House prices remain a major issue of the economy as once again we see prices in Sydney and Melbourne go up after significant falls. For now the market is being driven by owner-occupiers, and investors remain largely absent. That is good news for first-home buyers who are make up a greater share of buyers than at any time since the GFC. It also gives the Reserve Bank scope to cut rates again.
One of the more interesting things about the government’s new program to assist first-home buyers is it comes in at a time when they are already in the market in a big way:
Indeed if we look at the growth of housing finance, first-home buyers are the big movers. Home loans in December for non-first-home owner-occupiers were 10.1% above the year before, investor finance was just 3.2% above, and first-home buyer home loans were up 31.2%:
It is actually quite stunning how quickly overall home loans have grown in the past year. Total housing finance rose 12% in 2019. The past eight months have seen housing finance increase, the longest run of growing home loans since March 2017.
And given the clear link between housing finance growth and house prices, this means the latter look set to keep rising for at least six months:
The link between home loans and house prices is not just a national average but one that is clear in both Sydney and Melbourne:
Such a surge brings with it a level of concern that once again we will see the market quickly fall out of reach of most, and especially first-home buyers.
And while that is a warranted concern, it is worth noting just how far the market has fallen.
While the value of housing finance in all states and territories except Tasmania and the Northern Territory grew over 2019, when we look at the change over the past two years all except Tasmania are below their recent peaks:
It’s when we look at the total value of home loans rather than the annual growth you can see how far below the current level is from the 2017 peaks, even with the recent strong increases:
In March 2017 there was a record $22.5bn in new housing loans. By April last year that had fallen 26%. Even with the growth of the last half of last year, the $19.5bn loans in December was still 13% below that peak.
The story of that period is the departure of investors. While total owner-occupier loans are just above where they were March 2017, investor home loans in December were still 39% below that level.
And to a significant extent first-home buyers have filled the gap.
In December the level of home loans taken out by non first-home-buyer owner-occupiers was still 10% below the amount taken out in March 2017, but first-home buyer loans were a stunning 63% higher.
The Reserve Bank has been for the most part happy to see the recovery of the housing sector after falls in 2018 and early 2019 – but as with all things economic there is a good and a bad.
The governor of the RBA, Philip Lowe, told the standing committee on economics recently: “In the last six months the increase in housing prices has been a positive development for household balance sheets. And because it is positive for household balance sheets it is positive for spending and positive for the economy and jobs. But we can have too much of a good thing.”
Of course the reason why housing prices continuing to rise would be too much of a good thing is that unless it is accompanied by similar increases in household income it makes for an unsustainable market.
Essentially that is what happened in Sydney.
If we use average annual male full-time earnings and 50% of women’s full-time earnings as a proxy for household earnings, from the end of 2011 when the RBA began cutting rates to the middle of 2017, house prices in Sydney went from 4.9 times annual household earnings to 8.9 times.
That increase was unsustainable and there has been a strong correction and a similar – though smaller – one in Melbourne:
Again, this would please the RBA. Lowe told the committee his “own view is that the society would be better off having lower housing prices relative to people’s incomes”.
Certainly this improvement in housing affordability has allowed first-home buyers to come into the market. A big part of this has been policies introduced in New South Wales and Victoria which saw reductions in stamp duty for first-home buyers.
The federal government’s first-home buyer policy, which came into effect only last month, will not have as much of an impact. It is limited to 10,000 first-home buyers a year – which is only about 10% of such buyers.
What the numbers show is the big reason that allows first-home buyers get a foothold is when they don’t have to compete against investors. At the moment the market is being driven by owner-occupiers, and as long as that is the case housing affordability should remain relatively steady. And with that stability the RBA will be more comfortable with cutting rates again should it believe the economy needs a boost.
But should investors come back in strength and housing prices take off, then even in the face of sluggish economic growth it will be loth to hit the monetary policy accelerator again.
• Greg Jericho writes on economics for Guardian Australia