years and 1% ago. Dropping rates doesn't change the assessment rate, so in most circumstances further rate cuts won't improve the amount people can borrow.

Rate cuts do affect peoples perception of how much they can afford however, so rate cuts influence speculation. This means that those few remaining who can afford to borrow money are more likely to spend more. This drives prices up.

Likewise a rate increase won't reduce how much you can borrow until the rates increase over 5%. The assessment rate won't start to increase until existing rates increase by at least 1%, in some cases more. Peoples perception however will be that rates are increasing, therefore it's harder to afford properly, so the market would cool.

The biggest influence rate changes have at this point is on consumer perceptions, and not borrowing capacity.


A rate increase however, is likely going to be driven by inflation and a strong business sector. This is closely related to increasing wages which does directly affect peoples disposable income and their actual affordability. Rate increases will mean people can afford to buy more, but they're going to consider their decision to buy a lot more carefully under the specter of high interest rates. Affordability is improved, speculation is reduced, prices might still increase but in a more sustainable manner and in an economic environment that is stronger and can support all this.


The problem with this whole theory is the government can't simply increase rates to make housing more affordable. They need to take measures to strengthen the economy, anticipating that rates will increase as a result of a stronger economy. The response to a weak economy has traditionally been to reduce rates to promote business, but at this point rates are so low that there's almost nowhere to cut them anymore. A different approach to economic management than rate manipulation is required at this point.

 

Quite good points to raise, and I do agree with you

Affordability is in the eye of the individual. Some of us are starting out with a few hundred thousand, others have portfolio's in the Millions, each has to seem affordable to proceed

It may have encouraged business to borrow and invest, to increase growth/jobs/export

Very true

But will anyone in Govco be brave enough to implement true change, or remain too scared of upsetting the few at the detriment of the many

 

The root cause of the affordability problem is that property prices are extremely high relative to incomes. In a low inflation world, it could take decades for earnings to catch up.

I'd argue that a feasible solution would require reducing prices. For example, if the Sydney market fell by 3% per year, whilst incomes grew at the same rate, then in 2026 the median house would be around $750K, down from just over a million, whilst median household income would be around $120K, up from $90K. In real terms, that would be about a 50% reduction.

Unfortunately it would also be politically unfeasible.

I don't know what an acceptable solution would be. Prices remaining high would hurt one group, a market crash would impoverish another. There aren't any easy answers, and for all their rhetoric, I find that politicians are pretty poor at taking "tough decisions".

 

I'm sure I read (or heard) somewhere that high interest rates wont come back for another 20 years.
Whether you believe that is up to you. But if it stays low, there's no stopping high property prices. Somebody is going to be able to buy it, whther it be from overseas or interstate. The world is a global marketplace and people want to own something in Australia's larger cities.

As a first step, FHBs will go for a unit/townhouse or a house far out. But that's normal. People with rich parents are just going to inherit houses because it's too hard for the kids to save a deposit themselves. Not exactly fair, but that's life.

It gets increasingly more expensive in each generation as our cities get bigger and people want to live here... what's existing on any sort of land or is well located becomes more valuable. You might as well buy in as soon as you have a deposit, over time property keeps going up in areas of demand...

For prices to stagnant, you need a terrible economy, high interest rates so there's no buyers and stressed sellers. A pull back in credit is the most likely dampener on house prices but it hasn't had too much of an effect thus far.

But once interest rates go down again I think we'll see another boom as it gets cheaper to hold property and let tenants pay your interest payments.

 

Is it unfair if everyone cannot have a deposit to buy in a postcode?

 

You're right in the income vs affordability equation, but reducing house prices isn't going to work. Politically acceptable aside, people don't tend to sell their house for less than the next guy for the sake of public interest. Dropping house prices would eventually correct itself as well, increasing demand again.

Rather that drop houses, increase incomes. Higher inflation leads to higher incomes promoting affordability. It also gives people reason to pause when borrowing money as right now the sentiment is that rates are low so they can afford property.

Another reason why people focus on property so much is they can't see a safe alternative. Since the GFC, people seem to be less interested in other markets. A stronger economy (leading to higher inflation, etc) would encourage people diversify their investing.

 

Where can you buy that doesn't have a postcode?

 

Where is it cheap enough to buy the whole postcode? Huffingtonpost.com/news/town-for-sale

Lower real incomes and change the criteria for lending eg only one income is counted. Then few will be able to afford a property, those that need to sell will take any buyer prices will adjust.

 

Is it unfair if everyone cannot have a deposit to buy in a (certain) postcode?

 

I don't think that's unfair.
But some people would have you think they can't afford to buy in any postcode.

 

Life is unfair. The key is to stop wasting time wallowing in its unfairness and go after what you want. The equation of life will never, ever change.

 

??

 

The Federal Reserve, ECB, and Bank of England have been trying to drive up inflation for years. It's not been a resounding success, and, even worse, has driven up asset prices substantially.

I agree a stronger economy would be nice.

Mathematically any scenario where incomes rise faster than property prices will improve affordability. That could be from wage growth in a high inflation environment, or a collapse of the housing market during a deflationary period.

I don't know what the solution is. The government could probably take some of the heat out of the market through tightening up the existing APRA and FIRB regulations, reforming the tax system (particularly negative gearing and capital gains, possibly replacing stamp duty with a land tax), and easing up planning. I'm not sure how politically feasible some of these would be.

My suspicion is that we won't see an orderly slowdown, and any adjustment will involve a crisis. I suspect that it'll either be due to events in China, or the apartment boom blowing up.

 

Some people are born to complain and use excuses why they will never be able to buy. They may not be able to buy in their preferred postcode for their 1st house, but you gotta start somewhere - a concept they don't understand.

 

And how do you tell your coworkers and family friends where you live? People judge you by the car you drive and the postcode you use in your address no matter how much money you have stashed in a bank account.