Low interest rates haven’t helped out first home buyers much. But the apartment boom might. Photo: Penny Stephens
If the financial markets are right, the Reserve Bank will probably cut interest rates in the next few months, taking the cash rate to a record low.
For people looking to buy their first home, that might sound like great news. Lower interest rates should ease the pain of taking on a first mortgage, right?
Sorry, but I doubt it. If anything, people hoping to buy their first home tend to be more likely to miss out on buying a place when interest rates are slashed, as they have been in the past few years.
That is because for many people, the biggest challenge in getting into the property market is saving up a deposit.
And guess what? Interest rate cuts have dealt a double-whammy blow to people saving up a decent deposit. ” src=”http://www.smh杭州龙凤419m.au/content/dam/images/g/q/3/w/j/a/image.imgtype.articleLeadwide.620×349.png/1468312103240.png” title=”” width=”100%” />
Not only do lower interest rates lower what you earn on your savings, but perhaps more importantly, they also tend to put a rocket under house prices and allow other buyers to take on more debt.
The graphic shows you just how much tougher it has become to save up a 10 per cent deposit for someone with average pay in Sydney and Melbourne over the last few decades.
For our two biggest cities, it now takes more than a year’s salary to stump up a deposit of 10 per cent, Fitch Ratings calculates, compared with about six months pay in the early 1990s.
When the deposit hurdle has increased so sharply, it is hardly surprising that the rough share of first home buyers in the market was just 14.2 per cent in March, its lowest level since 2004.
The difficulties of raising a deposit are not the end of the story, however.
When interest rates are cut, it also gives a windfall to people who already own a home but are paying back their bank, by lowering their repayments.
Fitch also has a measure of the interest payments that people are making on their loans compared to average income, which measures home loan serviceability. It reports that home loan serviceability has fallen to just 7 per cent, its lowest level since 2003.
So, while things have become a lot harder for first home buyers, the mortgages of people who bought several years ago are generally more affordable.
Their repayments have gone down, at the same time as their homes have increased sharply in value. With this boost in their wealth (at least on paper) some have also taken the opportunity to borrow more and upgrade their house to a bigger one, or buy an investment property.
Unlike first home buyers, however, people who already own a home don’t typically have the same difficulty saving up a deposit, because they already have a big housing asset they can sell or borrow against.
Indeed, Fitch reports that all that extra demand from other buyers – investors and upgraders – is a key reason why first home buyers have been squeezed out.
In other words, the big winners from low interest rates have been people who already have a mortgage, often at the expense of first home buyers, who are finding it increasingly hard to get a foot in the door.
However, I’m not saying it’s the fault of RBA governor Glenn Stevens that many young Australians are finding it increasingly hard to afford a house. His main job is to keep inflation in check and manage the economy’s swings, not to determine who can afford a house.
Besides, interest rates are only part of the picture. They affect how much people borrow – and that influences demand for housing – but the other side of the coin is the supply of housing.
And on the supply side, the news is more encouraging for first home buyers.
A swag of economists, analysts and even banks are now publicly predicting there are too many apartments being built in parts of Sydney, Melbourne and Brisbane.
UBS economist Scott Haslem reports that the number of multi-storey apartments being built has more than doubled in the past few years, and almost tripled since 2010. The sheer number of high-rise apartments coming onto the market looks especially huge, with a record number being approved.
Many expect that the wave of units coming onto the market will cause apartment prices to drop, or at least remain flat for a while, in parts of Sydney and Melbourne.
Plenty of first home buyers may have no interest in living in a high-rise building, of course. But some analysts reckon the huge supply could affect other parts of the housing market, by pushing down rents, which could flow into softer prices.
So perhaps there is a slightly more promising outlook for first home buyers after all. But it is more likely to come from the apartment-building boom than it is from any future rate cuts.