House Prices

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<div class="column">GUEST OBSERVER </div>
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<div class="column">If you just looked at the top level results, there wasn’t a lot of good news in the business investment report.</div>
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<div class="column">Spending recorded a sizable quarterly fall, expectations of future investment are down over 14 percent compared with a year ago and the weakness was across all the states and territories bar Victoria and Queensland.</div>
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<div class="column">But this is really backward looking, categorising an environment that included the lead up to the Federal Election and Brexit – hardly an environment that would see businesses lift investment plans.</div>
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<br>However the main good news or rather glimmer of hope was the lift in expected investment plans compared with last quarter. The fourth estimate for 2016/17 is $106.9 billion, up 1.7 per cent on the third estimate (June quarter). In addition investment plans have lifted substantially in the past six months, up by 17 percent.<br><p>Encouragingly the lift in investment plans over the last couple of quarters, may be a sign of a shift in momentum by the business sector, but it is too early to tell. Certainly the lift in business conditions in recent months may be supportive of a lift in investment plans – especially in light of the surge in commodity prices and improvement in the global economy. No doubt the rebalancing across the economy is also being supported by the slide in the Australian dollar – an outcome that should garner further traction in coming quarters. But as we have seen in the past, business may plan for future investment but then mothball projects if the economic landscape doesn’t improve.</p>
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<div class="column">Business spending looks like continuing to be a weight on Australia’s economic growth performance in the medium term. The Reserve Bank could cut rates again, but it is far from certain that this would have a measurable impact in further lifting business spending. The Reserve Bank is more forward- looking and is likely to maintain its neutral bias on a more upbeat medium term growth outlook.</div>
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<div class="column">It may be no surprise to see that home prices continue to lift across most capital cities. But what was clearly surprising was the slide in apartment prices across the nation, in particular the outsized 3.2 per cent fall in Melbourne apartment prices. Over the last year there has been a lot of discussion on the anticipated lift in housing supply, with particular concern on inner city Melbourne and Brisbane. And it may just be that this is the first sign of the lift in apartments coming on stream and curtailing price growth.</div>
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<div class="column">While the housing market is more mixed across the nation, it was encouraging to see some of the resource states seeing a decent lift in prices over November. And the lift in commodity prices may suggest that the mining towns may have come through the worst of the downturn.<br><p>  Overall policymakers will keep a close eye on the housing sector the early part of 2017, and will prefer to see more balanced house price growth across the nation. And in particular a lift in regional house prices would be a positive outcome. Annual growth in home prices across regional centres was just 1.4 per cent over the past 12 months. </p>
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<p>What do the figures show?</p>
<p>Private business investment</p>
<p>Overall: Business investment (spending on buildings and equipment) fell by 4 per cent in the September quarter after falling by 5.2 per cent in the June quarter. Spending on buildings fell by 5.7 per cent in the quarter while spending on equipment fell by 1.9 per cent. Investment is down 13.7 per cent over the year with buildings down by 24.3 per cent while equipment was up by 4.6 per cent.</p>
<p>Sectors: Mining investment fell by 7.2 per cent in the September quarter (ninth straight decline), while manufacturing spending fell by 4.9 per cent, spending by “other selected industries” fell by 1.9 per cent.</p>
<p>States: In seasonally adjusted terms investment fell in six of the eight states and territories in the September quarter. Investment fell the most in Western Australia (down 11.4 per cent), followed by Northern Territory (down 10 per cent), the ACT (down 8.1 per cent), South Australia (down 4.8 per cent), NSW (down 3.5 per cent), and Tasmania (down 0.1 per cent). The only rise was in Victoria (up 3.3 per cent) followed by Queensland (up 2.7 per cent).</p>
<p>Prices: The overall deflator for investment goods fell by 0.3 per cent in the September quarter after falling by 0.5 per cent in the June. The cost of buildings and structures rose by 0.2 per cent while the cost of equipment fell by 0.8 per cent. Over the year, the cost of investment goods fell by 0.5 per cent – the largest fall 41⁄2 years. The cost of buildings rose by 0.9 per cent while the cost of investment equipment fell by 3 per cent.</p>
<p>Forecasts: The fourth estimate for investment in 2015/16 is $106.9 billion, up 1.7 per cent on the third estimate but down 14.3 per cent over the year. Over the last six months, investment expectations have lifted by 17.1 percent.</p>
<p>Home prices</p>
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<p>The CoreLogic Home Value Index of capital city home prices rose by 0.2 per cent in November and was up 9.3 per cent over the year.</p>
In regional Australia, house prices fell by 0.2 per cent in October and were just 1.4 per cent higher than a year ago. (regional prices cover just houses and data is up to the end of October).</div>
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<br>In capital cities, house prices rose by 0.2 per cent in November while apartment prices fell by 0.1 per cent. House prices were up 9.6 per cent on a year ago and apartments were up by 7.2 per cent.</div>
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<br>The average Australian capital city house price (median price based on settled sales over quarter) was $645,000 and the average unit price was $540,000.</div>
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<div class="column">Dwelling prices rose in six of the eight capital cities in November: Darwin (up 3.7 per cent), followed by Adelaide (up 2.9 per cent), Hobart (up 0.9 per cent), Sydney (up 0.8 per cent), Perth (up 0.6 per cent), and Brisbane (up 0.4 per cent). Prices fell only in Melbourne (down 1.5 per cent). Dwelling prices in Canberra were unchanged.</div>
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<div class="column">Home prices were higher than a year ago in seven of the eight capital cities. Prices rose most in Sydney (up 13.1 per cent); followed by Melbourne (up 11.3 per cent), Hobart (up 8.5 per cent); Canberra (up 8.4 per cent); Adelaide (up 4.7 per cent), Brisbane (up 3.9 per cent) and Darwin (up 1.1 per cent). Prices fell in Perth (down by 3.4 per cent).<br><p>Total returns on capital city dwellings in the year to November rose by 13.1 per cent with houses up 13.3 per cent on a year earlier and units up 11.8 per cent.</p>
<p>Performance of Manufacturing</p>
The Performance of Manufacturing index rose by 3.3 points to 54.2 in November. A reading above 50.0 indicates that the sector is expanding. The index had been above 50 for 13 months up until August 2016 – the longest period of expansion since September 2006.<br><p>AIG notes “The expansionary conditions were broad-based, with six of the seven sub-indexes in the Australian PMI indicating expansion in November. The strong lift in new orders (59.5 points) together with solid growth in sales (53.5 points) is promising.”</p>
