• 01/07/2022

First home buyers are not locked out

Business Spectator I Stephen Koukoulas I15 October 2013


There is a perception that housing is unaffordable for first home buyers and the fact that there are fewer young people buying houses and are ‘forced’ into renting the place they live in is a bad thing.

This appears to be another one of those spurious fact-free assertions that is probably focused more on first home buyers wanting to live near the city in expensive real estate rather than choosing to live a bit out of the city in a dwelling they can afford to buy.

Let’s get a few things sorted out.

Anyone who bought a house in the last three or four years has taken a pretty hefty hit to the hip pocket, notwithstanding the recent price pick-up. Prices are basically flat compared with the level three years ago, meaning that in real or income adjusted terms, prices are down around 8 to 10 per cent. First home buyers holding off for those three years and buying in recent times are much better off.

The other critical thing to note is that while house prices are high, they appear not to be ridiculously out of whack. According to research in April this year from the Luci Ellis, head of the financial stability department at the Reserve Bank of Australia, real house prices in Australia have risen by around 25 per cent over the past decade (see chart below). Not surprisingly, this has outpaced the net change in prices in Ireland, Spain, the US and the UK.

What is interesting is that real house prices have risen at a much faster pace in France, Norway, Canada, Sweden and New Zealand.

Graph for First home buyers are not locked out

What is also apparent is that the repayments on new housing loans as a percentage of household disposable income is currently around the long run average of the prior 30 years (next chart below). No more, no less.

Since the data in the chart below were produced around six months ago, rising incomes and lower interest rates are likely to have pushed the ratio lower, suggesting that new borrowers are better off now – in terms of their repayment schedule – than the average of the last three decades.

Graph for First home buyers are not locked out

What has happened to make this so is that the burden of a larger loan in recent times has been completely offset by the saving from low interest rates.

Indeed, Ellis noted when referring to this chart that the recent “recovery in dwelling prices makes sense given how much affordability has improved as interest rates have declined”.

Put another way, in the old days, when house prices were seemingly ‘low’, buyers had to confront a debt servicing burden driven by high interest rates – even with a relatively small mortgage. Now, borrowers have a debt servicing burden driven by high nominal debt which is offset by very low interest rates.

So far there is no evidence of a first home buyers’ affordability problem or that renting is inferior in some way to buying.

From an earlier research paper in March 2012, Ellis confirmed that capital city house prices were around 4.5 times average annual household disposable incomes (next chart below). This was a little below the average of the prior decade and down from the peak above 5 recorded in the early 2000s.

In the 18 months since this chart was produced, the ratio of house prices to incomes has no doubt fallen further with house prices flat to only slightly up and incomes rising at an annual rate around 3.5 per cent. In other words, on this measure, it is certainly easier now than at any time since the late 1990s for an average household to buy an average house.

Graph for First home buyers are not locked out

Perhaps the problem with house prices, if in fact there is one, is a lift in the period from around 1985 to 2000 when they rose from around 2.5 times income to 5 times income. But as noted above, this lift in prices was not met with higher repayments or a troublesome debt servicing given the structural lowering in interest rates over that time where interest rates, on average, halved. Indeed, the peak financial stress on mortgages was in the late 1980s when over 30 per cent of household income was used to for mortgage repayments.

There are also a couple of other issues which suggest the first home buyer price squeeze and the pain of rent is more fiction than fact.

Renters have the joy of not paying thousands of dollars a year in council rates, insurance and maintenance. That maintenance alone (depreciation is the accountants’ way of looking at it) is estimated to be around 3 per cent per annum on the building costs which, according to BTM quantity surveyors, is around $5000 a year on an average dwelling. Insurance and rates are at least a few more thousand dollars a year. For renters, that unexpected cost when the hot water system or heater or dishwasher fails, goes to the landlord.


Of course, renters do not get the capital gains, or indeed suffer any capital loss when prices fall. While price falls are uncommon over the long run in Australia, the international experience suggests that there can and will be times when prices take a dive. The lucky renters in Ireland and the parts of the US when house prices fell 50 per cent did not suffer when this happened.

The end point is that housing is somewhat expensive, but no more than at any time over the last 15 years or so. The debt servicing of a mortgage needed to buy an average house is about where it has been over the last 30 years, so no issues here. What’s more, there is nothing wrong with renting. One third of the population do.


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