Shared from the 6/5/2021 The Age Digital Edition eEdition

Running hot

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Shane Wright and Jennifer Duke ask what can be done about runaway house prices.

Pandemic stimulus measures have helped put home ownership further out of reach for many. Shane Wright and Jennifer Duke report.

The eastern Melbourne suburb of Hawthorn is home to some of the nation’s wealthiest residents. They need to be. The median price for a house in this exclusive enclave is now $2.6 million, having jumped by $200,000 over the past 12 months on CoreLogic figures. Almost all of the homes sold this year in the suburb have achieved sevenfigure price tags.

Hawthorn is also the home of federal Treasurer Josh Frydenberg, his wife, Amie, and their two young children. Pressed this week on whether his children would ever be able to afford to live nearby in their own homes, the usually confident Treasurer could not quite answer.

‘‘We have seen a rise in housing prices, but I think that the measures that we have introduced will enable more firsthome buyers to get in the market,’’ he said.

‘‘Obviously, there is both a supply and demand side to this equation. We don’t have the levers ... around supply as much of the states do, in terms of land release. But yes, house prices have got up.’’

CoreLogic data this week confirmed what anyone who already owns a home or has endured a Saturday auction already knew: the national property market is on fire.

House values in Sydney jumped 3.5 per cent in May to be 15.1 per cent up since the start of the year. Only Vancouver in Canada has experienced a sharper rise.

In Melbourne, values rose 2.2 per cent last month to be 9.4 per cent up since January 1. Melbourne’s median value is at $908,000, inching up $770 a day.

That’s just the nation’s two largest property markets. Smaller capitals such as Hobart, Darwin and Canberra have experienced an increase in values of more than 11 per cent so far this year.

The past decade illustrates the growing wealth gap between those with a home and those without. Data compiled by Domain shows that a decade ago about 10 per cent of homes in Melbourne went for $1 million. So far this year, it’s almost a third.

The rise in home values is a global

issue. Property prices across the world are surging on the back of ultra-cheap interest rates and stimulus measures put in place to deal with the pandemic.

In the US, prices climbed by 13.2 per cent in the 12 months to the end of March.

In Britain it is the regions where house values are soaring. Prices in Yorkshire (up 14 per cent) and the north-east (up 13.7 per cent) are soaring compared with London, where they have risen by a comparatively modest 3.7 per cent.

New Zealand has recorded price rises that would make a real estate agent blush. Across provincial areas such as Gisborne, Napier and Palmerston, values have jumped by more than 30 per cent over the past year.

In the capital, Wellington, values have risen 23.7 per cent, while in the nation’s largest city, Auckland, they have jumped 15.6 per cent.

The explosion in worldwide home prices has rekindled the debate about housing affordability and the potential long-term generational damage.

Australia went into the pandemic with some of the most expensive capital city dwelling prices in the world, and there were already concerns about how low and middle-income earners, as well as younger people, would be able to buy without relying on the bank of mum and dad. Melbourne’s median house price was almost 10 times the median household income; in the late 1990s, it was less than half that.

Even as the surge makes national news, no one seems prepared to take direct responsibility for what is going on.

Reserve Bank of Australia deputy governor Guy Debelle this week said ultra-low interest rates were not only boosting house prices but also supporting the broader economy and the jobs market.

‘‘There are a number of tools that can be used to address the issue, but I don’t think that monetary policy is one of those tools,’’ Debelle said on a podcast.

The Australian Prudential Regulation Authority oversees bank lending standards, but it isn’t going to step in to help first-time buyers either, seeing its role as limited to cracking down when risky borrowing takes place.

Authority chairman Wayne Byres said he was not convinced the responsibility for dealing with soaring prices fell to the Council of Financial Regulators either, saying ‘‘it’s a broader government responsibility’’.

The Coalition is under pressure from backbenchers to consider controversial policies to tackle the problem, such as letting first-home buyers dip into their super for a deposit. Frydenberg said affordability was being addressed, pointing to a recently introduced policies.

Among the measures is the First Home Super Saver Scheme. This enables people to put extra savings into their super and then pull them out to help buy a house. The maximum withdrawal had been $30,000 but the cap was increased to $50,000 in last month’s budget.

The budget also contained measures that feed into housing demand. They included the Family Home Guarantee, under which, over the next four years, 10,000 single parents will get a government guarantee of up to 18 per cent of the value of a property. The person will only have to offer a deposit as little as 2 per cent.

The First Home Loan Deposit Scheme was extended to another 10,000 people for 2021-22. First-time buyers under this scheme need a 5 per cent deposit.

Tackling the housing crisis is emerging as a theme for the upcoming federal election. Opposition Leader Anthony Albanese has promised to pour $10 billion into a fund to build tens of thousands of low-cost homes should Labor get in. Even bank bosses have urged governments to fast-track housing approvals.

