At a certain point you wonder if Joe Hockey has been planted in the government by the ALP. Within 12 months the treasurer has told everyone that “the poorest people either don’t have cars or actually don’t drive very far in many cases”, and that half the people in “higher-income households pay half their income in tax”. And now he has informed us that “if housing were unaffordable in Sydney, no one would be buying it”.
Sigh. Look, I know I was spoiled by having Paul Keating as treasurer during my formative years as a teenager, but cripes, has politics become so stupid that a man capable of uttering such vacuousness is also in charge of the nation’s finances?
People are buying Ferraris; that doesn’t make them affordable.
Let’s try to be fair though and provide the full quote. After making this rather asinine statement Hockey did admit, “it’s expensive. As a multiple of average weekly earnings it is expensive, it’s an expensive city to live in.”
Now sure housing in Sydney is expensive, but is it affordable? And if people are buying houses, which they certainly are, who is doing the buying?
When we talk of housing affordability we are really talking about first home buyers. No one really gives a stuff if people like Hockey and his wife, who own a $5.4m house and three other properties, are struggling to buy another house.
We are not even talking about repaying a mortgage, as Tony Abbott likes to always talk about – that is more a cost of living or financial stress issue.
Housing affordability is about the ability to buy a home and to get into the housing market.
And yet, if we look at the ratio of first home buyers as a percentage of owner-occupiers taking out home loans, fewer are entering the market than ever before, especially in Sydney:
On Wednesday the treasurer tried to clean up his mess from the previous day on ABC radio by suggesting the issue was not about investors, but supply, and that “around two-thirds of housing finance in Australia is for owner-occupied dwellings”.
Now he is right. The Reserve Bank’s credit data shows that of the total value of all housing loans outstanding to financial institutions, about 65% of it is for owner-occupiers.
But the Australian Bureau of Statistics’ (ABS) housing finance figures for the monthly amount of new housing finance taken out by investors and owner occupiers show a very different picture.
On Tuesday, the same day Hockey decided to tell us the Sydney housing market was not unaffordable, the ABS released the latest housing finance data. It showed the amount of new housing loans by investors now surpasses 50% of the all new housing loans (excluding refinancing).
The data produces my favourite housing graph, which reveals the shape of a shark – presumably one that is to eat up the Sydney housing market:
The real driver of the housing market in Sydney in the past two to three years has been investors.
The RBA knows this, and knows that this brings risks to the housing market. In the most recent Financial Stability Review it had a separate section on “responses to risks in the housing and mortgage markets”. And the most recent statement issued by the governor of RBA monetary policy noted, “the bank is working with other regulators to assess and contain risks that may arise from the housing market”.
The problem, aside from investor lending fuelling a possible housing bubble, is the increase in prices does make it less affordable for first home buyers.
Hockey suggested on Tuesday that “the starting point for a first home buyer is to get a good job that pays good money”.
Now that is true. It has always been the case that to be able to afford to buy a home you have need to have a job. The issue though is that just having a job is not enough. You need a well-paying one, and crucially, one that pays a lot more than was required in the past.
A simple look at the growth in wages and house prices since the RBA began cutting rates in November 2011 highlights how little wages have kept up with house prices in Sydney:
An even longer period shows just how much the recent housing price boom has reduced housing affordability:
But this looks only at growth of wages and prices and hides the big change in the total amount needed to purchase a home. What really matters to first house buyers is the amount it costs to buy a house, the deposit that is required, and how much it will cost to service that loan.
When Hockey talks of housing affordability he likes to focus on the last part. With interest rates at record lows, it is, he suggests, “more affordable than ever to borrow money for a first home now than it has ever been”.
Indeed, Justine Davies, the finance editor at the financial data provider Canstar, estimated the average mortgage repayments in New South Wales now accounted for about 24% of average after-tax earnings, compared with 29% in 1990 when interest rates were at 17%.
But that’s fine if you already have a loan. For those wishing to buy a first house they don’t just have to worry about the monthly repayments, but putting up a deposit in order to get a loan. The ability to do that is much harder than it was in the 1990s when Hockey and people like myself were entering the market.
The RBA estimates that in 1993 average house prices were about three times average income, now they are five times.
This accords with the ratio of the average size of a first home buyer home loan compared with average weekly full-time earnings:
And if we assume the loan requires a 20% deposit on the property, the size of the deposit has gone from being the equivalent of 62% of the annual average full time earnings to about 103%.
But fewer young people work full time now. In 1993 about 80% of 20- to 24-year-olds in work were full time, now it is about 60%.
Right now is a great time to be a home owner. Housing prices are going up, and interest rates are at record lows. But those like the treasurer, the prime minister and others who already own homes should realise that just paying the mortgage is not the only aspect of housing affordability.
Taking advantage of those record low interest rates is a mighty hurdle, and for the first home buyer, especially in Sydney right now, it is a hurdle too high for most.