<p>What is the importance of the economic data?</p>
<p>“Private New Capital Expenditure and Expected Expenditure” is released quarterly by the Bureau of Statistics. The figures show both actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.</p>
<p>The CoreLogic Hedonic Australian Home Value Index is based on Australia’s biggest property database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the CoreLogic Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.</p>
<p>The Australian Industry Group compiles the Performance of Manufacturing Index (PMI) each month. The Australian PMI is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.</p>
<p>What are the implications for interest rates and investors?</p>
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<div class="column">The great unwinding of mining investment continues although the lift in commodity prices may result in more of a soft landing in coming quarters.</div>
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<div class="column">The Chinese economic data remains encouraging, showing that the transition from the industrial sector to household sector remains on track. The manufacturing sector is expanding, while the services sector is clearly the driver taking up any slack.</div>
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<div class="column">The latest Australian manufacturing data is encouraging, suggesting that the current levels of interest rates and the Australian dollar are working in favour of domestic producers.</div>
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<div class="column">The Reserve Bank has regularly noted that housing supply will lift over coming years as work is completed on the bevy of new homes – especially apartments. The Reserve Bank looks to be comfortably on the interest rate sidelines over the coming year. </div>
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<div class="column"><em>Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a></em></div>
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Subdued business investment, healthy home prices: CommSec's Savanth Sebastian

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<p>GUEST OBSERVER</p>
<p>Across Australia’s capital cities, price growth has slowed with house prices up 6.1 percent in the year to July 2016 and unit prices increasing by 6.0 percent.</p>
<p>Since the low point in 2012, capital city house prices have increased by 40.0 percent in aggregate while unit prices rose by 29.8 percent. Unit prices started to recover a few months earlier than house prices;</p>
<p>Since bottoming out, the divergence between dwelling price growth in the different capital cities has been remarkably wide. The biggest uplifts have been in Sydney (+61.3 per cent) and Melbourne (+42.0 per cent). At the other end of the scale, Perth (-8.3 per cent) and Darwin (-12.7 per cent) prices have fallen substantially since peaking in 2014;</p>
<p>Despite the considerable variation during the current cycle, price growth across the capital cities has been quite uniform over the past two decades. In real terms, house prices have increased by 5.3 per cent annually compared with 3.9 per cent growth in unit prices;</p>
<p>The ratio of the median dwelling price to average earnings has increased substantially over the past two decades. Much of this is explained by structural changes in household size, economic participation rates, earnings patterns and the level of mortgage interest rates;</p>
<p>During the June 2016 quarter, the price to earnings ratio was 6.96 for houses and 5.80 for units. The highest ratios were in Sydney and Melbourne, with the lowest in Hobart and Perth. With the exception of Sydney, affordability is more favourable than the 15-year average in all capitals;</p>
<p>With respect to wider economic and financial conditions, dwelling prices across Australia appear to be proportionate. However, the wide geographical variation in current conditions means than some markets are likely to experience significantly stronger price growth than others over the medium term. </p>
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<p><span>This is an update of the HIA Economics note on dwelling prices which was released in November 2015. </span></p>
<p><span>That piece of research then reported on </span><span>how annual dwelling price growth across Australia’s eight capital </span><span>city markets reached 10.1 per cent during October 2015. Since then, the pace of dwelling price growth has slowed and latest data show that dwelling prices increased by 6.1 per cent during the year to July 2016. Over this period, detached house price growth (+6.1 per cent) was almost exactly the same as the growth in unit prices (+6.0 per cent). Later, we explore in greater detail the relationship between house price growth and unit price growth over time in each of the capital city markets. </span></p>
<p><span>As was the case late last year, the variation in dwelling price growth trends is very large when comparing capital cities. The chart below illustrates the changes in house and unit prices in each of the capital cities over the year to July 2016. House prices saw the largest increase in Sydney over the year (+9.0 per cent) followed by Melbourne (+8.0 per cent). Over the same period, the largest increase in unit prices occurred in Hobart (+12.9 per cent) and Sydney (+9.4 per cent). Despite the strong uplifts in several markets, house prices fell quite significantly in both Perth (-5.6 per cent) and Darwin (-5.9 per cent). Over the year, unit prices declined in three capital cities: Perth (-5.8 per cent), Darwin (-14.6 per cent) and Canberra (-0.4 per cent). </span></p>
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<p><span>Aggregated data for the eight capital cities indicate that dwelling prices bottomed out during May 2012 and have since expanded fairly consistently in all capitals apart from Perth and Darwin. The chart below summarises the cumulative increase in detached house prices in each market during the current cycle. Overall, detached house prices increased by 40.0 per cent across the eight capitals between May 2012 and July 2016. The largest house price rise occurred in Sydney over this period (+65.7 per cent), followed by Melbourne (+45.2 per cent) and Brisbane (+18.6 per cent). In contrast, house prices in Perth and Darwin have fallen back since reaching their peaks in 2014. Perth house prices have declined by 8.3 per cent while Darwin house prices are down by 11.8 per cent. Of the cities that have experienced consistent price growth, Canberra has seen the smallest increase in house prices since the 2012 trough (+13.0 per cent). </span></p>
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<p><span>The comparison between prices for detached houses and units in terms of growth is illuminating in several respects. The increase in unit prices has been significantly less pronounced during the current cycle. Also, the upturn in unit prices appears to have commenced about six months earlier than the recovery in detached house prices. Whereas detached house prices have increased by 40.0 per cent during the current cycle, unit price growth has been about 10 percentage points lower (+29.8 per cent). Over the same period, detached house prices have outpaced unit price growth in every single capital city apart from Hobart. This may be related to the smaller sample size in Hobart, as well as the shorter timeframe being analysed for the city.</span></p>
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<p><span>The pace at which detached house prices have outrun unit prices during the current cycle is greatest in Brisbane (18.6 per cent v 6.7 per cent), followed by Canberra (13.0 per cent v 5.5 per cent) and Melbourne (45.2 per cent v 20.1 per cent). It is also worth noting that in the Perth and Darwin markets where prices are falling, unit prices have dropped considerably faster than detached house prices. Hobart is the only capital city where unit prices have increased by more than detached house prices in the current cycle (+27.3 per cent v +16.1 per cent). The behaviour of prices in the current cycle underlines the great degree of heterogeneity both across and within the capital city markets. </span></p>
