Housing Affordability- Is it Harder Than Ever to Buy a Home?

There seems to be an emerging trend in Australia where there is an increasing expectation for government intervention in our free market economy, where supply and demand rationally determines the variable factor ‘price’. On a macro basis, the present economic environment seems like a perfect recipe for growth: historically low inflation & interest rates, credit/finance readily available, generous government subsidies, favourable exchange rates, relatively low unemployment. But it’s still not working as the economy is stalling, barely managing a growth rate of 1%, which is insufficient to support full employment for this year’s school leavers. It is clear that the low-interest rates are no longer an effective Reserve Bank lever to stimulate growth in the economy, so what are politicians to do?

With the Government having significantly closed the tax incentive for individuals to SAVE, (see ‘Age of Entitlement – Unsustainably Extended’), much of the economic investment has shifted to ‘Negatively Gearing’ property (a tax incentive for domestic investors who BORROW) and the Reserve Bank of Australia (RBA) is now deeply concerned that the housing debt is too high ($2 Trillion or 1.2x GDP) and a risk to the economy, particularly given the critical sensitivity analysis and impact on the economy when interest rates inevitably rise from their current low level of 1.5%. The RBA understands that the economy is fragile and there is nothing more it can do other than rely on a paralysed Government to act, by either further stimulating the economy or removing the red-tape barriers so businesses have the incentive to expand and grow.

Like the economy, wages growth has stagnated (public sector 0.6% Dec Quarter & 0.4% in the private sector) living standards are falling and the trouble for government is that they have few options to stimulate the economy, as they have literally blown their currency with debt now close to half a trillion dollars and the budget bleeding a cash deficit of approx. $200,000,000.00 per day. Governments are relying on businesses expanding, ‘dreaming’ that in the tradition of the classic Australian movie ‘The Castle’, we could survive by continuing to ‘dig holes’. But the heavy regulatory and Government control and intervention in commerce mean that the environment is not conducive for business to invest for growth.

Now politicians want to intervene by changing ‘Negative Gearing’ in the hope of improving housing affordability by removing buyers from the market. However that will only make room for more foreign investors, so as an alternative why not remove some of the bureaucratic restraints and bring more supply to market to help reduce the cost of housing.

In fact, on a micro basis how hard is it to actually buy a house today? ‘It’s ‘never been harder’ is the mantra, but is that true? This left me questioning this assumption: I concluded that it’s not harder now, it’s always been hard. It comes down to ‘what you are prepared to do’ and ‘what you are prepared to do without’ that makes the difference. There is no quick shortcut solution to circumnavigating what’s hard; otherwise it would be easy. We need to stop using ‘too hard’ as the excuse rather than the reason for not trying. So what are the facts?

Australia is now building the world’s largest homes in suburbia with an average floor size approx. 243 sq. m, the highest floor space per capita in the world. This is an increase of 50% from approx. 162 sq. m 30 years ago. Over that time the size of the household has progressively decreased, from an average of 3 members down to the present 2.5; that is a increase in living area per person of 80%.

The current low-interest rate environment has had the effect of increasing demand and therefore influencing house prices, but overall the lowest interest rates in over 50 years is extremely beneficial for those who want to get into the market. Compare the current home loan rates of 4% against 17% in the late 1980’s!

In the 1980’s a ‘home deposit’ was a non-negotiable 20% of the purchase price. The only way most people I knew could save for a home deposit, was by holding down a second job at night. It was just what you had to do to ‘get ahead’; we never thought it was hard, it was simply necessary if you wanted to save for a deposit to buy a house.

The biggest headwind to ‘saving’ was that you paid 60% tax on the income you earned on your second job. Back then the highest Marginal Tax Rate was 60 cents in the dollar for income over $35,000. Today the highest Marginal Tax Rate is 45 cents in the dollar for income over $180,000.

Another restriction back in the late 1980’s was that if you had finance approved by the bank, they could only fund a proportion of your requirement on cheaper Home Loan rates and the balance was on a separate consumer loan, with a much higher interest rate. This was probably the last time Australian’s experienced a credit squeeze, when the bank wanted to lend you money, but didn’t have enough funds to advance at home loan rates. Remember this was a time when commercial business lending rates were 22%-25% and when Government regulated existing home loans with a ceiling rate of 13.5%; at the expense of new home borrowers who were forced to pay market rates of 17% at the banks and 18% at Credit Unions.

On top of all that, most banks would not lend 100% against a female’s income, in case she found herself ‘in the family way’. Subsequent changes to discrimination laws meant that home loan repayments could not exceed 25% of an individual’s gross income and 20% of joint gross income (income from second jobs did not count). Loan terms were limited to 20 years with ‘principal and interest’ repayments (no ‘interest only’ loans or 30-year+ terms back then).

Thirty years ago there were no functioning Government subsidies, housing assistance or Stamp Duty relief. There was a first Home Buyers scheme but the bar was set pretty low, meaning that if you qualified for a payment under the scheme, then it meant that your financial position was such that you wouldn’t be eligible for a bank loan. I’m not sure that any Government funds were ever paid under that scheme, certainly none of any substance. It was the old chestnut: Government being seen to be doing something, without actually doing much.

Should we lower our expectations and look more closely at what we can ‘do without’ now in order to save for what we want in the future? Are we living within our means and have we anything to show for our apparent high levels of personal debt? Do you control your finances or are your finances controlling you? Having a long-term plan is important if you intend to commit to a 30-year loan term. These issues can also be impairments to entering the housing market.

I’m not saying that it’s easier now. Most of the key determining criteria generally remain unchanged i.e. there has always been a correlation between incomes and house prices. I don’t know if the problem is because ‘marketers’ have succeeded in making us all victims of ‘the Jones’ syndrome’, conditioning us to believe that we need bigger houses for fewer people per household.

Perhaps making the family home ‘exempt from capital gains tax’ is the problem, as the tax concession is encouraging excessive investment in single non-productive assets. I’m not omniscient, but what is certainly true is that credit is now far more readily available, which increases demand and puts upward pressure on real estate prices, simply because there are more buyers competing. Supply, on the other hand, is closely controlled e.g. land release, but I can’t help thinking that the most significant contributing factor or barriers to home ownership today is the doubling of the area under roof line over the last three decades and the impact that has had on prices.

I acknowledge that there are great difficulties getting into the market in certain areas where there are concentrated pockets of demand which attract all the media noise, but I’m not certain it’s a national crisis. While we might all ultimately like to live in an ‘advantaged area’ with a good postcode, the reality is that the location ‘entry point’ is dictated by what your budget can sustainably afford. Perhaps the solution can be more difficult than the actual problem if we let it. Remember, if you are striving to achieve an ambitious goal, the ‘hard bit is having the self-discipline and commitment to achieve it!

It always seems impossible until it’s done – Nelson Mandela

25 February 2017