The lift in prices,and the super-sized mortgages,have had several knock-on effects. Banks traditionally offered 25-year-long mortgages. Now,they usually lock in borrowers for 30 years to keep a lid on monthly repayments.
Larger mortgages,coupled with the slowdown in wages growth of the past decade,also mean people are paying out a larger share of their income for longer.
A person buying in 1990,when the average home loan interest rate was 17 per cent,used about 35 per cent of their household income to service the mortgage. But that proportion fell quickly,due to the relatively small mortgages Australians had at the time and as incomes grew.
Within 25 years,the share of income servicing the mortgage fell to about 8 per cent. Today,a couple buying now will,in 25 years,be shelling out 16 per cent of their income on their mortgage.
The young and the poor are bearing the largest cost from this change in the nation’s housing dynamic.
In 1981,almost two-thirds of the nation’s lowest paid and aged between 25 and 34 were in the property market. Now,that rate is down to just 23 per cent.
Among middle-income earners in the 25- to 34-age bracket,ownership rates have tumbled from 62 per cent to 41 per cent. The only age group to have maintained their ownership rates,across all income ranges,are people over 55.
The Grattan Institute’s Brendan Coates says Australia is watching the slow destruction of inter-generational equity as young people are priced out of home ownership
He says that in future,unless a person has wealthy parents who happened to hold a home,their chances of buying into the Great Australian Dream will be close to zero. It will be a return to a time when land determined a person’s fate.
“The biggest issue is one of equality. We’re moving back to some sort of Jane Austen world where wealth is less about your work and innovation and more about how much land you have or inherit,” he says.
“It’s moving back to the world of inherited wealth that comes from land or a house,to the sort of world we had in the 19th century.”
How did this happen?
A range of factors is contributing to the issue – one of those is the sheer increase in the number of people calling Australia home.
Between 2002 and late last year,the population grew by 6.5 million. About 70 per cent of that growth was in Sydney,Melbourne,Brisbane,Adelaide,Perth and Canberra. Another 700,000 people moved into Ballarat,Bendigo,Geelong,the Gold Coast,the Sunshine Coast,Newcastle,Wollongong and NSW’s Central Coast.
But population growth is not the only issue. House prices soared through 2020 and 2021 when the nation’s borders were closed to migrants including in both Sydney and Melbourne which suffered net population losses.
Over the past three decades,dwelling construction has generally out-paced population growth. But during the pandemic,the number of people per household fell quite sharply.
People fled share-houses,those working from home wanted properties with extra bedrooms that became offices while the pressure of lockdowns contributed to the divorce rate jumping to a decade-high.
Chief economist at property and mortgage exchange PEXA Julie Toth says the fall in household size had been a critical factor in the most recent lift in prices.
“We saw quite a big drop in household size during COVID,and so far it hasn’t unwound yet. The concern from a social perspective is how much of that will be voluntary,and much of it is an involuntary response to high prices and lack of affordability,” she said.
Government policy has exacerbated housing affordability issues,starting with first home buyer grants in the 1960s and the abandonment of mass public housing construction.
During the pandemic,every government supercharged the purchasing power of potential buyers.
In the Northern Territory,a first home buyer could receive up to $88,000 in financial assistance via local programs (including stamp duty concessions) and the federal government’s HomeBuilder grant. In Victoria,the handouts were worth $86,000 while in NSW they could pocket $85,000.
Cashed-up and with super-low interest rates,first-time buyers entered the property market and immediately bid up the price of a limited supply of housing.
Independent economist Nicki Hutley says the stimulus pumped into the housing market during the pandemic,including through the federal government’s early superannuation access program,repeated the mistakes of previous governments and their efforts to make property more affordable.
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All these programs did was drive up demand and prices.
“What they’re actually doing is making the problem worse,not better. And it’s not one government,it’s all levels of government,” she says.
“The definition of stupidity is to keep doing the same thing over and over again expecting different results.”
Were low interest rates to blame?
Some experts say it is our approach to building approvals and densities in our major cities which is holding back desperately needed supply that could ease price pressures.
Centre for Independent Studies chief economist Peter Tulip says local councils have for too long pandered to the loud voices of local residents opposed to changes that might mean more residents in the neighbourhood.
He says the outright opposition to higher density or changes in land use directly translates into higher property prices.
“NIMBYism is a big obstacle and so we need to change the process and give voice to people other than NIMBYs,” he says.
Tulip also says some of the blame lies at the feet of the Reserve Bank for using monetary policy,particularly between 2016 and 2019,to take the heat out of the property market.
He says interest rates were kept higher than they should have been by the bank in a bid to stop property prices from climbing. Instead,Tulip says macroprudential regulations (which take the form of restrictions on bank lending) achieved more without adversely affecting the broader economy.
“We don’t know if higher interest rates affect financial stability. But we do know that higher interest rates do push up unemployment,and that’s one of the main reasons for mortgage defaults,” he says.
Globally,official interest rates have been falling since the mid-1990s. By the time of the COVID pandemic,they had hit record lows everywhere.
In Australia,the Reserve Bank not only slashed the official cash rate to an all-time low of 0.1 per cent but also created hundreds of billions of dollars via its quantitative easing program.
One of the stated aims of that program was to get cheap money into small and medium-sized businesses. Buta Reserve Bank review of the policy found that’s not where the almost $200 billion in cheap money ended up.
Ordinarily,low interest rates should prompt businesses to invest in new technologies and take chances that deliver economy-wide benefits. Yet over that period,productivity levels slowed. In Australia,the 2010s had the lowest productivity growth rates since the 1950s.
The human cost of housing
Some economists believe the failure of housing policy is contributing to that productivity slowdown. One way to think of how housing is affecting key economic decisions is to think of people as a resource – just as valuable as an iron ore mine or a paddock of sheep.
Productivity Commission chair Michael Brennan says the inability of people to buy affordable housing close to their place of work is a drain on the overall economy.
“Housing policy has important implications for productivity. In a modern,service-based economy,skilled labour is an increasingly important ‘input’ to production,” he says.
“So the ability to house people close to job opportunities,and for firms to locate close to skilled labour,is the equivalent of mining or manufacturing firms locating close to raw materials or port infrastructure – the key difference being that the location of skilled workers is based on individual choices and shaped by policy.”
All of these issues have combined,says ANU demographer Liz Allen,into a wet,cold blanket of insecurity effectively smothering the family plans of young Australians.
She says high housing costs are delaying the time young Australians partner up with others. That partnering has traditionally been the first step towards having a first child.
Increased insecurity over the chance to buy into the property market,or even tenure on a rental property,adds to the pressures on a couple’s decision-making process.
“The way our housing costs are increasing does have human costs and they are changing the way we live,both within our existing households and the way we construct future families,” she says.
“If you have increasing housing costs,then home ownership becomes less affordable,that’s likely to have an impact on relationship development and the decision on parenting and the number of children.”
NEXT:Australians have made the wrong choices about housing
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