What housing affordability crisis?
It seems you can’t open a newspaper (does anyone do that anymore?), look at a website, or watch the TV news without seeing some story about housing affordability.
Evil negative gearing investors are driving first home buyers to the wall, no-one can afford to buy a house, and young people are eating too much smashed avocado to leave home.
Right?
The Census is our best measure of truth (at a local level) to investigate this subject. And the headline we haven’t been seeing (and perhaps should have been seeing), is that the Census shows that over the past 5 years, average mortgage repayments across Australia have gone down.
Yes, DOWN!
The median mortgage repayment, for those dwellings with a mortgage, was $1,800 per month in 2011. In 2016, it was $1,755 per month.
At the same time, the median monthly household income for the nation rose by $875 per month, from $5,330 to $6,205.
But house prices have gone up!
Yes, of course house prices have increased in this time. This reduction is obviously due to the reduction in interest rates over that five-year period.
In 2011, the RBA official cash rate was 4.5%, while in 2016 it had reduced to 1.5%. While the banks have passed on less and less of these cuts, it’s certainly the case that mortgage interest rates being paid by home owners in the past 5 years have reduced.
Median mortgage repayments Australia
This chart shows the median mortgage repayments by state, and by capital city.
2016 | 2011 | Change | |
New South Wales | $1,986 | $1,993 | -$ 7 |
Victoria | $1,728 | $1,700 | $ 28 |
Queensland | $ 1,733 | $1,850 | -$ 117 |
South Australia | $1,491 | $1,500 | -$ 9 |
Western Australia | $1,993 | $1,950 | $ 43 |
Tasmania | $1,300 | $1,300 | $ – |
Northern Territory | $2,167 | $2,054 | $ 113 |
Australian Capital Territory | $2,058 | $2,167 | -$ 109 |
So mortgage repayments have increased quite a bit in the Northern Territory, and a little in WA and Victoria, but otherwise are stable or downwards. The ACT seems to be taking it easy, with a big drop of $109 per month in their median mortgage payments.
Ah, but maybe housing affordability is only a problem in Sydney and Melbourne?
This is the same table, restricted to the Greater Capital City areas.
2016 | 2011 | Change | |
Greater Sydney | $2,167 | $2,167 | $ – |
Greater Melbourne | $1,800 | $1,811 | -$ 11 |
Greater Brisbane | $1,861 | $1,950 | -$ 89 |
Greater Adelaide | $1,517 | $1,540 | -$ 23 |
Greater Perth | $2,000 | $2,000 | $ – |
Greater Hobart | $1,402 | $1,430 | -$ 28 |
Greater Darwin | $2,200 | $2,167 | $ 33 |
For all the talk about housing in Sydney, their median mortgage repayment was exactly the same in 2016 as it was in 2011. And Melbourne’s went down by a small amount – $11 per month.
I think what this shows is that people will borrow based on the repayments they need to make, and when interest rates go down, they may borrow more but are not necessarily paying more. The difficulty may come when interest rates rise again, when some people may get into trouble, but for the moment, with very low and stable interest rates, it doesn’t appear to be a concern.
What about first home buyers?
OK, so most housing affordability discussion focuses (rightly) on first home buyers. Your repayments may be low if you’ve just upgraded your home and are paying off a loan which is a relatively small percentage of the value of your house. Maybe this is skewing the figures? Perhaps with fewer people taking out mortgages, those which are left are more likely to be older, smaller mortgages and this is driving it down?
Perhaps with fewer people taking out mortgages, those which are left are more likely to be older, smaller mortgages and this is driving it down?
I have rerun the analysis just for people aged 18-34 who have a mortgage, and who are not living at home with their parents. While we can’t actually get info on whether they are first home buyers, this is generally the key first home buying range, or at least it was historically.
