Posts Tagged‘mortgage’

Super For Your First House? Please, No.

Breaking into the property market has become more difficult for first home buyers in Australia as of late mostly because of reasons I’ve explained in detail on this blog before. It’s not an easy problem to solve as many of the options championed by self proclaimed experts are politically charged and increasing the housing supply isn’t as simple as many people think it to be. Thus many of the measures that the incumbent government suggests are often things that don’t address any of the underlying issues directly and instead look to put more money in the hands of potential first home buyers. Joe Hockey’s recent brainwave to address this problem, by allowing first home buyers to dip into their super for a deposit, is a classic example of this and it will neither help first home buyers nor address the underlying issues that they face.

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Whilst it’s not a formal policy they’re looking to submit yet (hence the lack of detail around how the actual scheme would work) Hockey says that he’s been approached by lots of young people looking to tap into their superannuation in order to fund their first home purchase. On the surface it sounds good, younger Australians get to put a roof over their heads and get their foot into the property market, something which should hopefully sustain them for the future. The main problems I see with this are two fold; firstly most people won’t have enough super to make a difference and, secondly, it will likely set most people back meaning their retirement will likely not be fully funded by super.

On average your typical superannuation balance at 25 is on the order of $10,000, not a whole lot in the grand scheme of things. Even the most generous loans that let you get away with a 5% deposit would only see you able to get a loan for $200,000 with that amount of cash, not exactly the amount that many now first time home buyers are looking to finance. That figure doubles by the time they reach their 30s but that’s still not enough to finance the home on its own. Indeed first home buyers are likely to need double or triple that in order to buy their first homes which means that they’ll need to have at least $20,000 in savings for those meager amounts of super to help push them over the line. If they’re able to save that you’d then think that bridging the gap wouldn’t be outside of their reach, at least within a reasonable timeframe.

This then leads onto the conclusion that the opposite situation, one where someone couldn’t save that much and required their superannuation to bridge the gap, is the least preferable scenario for a first home buyer. You see a savings track record proves that someone will be able to cope with the repayments that a mortgage requires whilst at the same time still being able to afford everything else they need to live. If you don’t have this and are looking to get into property diving into your super isn’t going to help you, instead it’s going to put you in the unenviable position of having even less money available to you, eradicating any chance you had at getting ahead. You’d hope that the last batch of lending reforms would prevent most people like this from getting a loan in the first place but I think we’ve all seen people get themselves into this situation before.

On top of this using most or all of your super would essentially put you back 5 or 10 years in planning for your retirement. That might not sound like much when most people will have 50+ years of working life but a lot of the power of super comes from compound interest. When you take an axe to your initial savings it resets the clock, pushing back the compounding rate significantly. That means you hit the high growth part of your super much later in life, leaving a lot less than you’d expect for retirement. This would mean more people getting onto the aged pension sooner, something which the whole superannuation system was designed to avoid.

I’ll hold off on any other criticisms until I see an actual policy on this but suffice to say the idea is rife with issues and I think the only reason that they’re entertaining it is to win back some favour with the youth vote. If they do put a policy before parliament though it’ll be interesting to see how they address criticisms like this as I know I’m not the only one to find fault with this policy. Heck I’d love to see more people getting into property since it’d bolster my investments but honestly I’d rather see the underlying issues, like lack of supply and the owner-occupier CGT exemptions, tackled first before they start looking towards trashing people’s futures for short term gains.

Want Cheaper Housing? Hope For Global Turmoil.

One thing that always gets me riled up is when people bitch to me about the housing prices in Australia. I’ve said in the past that yes, for an average single income earner, the median is unaffordable but I’ve long been of the stance that that situation is far from typical. What I feel is that Australians looking at the property market today are suffering more from a crisis of desire more than anything else, wanting to stay in the same level of housing that their parents had without the decades of living in the mortgage belt that preceded it. For the whiners out there however there might be a saving grace that’ll let them get into the house that they want, so long as they can keep their jobs through it.

