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

Government Absent on Credit Act-Disadvantaging Vulnerable, Youth & Working Poor

An interesting learning this week: apparently the tabloid media declared that January is the best time for individuals to review how well they manage their finances. It would seem from the story that the levels of personal debt are at record highs and credit cards are funding extreme levels of long-term unsustainable debt at usurious rates. Unsurprisingly, this is apparently due to the fact that many of us are living beyond our means and funding the shortfall on ‘credit’.

The story then promptly proceeded with what appeared to be a paid infomercial or ‘product flog’ offering a different credit card that does essentially the same thing!  So the solution is the same wrong behaviour with a different product provider! Is that how you take responsibility and control of your finances?

The tabloid media, like the Government, keeps missing the opportunity to educate the large numbers of consumers who clearly need help, although after about 10 years of Federal Budget deficits the Government is hardly in a position to lecture. The bottom line is: if you are using your credit cards for anything other than as a ‘method of payment’ you are simply not applying ‘efficient and effective’ management of your finances to achieve an outcome that is going to be beneficial for you.

Debt management is the essential first step if you are ever going to be in a position to accumulate sufficient assets to live a reasonable existence and a comfortable life in retirement. But who thinks that far ahead? Certainly not Government!

Almost everyone needs assistance to learn how to manage their finances; after all, it’s the mechanism we all use to fund ‘living’. It can be complex and getting the right advice should start early in your working life. The misconception is that you seek financial advice when you have plenty of money, but you actually need it when you have very little and looking to accumulate wealth.

It seems incongruous that Government reactively fund ‘Credit Counselling Services’ for those who have already got themselves into financial trouble, but do nothing proactively to assist with preventative ‘risk’ education for consumers. Nor are they willing to adopt workable policies or remove the failed and ineffective Government Legislation and the associated unenforceable compliance regime. If they did, the prohibitive costs of financial advice could be slashed and services made more accessible to the masses. The barrier for the average consumer is ‘cost’. At the moment only the wealthy can afford financial advice services. Why exclude the demographic that needs help the most?

Why do we accept that a certain socio-economic demographic are the disposable victims of the questionable practices and behaviour of the financial institutions issuing these credit cards to individuals who have no capacity to repay? How do these financial institutions continually avoid regulatory scrutiny from the Government’s own enforcement authorities? There needs to be an enforcement conversation about Financial Institutions complying with the Credit Act or, more precisely, the lack of scrutinising around the practices, behaviour, ethics and morality of the financial institutions issuing these cards.

There was a time when Financial Institutions issued credit cards, but only after completing a credit assessment of the applicant’s capacity to make repayments, as well as looking at their character and capital position or net worth, essentially to ensure the applicants could afford the repayments and to reduce the risk of individuals getting themselves into financial trouble.

Now with increasingly smart technology and the removal of manual credit assessments to reduce costs, the product model has changed. It is no longer about preventing or reducing defaults but rather a high turnover computerised system, which is programmed for an acceptable level of failure or default rate. The higher the interest rate margin the higher the statistical default rate can be. So it’s no longer about looking after customers to prevent defaults, it’s a statistical formula for acceptable losses where the casualties are the customers set up for failure by design, usually the young, vulnerable, disadvantaged and working poor.

Technology has completely changed the dynamic of the card facility and it is questionable whether credit cards can still be defined as a ‘financial product’ in accordance with the intended provisions of the Credit Act. It’s now a ‘service’ generated by a statistically programmed computer; designed by actuaries based on probability and operated by a ‘processing centre’, not finance-trained people. The governing legislation has not kept pace with the technological evolution in the finance sector, where defaults are no longer a potential consequence but a planned inevitability. The cost of the ‘systems failings’ is clear to see: whether due to theft, misappropriation, dishonesty or default, the systems disposable casualties just add further pressure on society and welfare dependency.

The financial services industry seems to have completely dehumanised the relationship with their client. They don’t care or feel accountable to their customers, especially the ‘acceptable losers’ built into these programs. If clients are defaulting because they were not correctly assessed in the first place, then you must ask the question: how are these Financial Institutions meeting their ‘Duty of Care’ to their customers and how do they remain compliant with the Government’s Credit Act? More to the point, where are the regulatory enforcement agencies?

The fact is that financial institutions make large profits from credit cards when the interest margins and fees are so high, particularly at the moment where credit spreads (interest ‘charged’ versus the actual ‘cost of funds’) have never been wider due to the present historical low-interest rate market. I’m not against financial institutions being successful by making profits but businesses still have a Duty of Care to their customers. We need to ask whether the absence of ‘Care’ is the reason why the profits are so high and if that’s the case, I can’t help thinking that the Government has left vulnerable consumers exposed to predators whose behaviour appears unscrupulous, immoral with unethical standards. It’s a numbers racket that would make organised crime syndicates envious.

The gap between what’s said and what’s done has never been wider, with the absence of ‘complete truth’ reflected in the length of the product disclosure documents i.e. they are what they hide. I accept that we all need to take responsibility for our actions, but financial institutions are acting as enablers, knowingly selling what they consider is an acceptable level of grief without accountability or reasonable preventative care. Shaping an orchestrated loss scenario for certain consumers feels like predatory behaviour to me. Why is the corruption of morals the only bankruptcy acceptable to the financial services industry? (See also ‘Why are Government Regulators – not working’).

The time is always right to do what is right. –Martin Luther King Jr.

25 January 2017