2016 Census | 2011 Census | Change | |
New South Wales | $2,129 | $2,182 | -$ 53 |
Victoria | $1,905 | $2,011 | -$ 106 |
Queensland | $1,958 | $2,165 | -$ 207 |
South Australia | $1,685 | $1,818 | -$ 133 |
Western Australia | $2,129 | $2,298 | -$ 169 |
Tasmania | $1,460 | $1,587 | -$ 127 |
Northern Territory | $2,408 | $2,341 | $ 67 |
Australian Capital Territory | $2,140 | $2,460 | -$ 320 |
Australia | $2,006 | $2,107 | -$ 101 |
This shows that in the key first-home buying age group, the fall in mortgage payment is across the board, declining in every state and territory except for NT.
There are very large falls in mortgages in the ACT ($320/month) and Queensland ($207/month). But even in Sydney and Melbourne, which have seen rapid escalation of housing prices, there have been modest declines in what 18-34 year olds are actually paying on their mortgages when they have them.
So in fact, a larger part of the decline is in this key group. Probably because they have the larger mortgages and are more affected by changes in interest rates.
So, while we have seen that children are delaying leaving home longer (though not much longer), once they do leave home, they are actually paying less to buy a house.
So much for a housing affordability crisis.
Yes, it remains to be seen what will happen when interest rates go up. But if you want to look at declines in affordability, look at what has happened to rents.
Between 2011 and 2016, the median rent in Australia went up by $50 a week to $335/week, or an 18% increase. This is where the decline in affordability may be seen, while mortgage holders have had it relatively easy as interest rates decline, renters are paying more. I will explore this further in another article.
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Are mortgage repayments a good measure of housing affordability?
Surely a downturn in economic conditions prompts people to reduce mortgage repayments, possibly to interest only levels. If this were the case then you could argue housing is less affordable as interest only payments increase the FV of the mortgage?
Conversely, perhaps by changing repayments mortgage holders are keeping housing as ‘affordable’ as in 2011, if you consider affordability to be some relationship between incomes and repayments.
I also cant tell if this includes investor mortgage repayments? They are the ones more likely to be buying due to low interest rates and may be keeping mortgage payments high as indicated by increasing rents.
Great article though!
Thanks for the comment. Yes, mortgage payments are generally not a great measure of the cost of housing, and the Census can muddy the waters because people can pay extra or bring their payments back over time. Rent is a much better measure of the ongoing cost of actually living in a dwelling, and this has certainly increased.
I suspect, however, that given mortgage payments went down only slightly nationwide, most people have actually maintained their payments at previous levels and are paying off extra on their mortgage. This may not apply to the first home buyers that I looked at, and this probably needs so me more attention. I don’t think many owner occupiers are paying interest only.
Census data doesn’t include any information on mortgage payments by investors. The residents of that household are the subject of the Census, and they would be renting.
Wow. Seriously disappointing write up guys. You’ve mistaken affordable debt for affordable housing. Glad to see rents get a mention at the end there because that is where the real story is…
http://tunswblog.blogspot.com.au/2017/06/2016-census-confirms-housing.html
It’s only meant to be a simplistic analysis, and there will be an upcoming blog where we look at rental affordability, which as I noted is the main concern at the moment. And if interest rates go up, people could be in trouble. The article is really just pointing to the fact that mortgage payments actually did go down over 5 years, even in the first home buyer age group. Debt is indeed more affordable, and debt is generally what people use to buy houses.
The real measure on this matter is best quantified by other more relevant measures such as;
1 The Average wage versus the Average House price in the average suburb. I believe that this ratio has increased from a multiple of 3 some 20 years ago to something like 10.
2. The discretionary spending of the average house hold as impacted by the mortgage repayments on a weekly basis.
3. The potential payback period for a mortgage now to that of 20 years ago. It is the case that an interest payment only capacity does not cumulate wealth and so it is now the case that the mortgage repayment will expand to two to Three generations.
In a country where such oppressive house ownership conditions prevail we need to look at the long term consequences. It is blatant that the nation needs to restructure its wealth distribution otherwise we will end up like the US where the poorest are poorer than in all other western countries on the planet.
One does not need to address such things as capital gains or negative gearing to bring about some sanity in the real estate. One needs only to place a restriction on land values by zoning to fixed price levels and legislating for no more than 10% net profit on building costs.
Relying on market forces to stabilize real estate prices is naivety to the extreme or surrounding to the power of Greed. Only Capitalist ideology subscribes to such ideals and socially unintelligent citizens and politicians.
