Author: Mr DDU.
I’m sure you know (but let me tell you anyway), house prices in major cities around the world have risen to all time highs. A lot of commentators are calling these prices unaffordable (We agree!), with many cities having house price to income ratios of more than 10 (eg average wage is $65,000 and average house price is $650,000 (not factual numbers)).
We have longingly thought about the idea of buying a house for ourselves, but it’s just too unaffordable at the moment. Even if we weren’t saving to have a baby through IVF I still don’t think we would be considering buying a house. We definitely want to buy a house, we are going to buy a house at some point. It’s going to be hard to justify spending so much money on something that doesn’t produce any money for us. Owning our own home is important, contributing to our Financial Independence / Retire Early fund is also important.
Renting makes sense for us, and does for a lot of Australians. Luckily rent prices have not gone up as quickly as house prices, so although landlords are getting a poor yield, at least people (like us) can afford somewhere to live. But how have house prices gotten so expensive?
There’s no one underlying reason, but there are several factors, some of them are:
Decreasing interest rates
In the 1980s, interest rates were at least 15% in many countries (which is crazy considering today’s ultra low rates). The interest rate has been steadily declining ever since. Most people have a certain amount they can afford to pay for their entire mortgage payment (paying for the house + interest). When the interest portion of the payment decreases, it means more can be put towards the mortgage/house. If interest rates start to rise again, theoretically house prices (particularly bond prices) would start decreasing.
More lending credit, less controls
A lot of banks became very slack on their lending leading up to 2008. They were lending out bigger loans (sometimes more than 100% of the value of the property) and to people who couldn’t necessarily afford the loan. These practices have added a lot of fuel to the property boom.
Housing demand not being met
Many city populations are continuing to grow, but the supply of building homes hasn’t been keeping pace. Anyone can tell you about the supply & demand relationship, so I bet you can guess how this has effected house prices.
Property increasingly being used as an investment
The older generations have used property investing to their advantage, turning a lot of the property market into a rental market. Which is nice for people who want to rent, but it’s harder for people who want to buy a home to live in, when they’re competing against a richer investor who can reduce their taxes if they make losses on their property. In Australia the Govt have no plans of changing the current set up, so this will stay for at least another 4 years. Good for anyone and everyone who has invested in property, you’ve done very well, we’d probably have done the same if we were 25 years older. Not so great for us millennials who have to compete with this.
The Asian influence
A huge amount of money has flowed from Asia (and away from their inflated property/share markets) into supposedly safer havens of Australian, New Zealand, American, Candian and British property. Some are just happy to have bought anything, parking their money in a place away from their country’s authority. How can locals compete against all of this foreign money? Do banks and Govts want this money coming into the country?
That last point has Westpac New Zealand worried
Westpac is Australia’s second largest banking group who have a subsidiary in New Zealand. It’s this subsidiary that have taken the extraordinary step of banning all new loans to foreigners. Westpac are concerned whether these foreigners are going to pay back the loan, what is stopping them going back to their home country and the loan becoming unrecoverable?
- Westpac will no longer lend to non-resident borrowers with overseas income
- borrowers on temporary resident visas will only be accepted if they have both a New Zealand address and New Zealand-based income;
- the maximum allowable Loan-to-Value Ratio (LVR) for New Zealand citizens and permanent residents with overseas income is 70 percent (down from 85 percent)
ANZ, Australia’s third largest bank, has also tightened its rules in New Zealand, but not as much. Some of the new rules:
- A maximum LVR of 70 percent
- Facilities are restricted to owner-occupied properties
- Boarder income not permitted
- No interest only lending will be available
- Applies to standard residential property only, and will not be available for the purchase of bare land or construction
- Loans are only available to individuals
- Refinancing is available, but no additional lending is permitted
- ANZ will honour existing pre-approvals
Australian banks have also been doing the same. Commonwealth (Australia’s largest bank) won’t accept foreign self-employed income and require 70% LVR. ANZ won’t lend to people with only foreign income and have also changed their LVR to 70%. NAB has changed their LVR to 70% for foreigners too. So only cashed up foreigners now stand a chance of buying with the major banks.
I think all of these changes are prudent, safe and the right thing to do for each bank. There is a lot of uncertainty about which direction the economy is going over the next few years. This is the time to be shoring up the lending and getting some security. If a decent number of buyers are taken out of the market, maybe this will create a price drop, who knows? As much as we’d like cheaper house prices for ourselves, having a recession isn’t good for us,isn’t good for our investments or Australia as a whole.
Australian banks have always performed well – even throughout 2008-2009 they continued to make billions of profit. These moves are quite defensive, but if another crisis hits they will be better prepared because of them, though they’re still vulnerable to a recession of course. We will be following any more developments closely.
The change in the mindset of banks towards home loan lending might be another tick towards the idea that the housing market is slowing. Either way, it will be interesting to see if the changes affects things.
Property prices are highly inflated due to all the above reasons and until the affordability ratios improve (compared to people’s incomes) we don’t stand a chance of buying for many years. In our opinion if the price growth of the housing market slowed or even slightly decreased, we wouldn’t consider that bad for us personally. It might even present us with a good opportunity in a few years. It could be a good thing for a lot of millennials. Though it may not be so good for older generations who may be heavily invested in property, if we were in the other bracket that would be adversely affected from the property market declining then we’d have a serious look at our asset diversification. The boom can’t last forever and we’d always want to be prepared for that.
Is property affordable where you live? Is your government trying to make property more affordable, particularly for first time buyers?
Thanks for reading this article about our financial journey Down Under.
Onwards and upwards!