HOUSING: by Patrick J. ByrneNews Weekly
A solution to young home-buyers' nightmare
, December 14, 2002
As the financial burden of buying a home increases, Prime Minister Howard has formed a task force to find a solution to the growing affordability problem.
The task force included a member of the Reserve Bank, representatives of all major lending institutions, and some consumer and community representatives, including Melbourne's Rev Tim Costello.
The Federal housing taskforce will be responding to the rapid rise in house prices which, in part, are the result of a confluence of government policies.
A person's principle place of residence is exempt from capital gains tax. Hence, many have invested heavily in the family home to make it a valuable tax free asset, driving up prices.
The decline of agriculture and industry in rural and regional areas has pushed more of the population into the large cities, forcing up prices.
Lower world interest rates have allowed domestic interest rates to fall. Lower rates, plus the Federal Government's First Home Owners Scheme, introduced on July 1, 2000, plus huge amounts of private funds coming off the stock market and into housing has created a housing price boom over the past two years.
While the taskforce is yet to meet, a proposal to have home buyers and financial institutions jointly own homes in a partnership arrangement is unlikely to solve the problem. It would mean that a home buyer has only a half size mortgage, but they would also be paying rent to the financial institution.
Solutions won't be easy. Governments need to make savings and other forms of asset building tax free to reduce people's sole reliance on investment in homes for tax free savings.
A savings system similar to superannuation is needed to help young families reduce their reliance on borrowing.
Decentralisation policies are needed to put industry and jobs in regional areas.
Fast rail lines out of the major cities into regional areas would allow families to settle in regions where homes are affordable, while still accessing city jobs.
The announcement of the housing taskforce comes on the heels of a report by the Parliamentary Library on housing affordability.
It says that the Australian Bureau of Statistics figures show that the average size of new mortgages has risen from around $29,000 in 1982, to $157,000 in 2002. This latter figure masks considerable variability that exists between states, with the average value of new loans ranging from $194,000 in NSW to $86,000 in Tasmania.
For first home buyers, who make up almost 20% of all home buyers, the average loan size in June this year was $150,000.
It says that affordability is determined by both interest rates and size of loan on the one hand, and household income on the other.
Over the past two decades, interest rates have varied considerably. They reached 17% in December 1989, making loan repayment burden extraordinarily hard on home buyers.
While interest rates are at much lower levels now, what is of serious concern is the size of today's home loans compared to family income.
The accompanying figure shows a comparison over the past 20 years between the growth of average new loans compared to the growth of family incomes. It shows that the average new loan grew more than twice as fast as family incomes from 1982 to 2002.
As well as making houses less affordable, this has made the borrower much more susceptible to interest rate increases.
Furthermore, one would have expected that those with existing mortgages would be paying off their loans, so that the size of their loans would be considerably less than those taking out new loans.
That was certainly the case in 1986 when existing home loans were 50% the size of new loans.
But by 2001, existing loans were 88% as large as new loans. The Parliamentary report says, "This reflects the dramatic increase in the number of new borrowing commitments and the average size of new loans which has weighted existing mortgages more heavily towards those mortgages taken out in recent years.
"Also, the trend towards refinancing of existing home loans to purchase such things as cars and holidays has similarly acted to push up the average size of existing mortgages."
The report concluded, "New and existing mortgages have increased significantly in size over the past 20 years, far in excess of the increase in family incomes. Apart from increasing the financial burden on households, larger mortgages mean that home buyers have become much more sensitive to interest rate increases than was previously the case."