Housing affordability - Extract from my book Myth Busting Economics

Mon, 15 Jun 2015  |  

There is a lot of emotive codswallop being written and spoken about housing affordability and house prices at the moment, so I have included a brief extract from one of the chapters in my book, Myth Busting Economics.

Have a read and think about the current house price dynamics.

Oh, and if you want a copy of my book, click and pay here.

https://www.booktopia.com.au/myth-busting-economics-stephen-koukoulas/prod9780730321958.html 

Cheers, The Kouk

============================================
Extract from Myth Busting Economics

Think of housing affordability in this way.

In the mid to late 1980s, a house cost, say, $75 000 and required a mortgage of $60 000 — that is, a loan-to-valuation ratio of 80 per cent. Household incomes at this time were around $25000 per annum and interest rates were around 13.5 per cent. In these circumstances, it took around 20 to 25 per cent of a household’s after-tax income to make the monthly mortgage repayment. The other 75 per cent of disposable income could be spent as the householder wanted.

Fast forward to now. A house is around $625 000 and, based on a loan-to-valuation ratio of 80 per cent, the mortgage would be around $500000. Household disposable income is around $125000 per annum and the interest rate is 5.25 per cent (although the increased competition now compared with the 1980s means that not many people pay this advertised rate). In these circumstances, it takes around 20 to 25 per cent of a household’s after-tax income to make the monthly repayments.

While house prices are up, so too are household incomes and, critically, interest rates are structurally down.

This shows, quite starkly, that it is no tougher financially for a first- home buyer today to service an average mortgage on an average house than it was 20 or 30 years ago. It is just that in the so-called good old days, the average home buyer’s mortgage pain came through interest rates and not the house price. Now, the pain comes through the house price and not interest rates and, I suspect, expectations being skewed to buying above-average houses.

Looking at it another way, monthly repayments are much the same on a $400 000 mortgage with an interest rate at 5.25 per cent as they are on a $300 000 mortgage with an interest rate of 8 per cent.

As a homeowner with a mortgage, what would you prefer? The joy of buying a house at a low price, with a relatively low mortgage, but having to pay a high interest rate, or taking out a large mortgage on an expensive house but having a low interest rate to service that loan?

Any prospective home buyer should be largely indifferent to these dynamics. Those wanting lower house prices, beware! It might come at the cost of higher interest rates, which would do little or nothing to help affordability.

Think of it this way. House prices could undoubtedly fall to make them more affordable, and a return to 8 per cent interest rates would no doubt help achieve that. Imagine paying a 13.5 per cent mortgage interest rate (as paid in the 1980s) right now. Obviously, if that were ever to occur again, a first-home buyer’s delight in getting a cheaper house and therefore borrowing less would, by definition, be neutralised by the pain of higher interest rates.

For those bemoaning high house prices now by stressing the lack of affordability, go to one of those very good mortgage calculators that are so common on the internet. Plug 10 per cent, 13.5 per cent or even the 1990s peak of 17 per cent into the ‘interest rate’ box and see how much you could afford to borrow today. The exercise should change those perceptions of poor housing affordability in recent years.

I am not sorry for going on about this — it is a vital point to make. It is a roundabout way of saying that it has never been easy to get into the housing market for the first time or to upgrade to a nicer house, but it is no harder now than it was in the past. It is just that the dynamics and the mix are different.

What has not changed is that sacrifices need to be made to get your foot in the door of the property market.

comments powered by Disqus

THE LATEST FROM THE KOUK

2019-20 budget will be 'problematic': here's why

Wed, 20 Feb 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/2019-20-budget-will-problematic-heres-194957605.html 

------------------------------------------------------------

2019-20 budget will be 'problematic': here's why

Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth.  The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.

This is the main driver for a cash rate CUT, and it'll happen soon

Wed, 13 Feb 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/main-driver-cash-rate-cut-itll-happen-soon-200635247.html 

------------------------------------------------

This is the main driver for a cash rate CUT, and it'll happen soon

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.