Data Diary

The end of affordable housing or cheap money?

Posted on 11 February 2010

The RBA’s measure of housing affordability explicitly includes the cost of money. If we lower interest rates, they reason, housing becomes more affordable – ’cause the interest bill on the average debt burden is reduced.

So with the RBA making the first steps towards tightening monetary policy, it’s not surprising to see the housing finance numbers tailing off – housing is instantly less affordable by their measure.  (The following chart maps the percentage change, month-on-month, of the 12 month rolling average of the number of housing loans – sorry bit of a mouthful that).

But there is more to it than that.

The real impetus for the recent strength in housing finance has come from various governments chortling around in the chariot handing out really cheap money (free in fact) to deserving and undeserving newly-weds alike. This has distorted both house prices and debt levels, most particularly in the more interest rate sensitive demographics. Consider the following chart showing the proportion of loans to first home buyers as a percentage of total housing loans written:

By way of background, the First Home Owners Grant was introduced in July 2000 to compensate for the effect of the GST’s introduction (funny how it’s hung around). It was a one-off grant of up to $7000 to be administered by state governments. Great – we can see the leap in FHO’s buying in 2000. The more recent upsurge was the result of the introduction of the First Home Owners Boost (add another $7000 for an established home or $14,000 if you wanted to build). This latest piece of expensively flawed thinking came to an end at 31 December 2009 (after stepping down in generosity in September 2009).

The obvious conclusion? With interest rates heading higher, maximum LVR’s heading lower, and taxpayer hand-outs being reduced, expect first home buyers to all but vanish.

What does this mean for property prices? Consider the following chart that maps the change in average loan size by measuring one month against that same month a year earlier:

Sure first home owners have been leading the charge, but the rest of us have been leveraging up into the rising property market as well. In fact, the ABS’s 13.6% weighted average rise in property prices over the period of the First Home Owners Boost compares pretty favourably with the 12.3% rise in loan size for all loans across the same period.

Back to Minsky’s speculative phase

The path to Minsky’s speculative phase is paved with cheap money. Cheap money facilitates speculation through the bidding up of assets beyond the point that the debt incurred can be serviced. The only way to repay the debt is via selling the assets themselves – this presupposes that asset values continue to climb.  At some point gravity takes over.

So to the Australian housing market and as we have discussed previously (see here), it has the silouette of a Minsky speculative market:

Tick in box number one – there has been a bountiful harvest of cheap money over the last 18 months – which if anything is simply the continuation of a longer term trend of lower interest rates and government gifts.

And yes – tick in box two - this cheap money has resulted in an abundance of debt hanging around (some) home owners necks.

And box three?  Are borrowers relying on house prices continuing to appreciate to repay debt? Two metrics to think about are:

1) Levels of mortgage stress – according to  Fujitsu Consulting’s Mortgage Stress-O-Meter things are pretty grim for the First Home Buyers.  As reported by Nick Gardner at the Courier Mail (refer to the article for more – I’m waiting on my own copy of the Stress-O-Meter):

ALMOST half of first-home buyers lured into the market by the Rudd Government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

2) Income versus house price growth:  Let’s take the ABS’s 13.6% growth in house prices from Sep-08 to Dec-09 and lay it down against the growth in average weekly earnings – it’s not an exact science but – extrapolating the 12 months to Aug-09 to get 6.9% growth in male earnings and 5.6% for females.  Sounds suspiciously like house prices outran income by a significant margin.

This brings us back to the RBA’s measure of housing affordability.  A house if more affordable if interest rates are low.  Odd concept when you put it like that.  Also, hints at the difficulties that are likely to unfold.  Interest rates are rising globally. Whether the RBA likes it or not, interest rates for mortgages will follow suit simply because the cost of borrowing will increase for the banks.

Wonder how long it is before the government is guaranteeing the banks’ debts again?

TRADES:

1) Sell banks - earnings growth momentum is peaking, with the real risk of rising bad debts ahead.

2) Sell residential related property stocks – faltering demand side while the supply side has kicked in.