But future promises of home building while current institutions and governments pass the buck will be of scant comfort to those dealing with the nation’s priciest cities right now.

PK Property Group director Peter Kelaher says 2021 has been the craziest period he has seen in 30 years of business. In the past month, he has completed $60 million worth of home purchases for clients.

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‘‘This is the first time in a long time that I have seen the general marketplace, not just in Sydney, but in NSW and most other states, firing on all cylinders at the same time,’’ he says.

While there have been booms in the past, notably the post-global financial crisis housing surge, Kelaher says first home buyers were previously able to buy in the outer suburbs. They have now been pushed into country towns, where they are encountering property markets running just as hot.

So far there are no major signs current

homeowners are taking on more than they can handle to get into the market.

Ratings agency S&P Global tracks the proportion of loans in residential mortgage-backed securities that are at least 30 days in arrears. Its latest report this week showed that in most parts of the country, arrears rates are falling.

In Victoria, the highest rate is in the Melbourne suburb of Altona East at almost 7 per cent. But it is an outlier, with the rate less than 2 per cent across the state and most of Melbourne.

Of more concern, S&P noted more than 42 per cent of loans in these mortgagebacked securities have higher loan-tovalue ratios. Two years ago the proportion was less than 37 per cent.

The traditional mortgage until the global financial crisis ran for 25 years. Now borrowers can be expected to have 30 years of repayments. It might seem a win for buyers, who can make smaller payments for their piece of Australia. But it’s a bigger win for the lender.

For example, if you borrowed $450,000 at 2.4 per cent over 25 years, the monthly repayment would be about $2006. Over the life of the loan, you would pay $152,000 in interest and bank fees.

Now extend that loan to 30 years. The repayment has fallen sharply, to $1765 a month. But the amount paid in interest and bank fees rises to more than $185,000. The borrower has a home, and the bank has captured $33,000 in cream on a $450,000 loan.

Where lenders have not been able to assist is with an issue the federal government and the Reserve Bank are struggling with: stagnant wage growth. In the past, rising wages have helped owners pay down their loans more quickly.

This is where the run-up in house prices could prove a long-term issue.

Assume our borrower with the 30-year $450,000 mortgage is earning $100,000 a year. The $1765 monthly repayment gobbles up about 30 per cent of their take-home pay.

If they enjoyed a 3 per cent average annual pay rise over the next decade, their 2030 pre-tax income would be closer to $136,000. The $1765-a-month repayment would fall to 21 per cent of their take-home pay.

Yet if our borrower averages only 2 per cent wage rises over the next 10 years, the mortgage’s share of takehome pay would be more than 23 per cent. All this is predicated on interest rates not increasing over 10 years.

One of the biggest factors in house

prices, here and overseas, has been the collapse in interest rates. Central banks, in a desperate attempt to protect their economies through the pandemic, have delivered trillions of dollars’ worth of support via ultra-low rates and quantitative easing.

The last increase in official interest rates was in November 2010. Since then, more than a million first-home buyers have taken on a mortgage.

The largest number of these people are in Victoria. Almost 307,000 mortgages have been bought by firsttime buyers in Victoria since 2010, with another 219,000 in NSW.

The various incentive schemes put in place by state and federal governments, coupled with low interest rates, has helped the number of these young mortgage payers reach a record high.

Over the past year, 46,500 Victorian first-time buyers and 35,900 in NSW have entered the market. None has experience of what an interest-rate rise does to their repayments.

Melbourne and Sydney have both lost residents to the regions or other parts of the country. But even that has not hindered price growth.

Analysts believe that, eventually, the heat will come out of the market. Just not yet. Another 10 per cent this year and a similar rise in 2022 are considered likely. But it’s how it ends – in a bang or a whimper – that is of interest to homeowners, home buyers and those who one day want to have a place to call their own.

AMP Capital chief economist Shane Oliver, who says fear of missing out is a key contributor to the current surge, can see a gradual end.

He notes poor affordability will drive out buyers, particularly those looking for their first property.

The drop in migration, the end to government stimulus programs and a realisation among those forced to work from home through the pandemic that they do not have to live in Sydney or Melbourne will all slow growth.

Finally, the biggest factor continues to be interest rates.

Oliver says: ‘‘While variable rate hikes are probably two years away at least, three and four-year-plus fixed mortgage rates have started to move up with the rise in bond yields and further increases are likely. This is significant, as fixed rates now account for around 40 per cent of new housing finance.

‘‘So it’s likely that the 30-year tailwind for the property market of falling interest rates has now run its course.’’

That might be the saving grace for those struggling to get into one of the world’s most expensive property markets.

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