So the reserve bank decided to drop rates by 25 basis points on Tuesday, confusing a lot of people as inflation was hovering around the Reserve Banks target rate of around 3%. It was the first time that the rates had dropped since April 2009 back when the fallout from the GFC was still causing problems. The decision seemed t0 be based around the fact that despite good economic figures Australian families were still struggling with mortgage payments and as such a drop in rates was seen as being more beneficial than keeping them on hold again. Taking a step back however I believe that they’re attempting to soften the blow of a potential upcoming crisis.

I am, of course, talking about Greece and the potential for a repeat of the events we saw with the GFC.

Rewind back a month or so and everything was starting to look better for Europe with Germany approving the rescue package albeit with some rather harsh provisions in order to make sure Greece didn’t do the same thing again. However just recently Greece has decided to put the rescue package measures to a referendum putting the future of the financial situation in Europe in the hands of the Greek people. Since there’s been rather hot and heavy opposition to the austerity measures that they’ve tried to implement in the past it’s understandable why everyone in the Eurozone is concerned about what might happen. Indeed with the way the markets reacted it’s seems like everyone thinks it’ll fall flat on its face.

But how, pray tell, does this affect property prices in Australia?

Well for the past year or so prices for Australian property have been declining slowly, on the order of single figure percentage points. Primarily this is because of many people coming out of the honeymoon period they had when they secured a massive mortgage during the GFC at spectacularly low rates, many below 5%. Once the pressure was back on with more sane interest rates many chose to sell up and this has lead to a downward pressure on the Australian housing market. It’s still not enough on its own to make property affordable though, for that we also need cheaper mortgages.

Markets are fun little beasts and are, for the most part, driven by irrational thought processes and fear. You’ll notice that during the GFC Australia remained relatively unscathed yet we still had as much panic as if we were going to go down with the rest of them. Indeed there was supposed to be a tightening of credit during this as well but many banks aggressively dropped their rates in order to draw people in. The fallout from the Greece’s financial problems is a very similar trigger to that of the GFC, enough so that if those measures don’t pass you can almost guarantee that interest rates will fall through the floor again as everyone tries to withdraw from the markets and the desire for credit dries up. Of course this will also mean that companies will use this as an excuse (both legitimately and illegitimately) to start downsizing again, pushing the unemployment rate back up.

For a financial sociopath like myself it’s like being a kind in a candy store as I’ll have my pick of the loans and properties available. However it’s not a situation that everyone can take advantage of, indeed only a select few (although not just the 1%) will be able to. However if you’ve got a decent deposit up and have been waiting for “just the right time” to get into the market then holding off for another couple months or so whilst this disaster unfolds could prove beneficial for you, especially if you take the banks current fixed term mortgage rates as any indication of where the market is heading.

Affordability, Statistics and the Australian Housing Market.

Before I get into what could be a slightly ranty post about the Australian property market I feel it’s prudent to mention that I’m an owner-occupier, investor and would be regarded as being particularly well off when compared to the average Australian. Thus my views may be somewhat skewed by the fact that I have a vested interest in the property market. However I believe that there’s a lot of disinformation out there about housing prices and what constitutes “affordable” property, especially when the entire market is boiled down to single figures. What I intend to show you is that whilst Australian property is more than likely above fair value this does not preclude the average Australian family from owning their own home, nor are first home buyers priced completely out of the market.

There’s been a report circulating recently from NATSEM that says we’ll need a decade of flat housing prices in order for them to come back to affordable levels. This sparked quite the reaction in the media, strangely lacking any direct finger pointing that usually accompanies issues like this. There’s no question that the last decade has seen some extremely wild growth in the Australian property market and for years people have been predicting the ultimate downfall of the Australian housing market. The Global Financial Crisis was supposed to be the trigger that sent property prices tumbling but it had the opposite effect, with extremely low interest rates pulling many into the market and increasing demand significantly. Now that the pressure is back on with interest rates at their pre-GFC levels the question of affordable housing is a hot topic, but it’s not all bad news for those chasing the Australian dream.