<p><span>How do dwelling prices behave over the long run? </span></p>
<p><span>Assessing dwelling price growth over time allows us to net out the effects of cycles and temporary factors and capture a sense of long-term trajectory of price dynamics. The chart below illustrates the real annual average growth rate for both detached house and unit prices over the 20-year period to the June 2016 quarter (due to data availability constraints, a 15-year timescale is used for both Hobart and Darwin). These data suggest that growth in real detached house prices tends to outpace unit price growth over the long run (5.3 per cent v 3.9 per cent per year). This was the case in each of the eight capital cities, with the single exception of Hobart. </span></p>
<p><span>Perhaps the most striking takeaway is that real dwelling price growth rates across each of the eight capital cities tend to lie within a relatively narrow band over the long run, especially in the detached house market. Real detached house price growth was strongest in Melbourne over the two decades in question (+6.4 per cent annually) and weakest in Brisbane (+4.3 per cent) over the same period. However, six of the eight capital cities were all less than one percentage point apart in terms of real detached house price growth on an annual basis (ranging from 4.4 per cent to 5.3 per cent per year). </span></p>
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<p><span>Compared with detached house prices, the divergence in real unit price growth has been wider from city to city. Over the long term, Hobart units have experienced the largest increase in real terms (+5.6 per cent annually) with the slowest pace of growth in Brisbane (+2.2 per cent per year). In the other six capitals, real unit price growth has been concentrated in a relatively narrow range of between 3.0 per cent and 4.7 per cent annually. </span></p>
<p><span>Despite the considerable differences in economic structure, geographies and the regulatory framework across </span><span>Australia’</span><span>s eight capital cities, real dwelling prices still behave in remarkably similar ways from city to city over long periods of time with detached house prices consistently growing more strongly than those of units, although there tends to be much greater price variation on the unit side of the market. </span></p>
<p><span>A possible implication of this is that those markets which have seen recent the strongest price growth exceed the long term average in the recent past are most at risk of below par price performance over the coming years. By the same token, the markets that have recently seen price growth underperformed the long term average rate performed weakest in terms of price are most likely to see future acceleration in price growth. </span></p>
<p><span>Price to Earnings: the relative price of housing </span></p>
<p><span>While median disposable household income is the most conceptually sound indicator for benchmarking dwelling prices relative to income in the economy, the fact that these data are released only once per year with a long lag means that other measures must be utilised for more timely and frequent updates. Accordingly, this note uses average earnings as a barometer for household income due to the fact that earnings data are prod</span><span>uced twice yearly (for the May and November ‘quarters’) in a relatively timely fashion. However, it is important to note that earnings data are an imperfect gauge of households’ financial </span><span>resources, as no account is taken of direct taxation, unearned income (such as pensions, etc.) and income in kind.</span><span>1 </span></p>
<p><span>Based on the average earnings data available from the ABS, the chart below provides an overview of the median dwelling price to earnings ratio across Australia since 1995, including data for detached houses and units. Over this period, the ratio has increased from 3.79 in the June 1995 quarter to 6.57 during the </span>June 2016 quarter. The median detached house price is now 6.96 times earnings, compared with 3.83 in June 1995. On the unit side of the market, the price to earnings ratio has increased from 3.73 to 5.80.</p>
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<p><span>At first glance, this suggests that dwelling prices have lost touch with prices and incomes in the economy. However, the big uplift in the price to earnings ratio can largely be explained by two structural changes over the past 20 years. First, the number of employees per household has risen significantly over the two decades due to higher female labour force participation rates, a trend towards taking retirement at older ages and changes in the structure of some households involving greater numbers of young professionals </span><span>in ‘share’ housing</span><span>. The secular reduction in interest rates over this period has also permitted dwelling prices to grow faster, due to the fact that homebuyers can affordably service much larger mortgages at current interest rates than was the case when the interest burden was much higher. It is worth noting that </span><span>the RBA’s Official Cash Rate in August 2016 of 1.50 per cent is only one quarter of t</span><span>he 6.00 rate in August 2006 and an even smaller fraction of the 7.00 per cent cash rate of August 1996. </span></p>
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<p><span>Given the wide variation in dwelling price levels across Australia, it is useful to compare the ratio of dwelling price to earnings in the eight capital cities. This is shown in the chart below for each city during the June 2016 quarter for both detached houses and units. In Sydney, the detached house price to earnings ratio continues to be the highest in the country but eased back to 9.55 during the June 2016 quarter, after reaching an all-time high of 10.31 during the final quarter of last year. Detached house price to earnings ratios are also elevated in Melbourne (7.72) and Canberra (6.96). The ranking in terms of unit price to earnings ratios is similar: it is highest in Sydney (7.31), followed by Melbourne (6.03), although Brisbane is in third place (4.86). </span></p>
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<p><span>The detached house price to earnings ratio is lowest in Hobart (4.53), followed by Perth (5.50) and Adelaide (5.92). In terms of unit prices, the pattern is similar. The price to earnings ratio is lowest in Hobart (3.67), followed by Perth (4.29) and Canberra (4.65). Across the eight capital cities, the detached house price to earnings ratio in the June 2016 quarter was 6.96 with the median unit price at 5.80 times average annual earnings. The tendency of dwelling price growth rates to converge implies that the capacity for future dwelling price growth is most limited in those markets where the ratio of dwelling prices to earnings is high, and vice versa. </span></p>
<p><span>The importance of affordability </span></p>
<p><span>While the dwelling price to earnings ratio is a useful snapshot of valuations, it does not take account of changes in financing costs which have fallen sharply over the past decade. The chart below provides an estimate of affordability in both the detached house and unit segments of the market, which is calculated as the ratio of mortgage repayments to gross average earnings of an individual (note that the average household earnings is are greater than the earnings of an individual in the vast majority of cases) on the purchase of a median price dwelling</span><span>2</span><span>. With the exception of the GFC period, affordability has shown rather steady improvement over the past decade. The eventual reversion to higher mortgage interest rates over the long term, however, is likely to put affordability under some pressure given that average housing debt levels are high by historic standards. </span></p>
