“It seems at least plausible that the rise in housing prices since the mid 1990s has contributed to declining home ownership rates among younger households. But the Census data suggest that the downtrend in home ownership for the 25–34 and 35–44 age groups started in the early 1980s, with much of the decline occurring by the mid 1990s, before the sharp increase in housing prices relative to income.”
So says the RBA.
The good people at Macrobusiness are continuing their stalking-like obsession with everything that I write. It is terrific that they are disseminating my material so widely, even if they have an acute difficulty understanding that house prices can go up and stay up and the Australian economy isn’t always on the edge of recession.
Two separate blog posts on my work yesterday alone, building on the dozens that they have written in recent times, plus the hundreds if not thousands of references to me in the comments section over the past few years. As far as I can work out they write more about me than RBA Governor Glenn Stevens.
One post yesterday awarded me an award for the “worst ever housing affordability analysis” which cherry picked one of many parts of the piece I wrote for the Guardian – here https://www.theguardian.com/commentisfree/2016/apr/04/millennials-should-stop-moaning-theyve-got-more-degrees-and-low-rates – which concluded that “young generations through time always seem to be doing it tough relative to older generations”, including today.
It was something of an own goal for the people at Macrobusiness. Recall that one of the MB contributors, David Llewellyn-Smith in 2010 furiously blathered “this blogger reconfirms his assessment of the bust ahead for Australian housing”.
His buddy Leith van Onsolen around the same time spluttered “an Australian house price crash is inevitable and cannot be avoided”. In 2011, Llewellyn-Smith went on “it is a near certainty that Australian housing will lose value in nominal and real terms for the next decade”.
Whoopsie daisy. Never mind house prices are up around 30% since those “best ever” housing forecasts were made.
Enough of that – shooting fish in a barrel is never fun.
The MB people tried their best to undertake some analysis on housing affordability with reference to my work in The Guardian article.
I must say that for me, it was a bit like Carlos Brathwaite facing up to Ben Stokes bowling the final over of the T20 World Cup earlier in the week – here we go – 6, 6, 6, 6, victory.
MB had lots of terrific charts but failed because they made a lot of stuff up which is never a good thing for someone trying to take down a strong piece of analysis.
MB started with a made up quote from me. Not a bad way to try to slag someone when you quote them saying something they didn’t say and that’s an instant fail in most university essays. MB reckons I said that Generation Y should stop complaining about housing affordability and that they “might choke on their lattes if they had to make the same sort of sacrifices” that “Gen Xers and baby boomers” did.
I can’t find the quoted remarks in my work because I didn’t make them. Bad one MB.
Let’s now have a little look at the sloppy work of MB.
They note that I “failed to account for the size of the deposit that must be saved by today’s buyers, which dwarfs prior generations.”
MB then try to work out the size of the deposit they reckon is needed to buy a house and came up with the conclusion that “Assuming that the household can save 30% of their disposable income for a deposit … [it takes] 6 years to save a 20% deposit for the median priced house.”
Six years… Whoa! Scary stuff for young people today. If only it were an accurate reflection of the way the mortgage market works.
If they had bothered to look at the convenient link in my article to RBA research on the issue (here it is again https://www.rba.gov.au/publications/submissions/housing-and-housing-finance/inquiry-into-home-ownership/pdf/inquiry-into-home-ownership.pdf ), they would have noted Graph 10 which showed that a 20% deposit for average house on average wages is about one year of income, little changed from the level over a decade ago, but above the level of 20 to 25 years ago. In other words, that is about 3 years of saving 30% of household income, not 6.
Without know it, the RBA implicitly demolish the MB claims noting, with me adding the emphasis:
“At first glance, this would seem to imply that housing ‘accessibility’ has declined; previous studies have found that the savings required for a deposit seems to be more important for the transition to home ownership than the ability to service a mortgage from current income thereafter (Bourassa 1995).”
“However, financial deregulation and increased competition in the mortgage market has partly offset this effect, by reducing minimum down payment (deposit) requirements. The maximum loan-to-valuation ratio (LVR) available in the Australian mortgage market has increased noticeably over recent decades, from the 80 per cent typical in the pre-deregulation period to around 95 per cent at present.”
The RBA go on: “Equivalently, the deposit required of a first home buyer is no longer necessarily around 20 per cent of the purchase price, but rather, more often in the 5–10 per cent range. This shift would have eased the accessibility constraint imposed by the deposit requirement more than would be apparent from a simple comparison of a fixed percentage of the median purchase price over time.”
They conclude “The latest data from mortgage lenders suggest that around 15 per cent of new lending to owner-occupiers involves LVRs above 90 per cent; most of these borrowers would be first home buyers.”
So to save a 10% deposit, it takes about 18 months of saving 30% of income.