For starters let’s dive into the (thankfully unbiased) figures from the NATSEM report. On the surface it looks bad for Australia with the median¹ house price being a whopping 7.3 times that of the median income, 50% higher than what it was back in 2001. However whilst I believe using the median as the measure is by far more intellectually honest than other measures it does hide some important information from the reader. Although the median Australian house price might be $417,000 that also means that 50% of all Australian houses are valued somewhere below that particular line. For first home buyers this means that they shouldn’t be shooting to buy a house at the median price since there is an ample amount of stock available at a much cheaper price bracket. The houses above the median then are usually more suited to those looking to upgrade and not those trying to break into the market.

For interest’s sake I’ve done some calculations based on some typical scenarios. The first is a median income earner attempting to buy a median house with a typical interest rate:

  • Income: $57,000 /year, $3,823.33 / month after tax.
  • Home loan: $396,150 ($417,000 house price, 5% deposit, 7.1% interest, principal and interest) =  $2,662.25 / month
  • Repayment as percentage of total income: 69.63%
In this situation I am in agreement with NATSEM that this is completely unaffordable. I believe that this is a pretty atypical situation however as a single person buying (or financing) a house should definitely not be shooting for a median property, opting instead for the lower end of the spectrum with smaller town houses or apartments. However a more typical scenario would be a young, childless couple (I’ll stick with median incomes) looking for their first home, shooting for the lower end so they can break into the market. Taking these factors into consideration we get:
  • Income: $114,000 /year, $7,646.66 / month after tax.
  • Home loan: $356,535 ($375,000 house price, 5% deposit, 7.1% interest, principal and interest) = $2,396.03 / month
  • Repayment as a percentage of total income: 31.33%
In this situation it’s starting to look a lot better with the percentage of total income spent on housing much closer to the 30% of total income that the banks usually use when determining loan size. The above scenario isn’t too far from the situation I was in when I purchased my first house back in 2007 and whilst it wasn’t the easiest thing in the world to do (it was helped a lot by renting out the spare rooms) it was definitely possible. This doesn’t disprove the point that Australian house prices are unaffordable for median, single income earners however but even in 2001 it would’ve been a struggle.

Since the media hasn’t played the blame game yet I thought I’d throw my hat into the ring on this one. Investors who are negative gearing would be an easy target with this one and they’re usually the first to get blame for high housing prices. However in Australia the vast majority of property, to the tune of 68.90%, is owner-occupied (I.E. people who own it live in it). The remaining 31.10% is investors but the vast majority of investors only own 2 properties, their home and another investment. It then seems infeasible for investors to be solely responsible for housing price gains when the vast majority of property is in the hands of owner-occupiers or one time investors. The price rises logically then come from the majority, but how are they doing so?

Simply put it’s people leveraging the equity in their own homes in order to upgrade to a bigger, better home whilst keeping the loan repayments at a similar level. The initial 2001 – 2004 boom meant that many had enough equity to upgrade and many did so over the years. Of course being rational actors they attempted to maximize their sale price in order to reduce the loan on the next property and this put an upward pressure on housing prices, both on the low (the one they were selling) and high (the one they were buying) end of the market. The interest rate scare of 2007-2008 put enough pressure on people to curtail this behaviour for a while, but the GFC dashed those high rates and the upgrades began again in earnest.

I’ve long been of the opinion that there will never be a house price crash, instead I foresee a long time of stagnant or small negative growth whilst wages catch up to bridge the affordability gap. The simple fact is that prices can only drop significantly if people are forced to sell and although many first home buyers who bought in during the lowest interest rates are feeling the pressure now they form only a small part of the market, not enough to trigger a price collapse and most will simply delay selling until conditions improve.

It is unfortunate that the Australian dream is out of reach for a median single income earner, but many factors point towards housing becoming more affordable for them in future. The government could do a much better job of incentivizing the construction of low cost housing as current market conditions favour bigger, higher cost houses. Additional land releases and incentives for desirable, low cost housing would also go a long way to putting a downward pressure on house prices. It’s not a problem that can be fixed overnight either and we’ll need long lasting reforms in order to keep housing affordable, lest the prices rise and the cycle start all over again.

¹The median in statistics refers to the value in which 50% of the total data set is above that value and 50% is below it. It’s much more resilient to use this figure when you have outliers on either side of the equation which in the case of Australian property and wage figures there are many. Using the average would then be less representative of the real world.