<p><span><em>Shane Garrett is senior economist for HIA and can be contacted <a href="https://hia.com.au/en/BusinessInfo/economicInfo/EcoGroup.aspx" target="_blank">here</a>.</em></span></p>
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Dwelling prices and the current state of play: HIA's Shane Garrett

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<p><img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>Like millions of Australians, I am an owner-occupier with a mortgage debt several multiples of our family’s annual household income.</p>
<p>Having bought in the last five years, I am on several Estate Agent’s email lists. This week past, I was accordingly surprised to receive an email from one of these Agents. The email concerned negative gearing, in 2016 a live election issue. It advocated against changing the existing policy, accordingly a vote for the incumbent government.</p>
<p>Australia is a democracy, and it is a privilege individuals and groups enjoy to be able to advocate for what policies they please. We are also a market economy, in which private interests are encouraged to pursue their private good within the limits of the Law.</p>
<p>Nevertheless, such direct advocacy by an Industry to its clients and everyone who will listen of one of the two major Parties' platforms is still novel or unusual. A precedent was set by the Mining Industry’s $22 million opposition to the Superprofit’s Tax.</p>
<p>Wise policy-making in a democracy or “common-wealth” should consider all the different interest groups affected, and different voices in the mix. It should orient itself towards a balanced, inclusive assessment of the general, as well as particular—and the medium and long-term, as well as short-term—good.</p>
<p>So let me put some considerations the email did not raise.</p>
<h2>Some things the email did and did not raise</h2>
<p>This email’s positive argument was familiar to anyone who follows the news cycle in Australia.  Negative Gearing is the ability of investors to claim any moneys lost on an investment property as reduced taxable income.</p>
<p>This effective subsidization of property investment may or may not have artificially inflated property prices by artificially boosting demand. This wasn’t mentioned.</p>
<p>Negative gearing may or may not place first home buyers aiming to own and occupy their little piece of Australia, against investors or consortiums buying 2nd, 3rd, or 4th properties, with much greater acquired wealth, economic capacity and even—with Negative Gearing—an artificial incentive to take on greater mortgages, but no intention to live on the property. This also was passed over.</p>
<p>But negative gearing stimulates property investment. And more investment properties means more rental properties. This keeps rental prices down. The beneficiaries of negative gearing are thus not only wealthy investors or developers, despite first appearances. The policy also benefits the (growing) 30 percent or so of Australians who presently rent: mostly the younger and least wealthy. It is an exercise in “equity”, as well as wealth creation.</p>
<p>Higher property prices also bring higher commission yields to Real Estate Agents. This was also not mentioned in my email.</p>
<h2>The house prices (and unprecedented household debt) in the room</h2>
<p>Also unmentioned were several relevant, larger pieces of economic information which affect how we should assess the wisdom of negative gearing, reintroduced by the ALP under Hawke-Keating in 1987.</p>
<p>By any accepted measure, the period of negative gearing in Australia has coincided with extraordinary rises in property prices. They have risen at disproportionate rates relative to the consumer price index. They have risen disproportionately relative to the median income.</p>
<p>In the year 1975 in which I, a Gen-Xer, was born, the average house price in Sydney was $28000.  To put things in perspective, the average Australian earned something just shy of $8000 in that turbulent year.</p>
<p>By early 2015, the median Australian income had become $72000, something like a tenfold increase, reasonably closely tracking the increase in the prices of most consumer goods.</p>
<p>House prices have however multiplied by something around thirty times in Sydney, Melbourne, Adelaide and Perth, and over twenty times in the other capitals.</p>
<p>In February of 2015, the average house price in Sydney came in at around $850000, well over ten times median annual income; Melbourne’s median house price (where we earn a bit less, to be fair) was about $615000.</p>
<p>As of August last year, Australian homes rated the third-least affordable of OECD countries. Only New Zealand, our neighbours across the ditch, and Canada, our commonwealth cousins North of our closest allies, have a higher house-price-to-income ratio.</p>
<p>The US itself suffered a grave financial crisis in 2007-2008 initially triggered by large numbers of defaults on household mortgages.</p>
<p>As of the turn of this year, some authorities suggest we have the second least affordable homes anywhere, following only Hong Kong.</p>
<p>So Australia is not alone in enjoying a property boom of historic proportions. Other countries have experienced broadly comparable rises in the price of property as against income and other consumer items.</p>
<p>Nevertheless, the rise of capital city house prices in the last four decades, as of last year,<a href="https://www.theguardian.com/business/2016/jan/15/how-australian-households-became-the-most-indebted-in-the-world"> </a>pushed Australia past Denmark as the most privately indebted nation, with a ratio of 123.08% debt to GDP. The International Monetary Fund (IMF), hardly crusted-on Labor voters anywhere, sent an economic team to Australia to examine “the risks posed by property speculation and record-high household debt as part of a broad health check-up of the sagging domestic economy.”</p>
<p>We Australians love a winner, and it is an Olympic year. But we should take no pride in the fact that, reaching the podium for a bronze in income-house-price ratios, we presently take the gold in private household debt.</p>
<h2>X’s, Y’s, booms and boomers</h2>
<p>Public debate around elections turns largely around budgets—what the government does with the money we provide the state in taxation, and who, how and what the government taxes or subsidizes. Less debate has turned over several recent elections on how Australia is now, after two decades of celebrated economic growth—and after a decade of being the economic envy of many another country globally—the most “negatively geared” population in the world.</p>
<p>But perhaps, since the ALP, Mr Turnbull and the Real Estate industry have made negative gearing an issue of public debate, now is the time we should be talking more—if not for our own sakes, then for those of the next generations. For the distribution of the household debt burden between different age and income groups is also not cause for celebration, alongside extant intergenerational data concerning who owns what in the lucky country.</p>
<p>Let me explain what I mean.</p>
<p>Since owning property requires greater wealth, everywhere the young and the less wealthy own less and, if this is possible (it hasn’t always been), lend more. The young have not had the time to accumulate wealth; the poor have had the time, but not the ability, opportunity or fortune.</p>
<p>There is nevertheless something historically exceptional about the present Australian situation. Anyone my age or younger, particularly those of us who teach and talk with Yers and “Nexters”, will know the frank resignation many young Australians feel about ever being able to own their own cut of the pie, except through aid from their parents.</p>
