Housing is about to become more affordable. That’s the good news.
It could be as early as next month and won’t be any later than early in the New Year.
But before you break out the bubbly, a word of caution.
If you are a first home buyer, it most likely will be a fleeting, and possibly minuscule, improvement.
Rate cuts are in the wind and, while they’ll certainly improve housing affordability, the downside for new entrants is that housing affordability is at an all-time low.
And if we’ve learned anything from the past four decades, cheaper loans have only helped drive prices higher.
Exactly when the Reserve Bank of Australia pulls the lever on rate cuts will depend on the data released over the next few weeks.
This week it will be unemployment. That will be followed in a fortnight’s time by the all-important inflation data.
There’s no doubt the economy is slowing and it is inevitable that Australian interest rates will be cut — it is simply a question of when.
Once the RBA does cut, housing loan repayments will drop, which will make it marginally cheaper to borrow and hence temporarily improve affordability.
Unfortunately, that could be enough to lure in more buyers, which will push prices higher and smash any hopes first home buyers may have — unless, of course, they have parents willing to stump up an early inheritance.
Tell ’em the price
When it comes to housing affordability, many merely consider the price of a dwelling.
It’s a hugely important factor, but it is just one element of an equation that also involves how much income you earn and have at your disposal, along with the cost of servicing a loan.
Right now, Australian housing is the most unaffordable in history.
Rate cuts could be a double-edged sword for housing affordability, if cheaper loans again drive up prices. (ABC News: Daniel Irvine)
Consider the current brutal combination:
Real estate prices nationally are at record levels and wages growth has lagged inflation, which has hammered household disposable incomes.
Meanwhile, the cost of borrowing, having been on a long-run decline since the 1990s, has done an about-face, soaring at one of the fastest clips on record.
Housing affordability has dropped below its previous low point, which was the period leading up to the global financial crisis, when a brief spike in interest rates and soaring property values saw affordability measures plunge.
While housing prices recovered after the GFC, affordability actually improved.
That’s because central banks continued to cut interest rates, which reduced the cost of servicing a home loan.
Then came the pandemic, with an official cash rate of just 0.1 per cent, which lifted affordability levels back to where they were at the turn of the century.
But with property, we’ve constantly chased our tail: when rates were cut, we borrowed more, pushing up values.
The rate hikes of 2022 and 2023 were an inflection point.
Since then, it’s been downhill all the way when it comes to affordability.
Ordinarily, you’d expect housing prices to plunge. They did for the first few months after the RBA began hiking rates.
But since the beginning of last year, against all logic, they surged again, primarily because population growth began to outstrip housing supply.
Given we’re not building anywhere near enough dwellings to house our rapidly expanding population, real estate is likely to continue rising.
Add to that the tax incentives that favour investors, and any interest rate cuts are likely to only deliver a temporary respite to those looking for a first home.
A classless society no more
It’s often portrayed as a spat between the generations, with both sides whipping up outrage and swapping snide remarks.
But the affordability crisis has become a permanent feature of our economy that could fundamentally alter our society.
The most recent Intergenerational Report neatly captured the problem with this graph:
A larger proportion of Australians are becoming home owners at a later age than they were 20 and 40 years ago. (2023 Intergenerational Report)
Back in 1981, almost 55 per cent of Australians aged 25 to 29 owned a home.
Four decades later, and there has been a huge drop to just over 35 per cent.
The gap narrows the further up the age cohort you proceed.
For those aged more than 70, the proportion of Australians owning a home now is roughly the same as that in 1981.
But that’s because those now over 70 mostly bought in the 1980s and 1990s, before the huge boom in real estate.
Here’s where it gets disturbing: the gap, unfortunately, will remain constant as the current crop of under 30s moves up the band.
Meanwhile, that gap is likely to further widen when the next crop of under 30s enters the data.
In 2021, around 80 per cent of Australians over 70 owned their home, but that figure is likely to fall as the current population ages. (ABC News: Louise Merrillees)
What the data is telling us is that fewer Australians in each age cohort now own a home than was the case 40 years ago, and it is taking far longer now for Australians to enter the housing market.
That has some worrying potential consequences for the future.
When the current generation reaches retirement age, those without property will have to continue to rent with just a limited income.
And of those who purchased a home, many will be left with sizeable mortgages, meaning they either will have to continue working well into their retirement years or will be forced to sell and opt for something cheaper.
This is likely to have a major impact on our nation’s future retirement savings pool and the federal budget.
Real estate is rapidly transforming our society and becoming the great dividing factor.
Nothing to worry about here
Don’t you just love averages?
On average, Australians are amongst the world’s wealthiest.
According to the Australian Bureau of Statistics, total household wealth soared 7.8 per cent to $15.7 trillion in just a year.
As the ABS’s head of finance statistics, Dr Mish Tan, noted: “Household wealth saw a large boost from rising values of assets this quarter.
“House prices continued to grow significantly, as did domestic and overseas share markets.”
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More than ever before, home ownership is a major determinant of individual wealth and, in later years, financial survival.
But that rising wealth is likely to be concentrated in ever-fewer hands in the future.
The flip side to the wealth measure is the amount of debt we’ve accrued: Australian households are amongst the world’s most indebted as we’ve all fought tooth and nail to secure a loan to fund ever more exorbitant property purchases.
And our banks have profited handsomely from the trade.
Australia’s two biggest banks, CBA and Westpac, overwhelmingly rely upon selling mortgages for their earnings, while ANZ and NAB aren’t too far behind.
Ours is an economy overwhelmingly geared to property and ever-rising real estate values.
Unwinding that would be nigh on impossible without inflicting a terrible blow to the economy.
Japan suffered a 40-year recession when its property bubble burst. China is four years into the same experience.
But that doesn’t mean the excesses couldn’t be curbed.
Removing or even winding back tax incentives that turbocharge capital gains and balancing population growth to housing supply would be a good start.
Before it is too late.