The poor relation in all our worries – about the pandemic, the economy, climate change – has been housing affordability. While everything else in the economy has been weak, house prices have been rocketing.
I can tell you why they have, and I can say with confidence that house prices can’t keep rising at double-digit rates forever. But I can’t assure you we’ll ever get house prices to rise no faster than we find easy to afford, nor that we’ll ever manage to reverse the steady decline in the proportion of households owning their home.
When I started in this business in 1974, it was at a record 70 per cent. Today it’s down to 65.5 per cent – it’s lowest since 1954 – and almost certain to keep going lower without radical change.
It’s always possible that it’s all a great bubble that one day bursts, bringing house prices crashing down. That, amid all the pain and destruction – all the families being evicted from homes the mortgage payments on which they could no longer afford – the consolation for others would be much more affordable prices.
For the housing market to one day go from boom to bust is almost certain. It’s happened plenty of times before. It’s a myth that house prices always go up and never down.
But in my experience, they’ve never fallen far, nor for very long. They take a breather for a couple of years before resuming their upward march at a more sedate pace. Until the next boom.
Why am I so confident that, over any period longer than a decade, house prices will be higher? I could say it’s because Australians are obsessed by the desire to own their home, and then gradually turn it into their mansion. But Aussies aren’t different to people in other rich countries.
So I’ll just say housing – along with education, healthcare and other things – is a “superior good”. As our incomes rise over time, we spend an increasing proportion of them on our housing.
This is mainly why house prices keep rising. One consequence of the rise of the two-income family was that a higher proportion of their joint income went on housing. What we hope we’d achieve by this was a better house – bigger, better located or better appointed.
It’s true that newly built houses are bigger and better than they used to be, and established houses are always being remodelled and extended. But when lots of people are trying to get a better place at the same time, a lot of the extra borrowing and spending just bids up the price.
It’s much the same story with the fall in interest rates. From their peak of 17.5 per cent in 1989, mortgage rates are now down to about 3 per cent.
Why? Primarily because the inflation rate’s fallen from 9 per cent to less than 2 per cent, but also because the advanced countries have never got their economies working properly since the global financial crisis, and have been using ever-lower interest rates to get things moving.
(Note that, unlike normal people, economists use the word “inflation” to refer only to the prices of ordinary goods and services, never to the prices of assets such as houses.)
The point is, every time interest rates have fallen a bit over the past 30 years people have used the opportunity to borrow more in an effort to buy a first home or move to a better one. Again, when too many people do this at the same time, house prices are bid even higher.
The main reason house prices have soared during the pandemic is that the Reserve Bank has acted to protect the economy by cutting its official interest rate virtually to zero, and we’ve responded the way we always do to lower rates.
So, much of the seeming benefit of lower interest rates ends up as higher house prices – to the benefit of existing home owners and the expense of young aspiring first-home buyers.
The good news for first-home buyers is that, with rates having hit the bottom, this is the last time house prices will soar simply because rates have been cut. So double-digit rises in house prices can’t last.
The bad news for would-be and recent actual first-home buyers – which won’t come for a couple of years yet – is that the next move in rates can only be up.
The rules of the home-ownership game are rigged in favour of existing home owners. That’s because they far outnumber aspiring home owners. And they’re not willing to give up their tax and other privileges to help the younger generation.
Except, of course, their own kids. The Bank of Mum and Dad has played a big part in making seemingly unaffordable house prices able to be afforded – by some.
The ever-rising proportion of Australians who’ll never own their homes are mainly those who failed to pick the right parents. Want proof of the widening gap between the rich and the rest? Look no further than home ownership.