<p>As a Gen-Xer, I belong to the most indebted generation (35 to 44 year olds), when it comes to mortgages ($140000 average, as of 2011-12, including the growing proportions of us who do not own a house to be paying back). But my generation is followed by the Gen-Yers, 25 to 34 years (c$110000 average, for the same period). The Nexters must wait their turn.</p>
<p>In 1981<a href="https://grattan.edu.au/wp-content/uploads/2014/03/800_Renovating_Housing.pdf">,</a> more than 60 per cent of 25 to 34 year olds owned their own home in this country. By contrast, by 2011, only 48 per cent did so. The decline over the same period was 10 percentage points for those aged 35 to 44, from 75 percent to around 65 percent.</p>
<p>Home ownership rates stayed relatively stable only for Australians over 55 (born before 1960) in the decade of 2003-2013. In contrast to their children and grandchildren, the baby boomers remain the principal beneficiaries of the property boom.</p>
<h2>We’re all in this together</h2>
<p>Negative gearing is not solely responsible for this growing gap between income and house prices, Australia’s global leadership in household debt, and as such, the growing intergenerational wealth gap. The increased availability of credit, continually low interest rates, continuing population growth, and other factors have also contributed.</p>
<p>Illustrating all the old gags, economists disagree as to the effects of ending the regime of negative gearing in Australia. There will foreseeably be some decline in property investment, relative to other possible markets for capital. This may, in the shorter term, affect the availability of said properties to renters. Thus rental price increases are likely, at least in the short term.</p>
<p>But how steep the investment decline and how high the rental rise is debatable, should negative gearing be rolled back. Also debatable is how long these effects would last before the interconnected rental and ownership markets rebalance themselves.</p>
<p>Any such negative effects, that is, should be balanced against the effects removing negative gearing would have in moderating the rise and rise of Australian house prices relative to income. These are effects which will be relevant not only to Mr Turnbull’s “largest asset class”<a href="https://www.propertyobserver.com.au/https://www.abc.net.au/news/2016-05-13/real-estate-industry-attacks-labor's-negative-gearing-policy/7412458">,</a> in whose name he has called down havoc on Mr Shorten’s “reckless and dangerous experiment”. They will also have impacts for the next generations, increasingly a class or classes with a longer future and fewer assets.</p>
<p>Most Australian parents I wager would prefer that the around $100-200,000 their child will spend in renting in a capital city throughout their twenties would go to paying down a mortgage of their own in the suburbs, rather than paying down the mortgage on someone else’s investment—particularly an investment whose losses (above what their child’s rental outlays pay down) are deducted from the investor’s taxable income.</p>
<p>They would also rather that when their child and her/his partner wishes to bid at auction for their own small place in the housing market, they were not competing with investors who already have theirs; who have no intention of living in this new property; and who, to boot, intend to claim any costs unmet by rental income as the means to minimize their tax share.</p>
<p>So boomers too, who are also parents and grandparents, have compelling reasons to listen to more voices on this issue than the Real Estate lobby.</p>
<h2>Future proofing</h2>
<p>One of the stronger criticisms of electoral democracy is that, by focusing politicians on winning the next three-four year term, it blinds deliberation to longer term trends and problems. In complex economies like Australia’s, increasingly intertwined with global economic forces, many trends that shape the way we live, the prices of our goods and availability of our services develop over decades.</p>
<p>The property boom, relative to income, and accompanied by unprecedented private Australian debt, is not the product of Mr Turnbull’s term in government, nor of Mr Abbott’s, nor Rudd-Gillard-Rudd’s, or even Mr Howard’s economic miracles.</p>
<p>It takes courage to challenge such a three-decade policy with so many beneficiaries. “Whatsoever is new is unlooked for; and ever it mends some, and [im]pairs others”, someone said. For “what is settled by custom, though it be not good, yet at least it is fit.” But just as the institution of negative gearing has aided some, it has impaired the young, and solely-wage-earning Australians who typically earn less than others, but must be taxed on it all.</p>
<p>Just so, by scrapping negative gearing, we shall be impairing investors and Real Estate agents, but aiding the next generations of Australians. At worse, if rental prices do rise, this will provide an incentive for the young to enter the property market earlier, bucking existing inequitable trends.</p>
<p>Scrapping negative gearing may help avoid a more damaging “correction” in property prices that more bearish commentators have long been prophesying, and the IMF felt concerned enough about to come visiting down under.</p>
<p>For by scrapping negative gearing, make no mistake about it, any new government shall be making a small step towards reducing Australian house prices. This, and its effects on their commissions, is the red raw motive behind the Real Estate lobby’s wounded advocacy.</p>
<p>But looking forwards, at some point Australia is going to have to confront the growing wealth disparity between the generations, and the gap between what people earn and what they owe. While it is just that older people be rewarded for their labours, this consideration needs to be balanced against the right of younger generations to feel like they can and do own a stake in the commonwealth, rather than facing longer and longer periods of paying down others’ mortgages or world-leading mortgages of their own.</p>
<p>So a vote against negative gearing, no matter which Party proposes it, is a vote to minimize the increasingly huge debt burden the younger generations need to take on to own, if not their quarter-acre block, then a quarter of the land most middle-class Australians could comfortably afford two generations ago.</p>
<p>Just as the email said, this is urgently important.</p>
<p>Matthew Sharpe is associate professor in Philosophy, Deakin University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/matthew-sharpe-125260" target="_blank">here</a>.</p>
<p> </p>
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Negative gearing not solely responsible for growing gap between income and house prices

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<p>GUEST OBSERVER</p>
<p>Here are the six standout charts over the past week covering home prices, Australian All Ordinaries Accumulation index, business investment, planned business investment, Nymex oil price and US 10-year bond yields.</p>
<p><a href="/images/2016/12/05/Screen%20Shot%202016-12-05%20at%201.06.56%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/12/05/Screen%20Shot%202016-12-05%20at%201.06.56%20PM.png" alt="" width="760" height="500"></p>
<p><a href="/images/2016/12/05/Screen%20Shot%202016-12-05%20at%201.07.06%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/12/05/Screen%20Shot%202016-12-05%20at%201.07.06%20PM.png" alt="" width="654" height="214"></p>
<p><em>Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a></em></p>
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The six standout charts for this week: CommSec's Savanth Sebastian

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<p><span>GUEST OBSERVER</span></p>
<p><span>The revised Metropolitan Strategy for Sydney along with the six District Plans contains a 10 percent levy proposal on new housing to fund affordable housing and this could increase the cost of all new housing. </span></p>
<p><span>While there is a lot of good work in the long awaited District Plans for Sydney there is an ominous proposal </span><span>to add yet another levy onto new housing</span><span>. </span></p>
