How the two iron laws of the Australian property market are putting pressure on every generation | Cameron Murray

Each generation has its own housing problems. With interest rates rising, the late 1980s is an era we’ll be hearing more about.

During that period, mortgage rates rose from 9% in 1983 to a peak of 17% in 1990. It was tough for home buyers. It also left us a legacy of family conversations about “how hard it was to buy a house with 17% interest” and how “we didn’t waste our money on avocado on toast like you do now”.

It is true that during that period home buyers had a hard time paying off their mortgages.

But any comparison between eras must recognize that prices were lower then because of high interest rates, just as today’s high prices are high because of low interest rates.

My view as a housing economist is that every generation has to deal with the same two iron laws of the housing markets. First, rents and prices tend towards the limit that tenants and buyers can afford. Second, the market moves in cycles and suitable times to buy do not last long.

But these problems look different for each generation.

In the 1930s, it was the working-class slums in the wake of the Great Depression. While the private real estate markets satisfied the middle and upper classes, the poor conditions of the working class began to force the government to intervene in housing. A 1947 review, The housing problem in Australianoted that during this period, low-income groups were “seriously neglected” and “had been unable to afford a house of modern standard and adequate food and clothing”.

As now, rents were leaning towards the limit people could afford, no matter how bad the conditions were.

In the post-war era, shortages of materials for new homes were the main problem. Unique to this time was the heavy-handed involvement of the government in housing and facilities for the working class.

Governments acted as land developers and intervened in supply chains to make labor and materials available for catch-up housing.

This period also saw a final sustained increase in home ownership, from 52% in 1947 to over 70% in 1961. By 2016, home ownership had fallen to 65%.

In the 1960s, conservative mortgages, which required high deposits, savings, stable jobs and family structures, put another limit on who could buy a home.

Related issues still exist today. The challenge of saving a down payment is one that affects both sides of politics, leading to the announcement of Labour’s share-share scheme and the coalition’s pension-for-housing plan during the election period. But the iron laws of housing suggest any benefits will be temporary.

The modern era began in 1993, when Australia began to manage the macro economy with monetary policy. Higher interest rates are used to lower house prices and spending, and low interest rates to stimulate them.

This is why in 2020 I predicted that, despite the economic panic, real estate prices would rise 20% rather than fall 20%.

This led to an opportune moment to buy. First home buyers benefited and the number of first home buyers’ mortgages grew to 171,000 in fiscal year 2020-21. The average over the three years before that was only 95,000.

Then the second iron law came into effect. Real estate prices rose. And as they did, the advantage of the low interest rate disappeared. With interest rates rising, the situation is only getting worse.

This is why the Reserve Bank of Australia’s 0.5% point increase in cash interest this week caused so much discussion. If your mortgage rate is 2%, going to 2.5% increases your interest payments by 25%. It’s like going from a 10% mortgage rate to 12.5%.

Today’s buyers will be stretched to their limits, just as they were due to rising interest rates in the late 1980s. It is, after all, the first iron law of housing. Only now are high prices pushing the limit at much lower interest rates. It’s not the avocado toast.

dr. Cameron Murray is a research fellow at the Henry Halloran Trust at the University of Sydney

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