Very useful analysis especially as you reveal the contrast between falling mortgage payments 2011-16 and increasing rental costs. Your analysis shows that different households in different tenure circumstances face very different combinations of costs and benefits through their lives as purchasers or renters of their homes. It will often be the case a rental dwelling which is deemed not to be ‘affordable’ for its tenants is very ‘affordable’ for its owner (the landlord), especially during a period of low interest rates, easy access to loans and a tax regime that privileges property investment. I look forward to your analysis of rental affordability.
Interesting Glenn – shows how complex the concept of housing affordability is. At a Grattan Institute event recently one of the speakers suggested that the biggest hurdle for first home buyers was saving the deposit, and when they get past that, paying off the mortgage was far less cumbersome (at current interest rates of course). This analysis certainly gives further weight to that perspective.
Thanks Glenn, good article.
The risk to recent buyers who have taken on a large mortgage (often interest only) is what happens when interest rates start rising.
Low interest rates maintain the status quo, but if mortgage rates where to rise by a percentage point or two over the next few years I think many buyers would have real difficulty in managing payments while maintaining their current standard of living / spending / other financial commitments. We are in the 9th year of a global bull market, and many first time buyers haven’t experienced a serious recession or drawdown in equity markets / housing markets. I worry for these buyers when this eventually does occur.
Absolutely. It is certainly an issue if people are already paying a large mortgage with interest rates at record lows. There is no sign of interest rates rising at the moment but they must eventually.
Love the analysis, but anecdotally it’s not the repayments that cause the problems, but the ability for potential first home buyers in Sydney and Melbourne to save the ever increasing deposit required in the first place. I’m not a statistician, so I have no way of understanding how you might explore that aspect, but I suspect that’s the real underlying story.
That’s certainly a difficulty to explore with Census data. Mortgage repayments are an imprecise measure because they are affected by the level of equity in the property and whether or not people are paying more than the minimum (which many are). The deposit becomes a big hurdle to save for at current housing prices.
“So, while we have seen that children are delaying leaving home longer (though not much longer), once they do leave home, they are actually paying less to buy a house. So much for a housing affordability crisis.”
Glen, I think you need to do some more investigation on the ground before saying that people “are actually paying less to buy a house.” This is clearly not the case and there are many factors driving up house prices to extremely unaffordable levels in capital cities, which is where most of the Australian population live. To suggest “What Housing Affordability Crisis?” is akin to telling people “Just get a higher paying job to afford a house.” Not helpful.
Thanks for the comment Michael. That comment was meant slightly tongue in cheek, and we are well aware of the housing price escalation in the capitals. I think that it does show, however, is that housing price esclation has mainly been driven by lower interest rates – people will borrow up to a certain level of payments that they can afford, regardless of the actual price involved. In terms of what they’re actually paying on a weekly or monthly basis, that is less (marginally so). So interest rates go down, and housing goes up, in any area where there is sufficient demand. I think it does show that people are not in over their heads at the moment, but if interest rates rise they may well be.
This is worth noting, as far as it goes. But, of course the crisis of affordability has not (so far) been with mortgage stress, but with the barriers to entry for home owners and (as you rightly point out) renters. But the important conclusion from what you’ve said (and others have noted above) is that mortgage payments have stayed constant as interest rates have fallen, meaning that relative to interest rates, they’ve risen significantly. All the more reason to be alarmed about what’s around the corner when rates rise. Moreover, mortgage stress (and delinquency) is relative to incomes which, as we all know, have seen little or no growth. So when interest rates go up again, households are likely to find very little room to move.
Agreed – as I did say, there could be people in trouble when interest rates go up, particularly those who bought in at higher prices fuelled by the low interest rates. However, it’s worth considering that the bulk of mortgage holders who did not buy in so recently may have just kept their payments the same (which we know a lot of people do) in order to pay off a mortgage faster as interest rates fall. Census doesn’t ask for the minimum repayment or what proportion is principal, just what they are paying on the mortgage. So it’s possible that many of these mortgages, while paying no more than they were 5 years ago, are actually paying off their mortgage faster than before.