<p><span>The plans use a </span><span>false logic that by requiring developers to provide up to 10 percent of new housing as affordable this will help with </span><span>Sydney’s rapidly escalating house prices. Clearly the cost of giving away 10 percent of new homes will have to be </span><span>distributed a</span><span>cross the other 90 percent of new homes therefore forcing house prices up.</span></p>
<p><span>The Urban Taskforce has presented a better way to create even more affordable housing by allowing </span><span>new projects an increased floor space of 20 percent provided it is for affordable housing. We estimate that this </span><span>could provide 40,000 new affordable homes over the next 10 years.</span></p>
<p><span>The Greater Sydney Commission fact sheet is now targeting 189,100 new homes over 5 years which </span><span>requires an average of 37,820 new homes a year. The highest number of new homes in recent years has been 30,000 last financial year so the most important task the Greater Sydney Commission has is to </span><span>increase housing supply but by adding a new tax the opposite is likely to occur.</span></p>
<p><span>A Greater Sydney Commission Fact Sheet does suggest that the levy would be in areas where some floor space uplift would compensate for the levy but the approach to give away affordable homes under SEPP 70 rather than providing them as low cost rental for ten years as indicated in the Affordable Rental Housing SEPP will certainly impact of the feasibility of future housing development.</span></p>
<p><span>Sydney needs a plan to increase housing supply dramatically and to provide large numbers of affordable </span><span>homes. The Urban Taskforce approach achieves both of these aims.</span><span><br></span></p>
<p><span>The District Plans seem to be fairly general documents with little data on heights or density. There are </span><span>broad jobs and housing targets but the real definition of built form would appear to be delegated to the development of Local Environmental Plans by councils. This could leave certainty in the planning system on hold for a few years particularly as elections for new amalgamated councils are a year off. The new data in the draft District Plans is likely to generate many planning proposals that want to vary existing controls.</span></p>
<p><span>We have a concern that the definitions of District and Strategic Centres now do not include residential accommodation. The Urban Taskforce supports mixed-use urban centres that are activated all the time </span>rather than only being 9 to 5 work environments. With so much focus on providing transport infrastructure to major centres it is important that this investment supports a bustling 24/7 mixed use environment.</p>
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<p><span>The package of documents does not seem to address the issue of Value Capture that was recently raised by the Federal Government to help fund new infrastructure and this could become another tax on the cost of new homes.</span></p>
<p><span>The Urban Taskforce is keen to work with the Greater Sydney Commission to ensure housing supply is maximised and that quality mixed use urban centres can be achieved.</span></p>
<p><span><em>Chris Johnson is chief executive officer of property development industry group Urban Taskforce and can be contacted <a href="https://www.urbantaskforce.com.au/index.php?option=com_content&amp;view=article&amp;id=97&amp;Itemid=126#.Vdaart55dFI" target="_blank">here</a>.</em></span></p>
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Proposed levies in Metro Sydney Plan could increase housing costs: Chris Johnson

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<p>House prices are going nuts again, according to <em>Australian Financial Review</em> columnist Chris Joye.</p>
<p>He noted home values across the five capital cities have expanded 9.8 per cent over the last year with "staggering" 4 per cent capital gains in the past three months alone.</p>
<p>The correction called by so many in late 2015 has been superseded by an elongation of one of the biggest, and certainly most dangerous, house price cycles in history, Joye suggested.</p>
<p>Over the 12 months to mid-May, Sydney and Melbourne prices have leapt by a stunning 12.4 per cent and 12.7 per cent, respectively.</p>
<p>Dwelling values in Brisbane and Adelaide have increased 7.4 per cent and 5.6 per cent over the last year which, according to CoreLogic RP Data, which Joye noted while seemingly modest, is 3.5 and 2.7 times the pace of wages growth.</p>
<p>Joye advised the Reserve Bank of Australia's decision to further crush the cash rate to another record low of 1.75 per cent in May had compelled his upward revision to his 2016 forecasts.</p>
<p>In December his nominal appreciation forecast was of 2 per cent to 4 per cent which assumed an unchanged cash rate. </p>
<p>"Given current yield curve expectations for a second cut in 2016, my central case is house prices run at three to five times wages, which represents capital growth of between 6 per cent and 10 percent.</p>
<p>"We are, therefore, in completely unchartered territory that means the risk of policymaking errors apropos asset price bubbles is higher than it has been before.</p>
<p>"So if you are buying a house, you would be well-advised to embed a chunky margin of error in price terms to hedge against such hazards," said Christopher Joye who is a director and shareholder in Smarter Money Investments, which manages fixed-income investment portfolios.</p>
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Chris Joye says house prices are going nuts again - maybe up by 10 percent

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<p>An increase in population and income are two demand influencers on high dwelling rents and prices, according to the directors of Real Estate Research and Teaching for the UNSW Business School.</p>
<p>According to Nigel Stapledon's<span style="line-height: 1.3em;"> submission to the House of Representatives Standing Committee on Economics inquiry into Home Ownership, the rise in house prices it is not only happening in Australia, but all over the world. This is due to low interest across the world.</span></p>
<p><span style="line-height: 1.3em;">"In the period 1993-2003, population grew at a 1.1% annual pace, in the period 2003-13, it averaged 1.6%. At the margin, that extra 0.5% per annum is a very significant difference. This surge in population also changed expectations about future population growth, which in turn influenced expectations about future rent growth. If buyers expect the future rate of rent growth to be higher, that justifies higher prices." </span></p>
<p><span style="line-height: 1.3em;">It is his belief that foreign buyers add to the pressure on prices, but the effect in the long term is not permanent.</span></p>
<p>"The broader point is that Australia is a major beneficiary of its open door to foreign capital. In the long term, Australia’s reputation as a secure, transparent place to invest is a positive. Apart from anything it lowers the cost of capital for governments, business and individuals. If we start imposing controls to help manage perceived short term problems, that will put that reputation at risk."</p>
<p>Taxation policy is not as important as the demand factors mentioned before. Nigel Stapledon says that a more efficient tax system is desirable but is not what affects housing.</p>
<p>"The real debate on the question of housing affordability is on the question of supply. There are a number of angles to this. </p>
<p><span>"</span>In economics, the margin is what matters. On the demand side, an increase in population growth rate from 1.1% to 1.6% per annum in the period 2003–13 caused rents to rise substantially. </p>