MB then suggest that I “conveniently” have drawn my conclusions by arguing that interest rates are much lower today than in the 1970s and 1980s. Convenient? Yes, but I do like using facts to support my analysis.
MB claim that the high mortgage interest rates “did not stay high for long” in the 1970s, 1980s and early 1990s. A quick look at the RBA data base would have shown that the mortgage interest rate was at 8.0% and above for every month between October 1977 and January 1997 for an average rate of 11.65%.
20 years of 11.65% on average. Not long on the MB time calculator.
What’s more, between June 1980 and April 1993, mortgage rates were 10.0% and more – every month – for an average 13.3%. That’s only 13 years with an average mortgage rate of 13.3%.
The last time mortgage interest rates were 10% or higher was 20 years ago in 1996 and in the last 20 years, the average non-discounted mortgage interest rate has been 7.05%. Millennials – eat your heart out!
Oh MB, you’ve done it again!
When I put 13.3% or even 10.0% in my mortgage repayment calculator, I choke on my 1971 Grange! Which by the way I paid $15 for when it was released.
Next the good folk of MB throw some dirt into the pot and muddy the waters by talking about real mortgage interest rates. That ‘analysis’ confirms that consumer price inflation was some how linked to house prices or something. It’s convoluted. MB talk about wages but fail to note the fall in real wages for a large part of the 1980s and early 1990s, but that is a bit esoteric and adds nothing to the issue so I will let that one go… for now.
MB dropped a bit of tosh into their argument saying “today’s buyers will have to sacrifice a much larger proportion of their lifetime’s earnings on housing than previous generations did.” No data to support this of course, but as I refer to the RBA research paper again, I see that debt servicing costs are below the 10 year average and similar to the average level of the last 30 years and well below the 1980s and 1990s peaks.
A burden – yes.
Much larger proportion than earlier generations – not really guys.
On that point, MB note “The Kouk’s statement that “the average mortgage repayment is a smaller proportion of income than the long-run average” is also false.”
Sorry MB – not my numbers, they are from the RBA!
The poor sods at MB then suggest that I “conveniently fail to mention the sharp drop-off in home ownership rates among younger cohorts – bonafide evidence of falling housing affordability.”
They produce a chart showing a moderate decline in home ownership rates, especially for 35-44 years olds and 45-54 years olds, but for some reason, I wonder why, don’t show the rise in home ownership rates for 15-24 years olds. Those bloody facts! MB hate them.
In the flotsam and jetsam of their arguments about the reasons for this, they ignore several vital points noted by the RBA as reasons why lower home ownership rates have occurred over and above rising house prices.
No apologies for the length of the RBA quotes, but this is what they say:
“The home ownership rate for typical first home buyer age groups has drifted down over several decades. The pace of decline has not increased noticeably recently, but the underlying drivers of the decline might have changed.”
“Older age groups are now less likely to own their home outright than in the past”
“The decline in home ownership among younger households has attracted considerable attention. In general, there are many interrelated factors that can affect the home ownership rate, whether at the aggregate level or for particular age groups (Yates 2011). These include:
demographic and social factors, such as the distribution of the population by age or household structure
economic factors, such as the relative cost of renting and owning or the level and distribution of (current and expected) household income
institutional factors and government policies, such as the taxation of housing or the provision of public housing.”
“Demographic change has been an especially important driver. In particular, the pronounced trend towards later marriage and family formation over the past 40 years or so would be expected to have reduced ownership rates”.
“A trend to later marriage is likely to have resulted in deferred home purchase among younger people. Over recent decades there has also been an increase in the prevalence of single adult households, particularly single-parent households, in part driven by significantly higher divorce rates since the 1970s. This trend is also likely to have weighed on the home ownership rate, as single adult households have a much lower tendency to own their own home.”
“Of the possible economic causes of declining home ownership rates among younger households, the most obvious would be the sharp rise in housing prices in Australia since the mid 1990s. Housing prices rose significantly, including relative to income, between the mid 1990s and mid 2000s (Graph 8). However, this mainly was driven by the structural downward shift in consumer price inflation and thus nominal interest rates. As a result, housing ‘affordability’, measured as the share of average household income required to service a loan on a median-priced dwelling, has continued to cycle between 20 and 30 per cent, and is currently well below previous peaks.”
“In fact, Census data imply that home ownership rates were relatively stable across these younger age groups between the mid 1990s and mid 2000s when housing prices were rising most rapidly relative to incomes. And the subsequent dip in the home ownership rate between the 2006 and 2011 Censuses was apparent across nearly all age groups, not just for these younger households. This suggests that other factors are also likely to have been important contributors to the decline in home ownership among younger households, including the demographic trends discussed above.
Sorry MB, you are wrong. Embarrassingly so.