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.

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.

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.

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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