<p>"Allowing for age composition effects, potential household formation lifted from 1.4% to 1.8%. That small marginal change mattered a lot. Because supply lagged in its response, most of the initial action was in higher rents, which worked to subdue demand (more young adults - potential new households – for example stayed at their parents’ home). </p>
<p>"In period 2003-13, the stock of dwellings in Australia grew by an average 1.6% per annum – only slightly slower than potential household formation but the cumulative effect matters. With a lag, complicated by some big intervening events e.g. GFC (Global Financial Crisis), we are now seeing supply respond in a more substantial way. </p>
<p>"In 2014 new completions increased the dwelling stock by 1.8%, and in 2015 and 2016 the pipeline of starts tells us that rate of growth will be running at a 2.0% pace. Bearing in mind that population growth has now slowed to a 1.4% pace (household formation below 1.6%), then clearly the demand-supply equation is shifting towards buyers/renters. The evidence of that is the deceleration in rent growth evident in 2014. It is the indicator to watch in 2015. </p>
<p>"But imagine if the stock were to increase by more like 3% (double the normal) in 2015. That order of magnitude increase in supply would require lower rents/prices to encourage more households (those young adults staying at home) back into the market. Otherwise, there would be a lot of vacant new dwellings. </p>
<p>"As the city’s population grows, if the green zone is unchanged, what urban economic theory tells us is that when the constraint becomes binding that the increase in demand will cause the price of land to rise. In response, buyers will choose smaller amounts of land consistent with the policy-makers’ desire for increased density. </p>
<p>"While less land is used, which partially offsets the higher price per unit of land, it is only a partial offset and the price of housing rises. For the pre-existing stock of houses, the price rises and their owners (owner-occupiers and landlords) enjoy a capital gain. </p>
<p>"The binding constraint will lead to pressure for some relaxation. To the extent that policy-makers relent and rezone some of the greenbelt land, the owners of that land will achieve significant capital gains. This leads to significant resources going into lobbying and a propensity for corruption. </p>
<p>"The second policy option is to impose a development tax. This lifts the price of land and in response we again see smaller lots and increased density. If the tax is set at the right level, the same degree of increased density can be achieved as with quantitative controls. </p>
<p>"One advantage of the development tax is that the development tax captures the capital gain which would be earned by owners of greenbelt land which is rezoned. A second advantage is that it keeps the market for land competitive. </p>
<p>"I would note that constraints on higher density building in inner urban areas will also constrain supply and lead to higher rents/prices across the urban area. There are many such restrictions. For example the recent decision in NSW to impose a minimum size on apartments of 35 square metres will add to the cost of housing. </p>
<p>"The cost of commuting (both in dollars and in time) is the most significant influence on the cost of land within cities. The higher are commuting costs from the urban fringe, the more valuable is living in the inner urban areas where commuting costs are low. </p>
<p>"As a city grows, there is a need to add to the transport capacity (wider roads, more rail lines). If governments fail to expand the transport infrastructure, congestion rises and lifts commuter costs. </p>
<p>"There is strong advocacy for public/social housing, which represents less than 3% of the housing stock, to be a much bigger part of the market. At its peak in 1971, public housing represented closer to 6% of total housing stock. </p>
<p>"There is a place for public housing but do young Australians see it as the answer to their future housing needs. I suspect they all aspire to something better. It is seen as a safety net. </p>
<p>"Aspirations aside, public housing is heavily subsidised. And as the cost of housing rises in a city, so too does the cost of subsidising public housing. It follow that policies which make the cost of private housing lower also lowers the cost to the taxpayer of providing any given amount of public housing."</p>
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Aussies aspire to more than public housing

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<p><img src="/images/2015/11/NEW_RAMS_LOGO.jpg" alt=""></p>
<p><span>Owning a home is a key goal for many Australians. But rising property prices have led some people to question whether to give up on that dream and continue to rent.</span></p>
<p><span>In some areas it is cheaper to rent than to buy, but there are still suburbs where buying a home is affordable. If you have a reasonable deposit saved you may find your mortgage costs are comparable to rent, or even lower. </span><span> </span></p>
<p>There are also non-financial benefits to buying a home, although renting has its advantages as well and there are downsides to both. </p>
<p><span>WHY BUY?</span></p>
<p>If you buy, you could build equity in your property. Once you’ve fully repaid the mortgage, you’ll own it outright. </p>
<p>Buying allows you to put your personal stamp on the home, decorating or renovating to your taste and perhaps adding to the property’s value. As a result, you’ll typically feel a greater emotional connection to a property you’re buying than to one you rent. </p>
<p>You’ll also have greater security and stability if you buy. As long as you comply with your obligations under the loan, you can live in your home as long as you want – and leave it as an inheritance to your loved ones. <span> </span></p>
<p>The downsides to buying are that if you do wish to move, you’ll have to rent out the property or sell, which involves time and transaction costs.</p>
<p>Owners also have costs such as repairs and maintenance, strata fees, council rates and water levies which tenants do not have to cover.</p>
<p><span>WHY RENT?</span></p>
<p>Flexibility is a key benefit of renting. If you wish to move at the end of a lease, you can easily do so. </p>
<p>You may also find you can afford to rent in a location where buying would be out of your reach, particularly if you don’t have much savings. </p>
<p>The drawbacks are that you’ll never own the home you live in and you could be asked to move out if the landlord decides to sell or move into the property themselves.</p>
<p>Tenants must seek landlord approval for simple changes, such as hanging pictures on the walls so it’s hard to create a home that perfectly matches your style. </p>
<p><em>Quick tip: Buying offers stability, security and the chance to build an asset. Renting provides flexibility and freedom. </em></p>
<p> </p>
<p><span>TO FIND OUT HOW RAMS CAN HELP EASE YOU THROUGH THE PROCESS, GET IN TOUCH WITH YOUR LOCAL RAMS HOME LOAN EXPERT OR DROP IN FOR YOUR <a href="https://ad.doubleclick.net/ddm/clk/297185195;124281891;s" target="_blank">FREE FIRST HOME BUYERS’ GUIDE</a>.</span></p>
<p>For more great property advice and tips on buying your first home from RAMS subscribe to <a href="https://ad.doubleclick.net/ddm/clk/297187169;124281892;w" target="_blank">The Great Australian Dream property series</a>.</p>
<p><span>For your free </span><em>Property Observer</em><span> eBook from RAMS, <em>12 tips for first-time buyers</em>, </span><span>covering</span><span> </span><span>everything</span><span> you need to know when it comes to purchasing property, <a href="component/content/article?id=48727" target="_blank">click here</a>.</span></p>
<p><em>Disclaimer: Information in this material is general and does not take into account your objectives, financial situation or needs and you should consider whether it is appropriate for you. You should also obtain independent professional advice relevant to your financial circumstances.</em></p>
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To buy or to rent?

