First home buyers – Part 2

A few weeks ago, I posted about the first home buyers.

That missive drew quite a few comments, many in support – thanks – and some not so supportive.

Several asked me for a chart showing the long term trend between the money lent to first home buyers versus investors.  Others wanted to know how many loans are made to first home buyers each year.  And a few lost souls wanted to know what I would do to help improve the situation.

So here is my reply and I have included two charts in this follow up post.

Some observations

1. Between 50% and 60% of the money borrowed to buy housing in Australia is lent to second or subsequent owner residents.  How the remaining monies – when excluding refinancing – is distributed between first home buyers and investors has changed dramatically over the last three decades.  Investors these days get the lion’s share.  Revisit chart 1.

2. Over the last 25 years some 110,000 households – on average across Australia each year – bought their first home each year.  Revisit chart 2.

3. In recent years there have been 4 investment loans to 1 first home buyer mortgage.  Given that some investors do not borrow to invest, this ratio is likely to be closer to 5 or 6 to 1.  In the decade prior to the halving of capital gains tax in 2000, the ratio of investment mortgages to first home buyer loans was 2 to 1. And this relationship was largely 1 to 1 through the 1950s to late 1980s.

4. As a proportion of the 25 to 34 age household segment the first home buyer activity shown in chart 2 varied between 7% and 15% depending size of that segment and number of first home loans over the last 25 years.

5. Interestingly, the average in the 1990s and before any first home buyer assistance was 10%; during the 2000s when the First Home Owners Grant and subsequent Boost were introduced it averaged just 12% and since 2010, it has fallen back to 8%.  It rose to 15% during 2009 and was 11% in fiscal 2018.

6. Of note is that it took the GFC, in 2009, to see the highest number of first home buyer loans in any one year in Australia.  Also, in financial 2018, some 145,000 first home buyers secured a home loan.  Again, revisit chart 2.

7. So, when investors pulled out of the market like they did during the GFC and in more recent years, the banks filled the void, illustrating that loans to first home buyers can be done, it is just that, in my simple mind, investors crowd them out.

Looking forward

Forget the official definition of a recession, a large portion of Australia is already in an ‘income recession’ and many more are about to enter one.

At first glance, therefore, it makes perfect sense that the RBA cuts interest rates.

However, whilst the intention is to help boost employment, in reality, rate cuts incentivise businesses to invest in technology that displaces jobs.

As revenues fall, businesses are forced to find cost effective solutions and automation is high up on the list, especially when tax rebates apply.

Taking a wider view, one of the major reasons why interest rates are low globally is because jobs are being displaced by automation, robotics, digitalisation and the internet of things.

And so, we are stuck in a vicious circle, where central banks cut rates, further incentivising investment in technology that displaces jobs, forcing central banks to cut rates further.

Of course, rate cuts also help lift the price of real estate which benefits those who already own assets but does nothing for those without such assets.  And so, rate cuts widen the inequality gap and really do hurt first home buyers.

The federal government’s planned first home deposit scheme, which starts in January next year and is income dependent plus capped at certain price points depending on location, will do little to really assist first home buyers.

In most part, house prices will rise beyond their capacity to borrow.

And besides all these schemes do is bring the activity forward – revisit chart 2 one last time – and hence distort the normal building/property cycle.

What’s needed 

Below are some things worth thinking about.

1. Get the ratio of first home loans to investment loans back to where it was in the early 1990s.  This can be done by a carrot or a stick.  The carrot is incentivising financiers to do more business with first home buyers.  The stick is to place a brake on investment loans.  We need to stop artificially fuelling house price appreciation via first home grants, boosts and deposits.

2. We need to build more homes but the right type of homes.  We need to encourage more appropriate dwelling forms across the country and especially in our middle ring suburbs.  Revisit this post.

3. Provide substantial tax cuts for those on lower to middle incomes.  These earners spend a high proportion of their income and cutting their tax rates increases the flow of money through the economy.  Dropping interest rates, given the current circumstances, is having the opposite effect.

4. More spending on appropriate infrastructure projects – like the recently announced NSW school maintenance program or much needed new bridges crossing the Brisbane River. Such initiatives are more immediate, more equitable in terms of benefits and employs more people than the typical big white elephant road or rail project.

5. Have the RBA meet once a year – in June say – and set a course for the year.  If these cats cannot forecast and plan out the year ahead then let’s employ someone that can.  We need fewer distractions, more focus and certainty.

For my full overhaul list revisit this post.

And thanks to Roger Montgomery for some key thoughts here.

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