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<p><span>GUEST OBSERVER</span></p>
<p><span>The Westpac–Melbourne Institute Consumer Sentiment Index rose by 7.8% in August from 92.2 in July to 99.5 in August. </span></p>
<p><span>This is a very surprising result. Movements of the Index of this magnitude are unusual and generally associated with highly significant events such as interest rate moves or Commonwealth Budgets. There is no comparable event they may have triggered this response although the solution may lie with international issues and housing.</span></p>
<p><span>Last month we conjectured that the main reason behind the 3.3% fall in the Index related to concerns around global issues associated with Greece and the Chinese equity market. That fall had followed a fall in June of 7.1% (also influenced by concerns around Europe in particular) from the big increase in May<br> (8.0% jump) which was most likely associated with the Reserve Bank’s rate cut in early May and a positive response to the Commonwealth Budget.</span></p>
<p><span>It seems that with the tensions in Greece and the Chinese equity market no longer dominating the media consumers are feeling more relaxed. However, the Index remains below 100 and is therefore the 16th reading out of the last 18 where the Index has been below 100 indicating that pessimists have consistently outnumbered optimists.</span></p>
<p><span>Ongoing positive news around house prices may also have buoyed confidence. Certainly there was a much larger lift in the confidence levels of those respondents who wholly own a property (up 6.2%) or who hold a mortgage (up 11.0%) than those who are out of the housing market (up 4.3%).</span></p>
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<p><span>However confidence is not being boosted by the expectation of more interest rate relief. In our special question around the outlook for mortgage rates 55% of respondents expect mortgage rates to rise over the next 12 months; 35% expect rates to be steady; and 5% expect further rate cuts (5% with no opinion)</span></p>
<p><span>Over that 18 month period there have been two months (following the RBA’s rate cuts in February and May) when Confidence has rallied but this has not proved to be sustained.</span></p>
<p><span>I expect that this current “rally” will equally prove to be unsustainable particularly given a resurgence of concerns around China and the evidence last week that the unemployment rate lifted to 6.3%.</span></p>
<p><span>The rise in the overall Index was associated with a modest improvement in respondents’ confidence around the labour market. The Westpac Melbourne Institute Index of Unemployment Expectations fell by 2.1% following a 1.3% fall in July (a lower level indicates that respondents are more confident with the labour market outlook). However the Index is still above the level in May and 6% above the level in October 2011 immediately before the Reserve Bank began its easing cycle.</span></p>
<p><span>Not surprisingly, all components of the Index increased. Possibly reflecting the house price theme we saw a huge lift in “family finances compared to a year ago” of 15.5% while “family finances over the next 12 months” rose by 3.9%.</span></p>
<p><span>Prospects for the economy, possibly influenced by a more settled global outlook, also lifted. “Economic conditions over the next 12 months” rose by 13.4% and “economic conditions over the next five years” was up by 5.8%. However note that these two components are still down on a year ago: –8.7% and –2.1% respectively.</span></p>
<p><span>“Whether now is a good time to buy a major household item” rose by 3.7% but is also still down 1.6% on last year.</span></p>
<p><span>Sentiment towards housing improved. “Whether now is a good time to purchase a dwelling” increased by 8.2%. But that really only represents a recovery from the precipitous fall last month of 15.4%. The level in August is still 8.5% below the level in June and still represents the second lowest print for this Index since November 2010 – the aftermath of the Reserve Bank’s rate hike cycle. There was only one state, New South Wales, where the Index fell further (– 3.3%) from the July level. The Index for New South Wales is now 22% below its level two months ago. This sentiment is probably being driven by concerns around both affordability and prospects for prices.</span></p>
<p><span>Respondents were less confident about the outlook for house prices. The Westpac–Melbourne Institute Index of House Price Expectations fell by 5.6% (to 137.7) from its level in July (145.8) and is now down by 10.3% over the year. </span></p>
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<p><a href="/images/2015/08/12/Screen%20Shot%202015-08-12%20at%2011.48.33%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><img src="/images/2015/08/12/Screen%20Shot%202015-08-12%20at%2011.48.33%20AM.png" alt="" width="660" height="225"></p>
<p><span><em>BILL EVANS</em></span><em> is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.</em></p>
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August consumer sentiment index rise surprising: Bill Evans

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<p>Rising household debt levels, the hot Sydney property market and continued low interest rates has made Australian Prudential Regulation Authority Wayne <span class="il">Byres</span> uneasy.</p>
<p>It seems he especially fears a market propped up by artificially low, interest-only borrowing rates.</p>
<p>Last month he decided the trend to over borrow, and then not to repay home loans in the conventional manner of interest and principal, was a likely recipe for a economic uncertainty.</p>
<p>To preserve financial stability, the prudential regulator decided in its latest macro-prudential measure that the interest-only loans fad need to be constrained.</p>
<p>The banks were told that less than 30 per cent of their new mortgages can be interest-only, <span>well below the 38 per cent of total loans currently taken.</span></p>
<p>With borrowers realising paying interest-only freed up cash-flow, they've dived into interest-only loans which haven't been below 30 per cent since around 2008.</p>
<p>Interest-only loans typically have a period of five years, and then the loan will revert to the normal P&amp;I repayments, with the recent accompanying price growth seeing the investor nicely placed to cope with the higher repayments.</p>
<p>The tax deduction of interest payments in the meantime on these investor loans will have been a big incentive for the investor.</p>
<p>Investors have accordingly snapped up the bulk of interest-only loans, but owner occupied borrowers have been a worrying large 40 per cent share.</p>
<p>As Sydney house prices have surged since 2012, house loan sizes have grown, and for most households who've have experienced limited wage growth, the upsizing to the bigger home has only really worked with getting an interest only loan.</p>
<p>On a $300,000 mortgage over 25 years at a 5% p.a. interest rate, the usual monthly repayment would be $1,754 a month. But if you were making interest-only payments, the monthly cost would be $1,250 a month.</p>
<p>For a $750,000 home loan the monthly repayment of $4,174 drops to $3,325 if only the interest is repaid – which for many Sydney families is the difference between owning a bigger home or not.</p>
<p>The push hasn't just come from borrowers as mortgage broker's commissions are calculated on the size of the loans so they are incentivised to write interest only loans.</p>
<p>ASIC advised this week while interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense.　</p>
<p>The Reserve Bank of Australia has warned for two years that the rise in interest-only loans could amplify the housing price cycle, increase the risk of significant price falls, and may result in households overburdened in debt. </p>
<p>If house prices do drop, the borrower will likely end up owing more than the house is worth, paying much more interest than they would have otherwise paid, and then coping with the many ensuing dramatic problems.</p>
<p><em>This article first appeared in the Daily Telegraph.</em></p>
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