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      16 Jun 2017

      The ​Housing Affordability 3 Card Trick

      Recently announced Federal and State Government schemes and incentives appear to be focussed on making housing more affordable for first home buyers, but they’re just playing the old three card trick on us.

      First card:
      Provide generous deposit saving initiatives, buyer grants and Stamp Duty exemptions to first home buyers.

      Hey presto! More first home buyers can raise a home loan deposit and buy their first home.

      The first card trick:
      Rather than making housing more affordable, this does the opposite. It increases demand by putting more first home buyers into the market and it gives them the capacity to pay more for their homes.

      This is because buyers don’t stump up the full price of a home purchase, only the deposit. A $10,000 rise in deposit funds means that borrowers can suddenly afford to pay $50,000 to $100,000 more for a home, provided they can meet the repayments. The result is that housing prices rise until a new deposit unaffordability limit is reached.

      Second card:
      Make investors pay for these first home buyer schemes and incentives by introducing harsh taxes and imposts.

      Hey presto! It was those nasty investors who caused the Sydney and Melbourne housing booms and now they must be punished, especially foreign investors, because they don’t even live (or vote) here.

      The second card trick:
      Australian capital city rent and price rises when combined are now at their lowest level for decades and trending down. This is not the right time to hit housing investors with increased taxes and levies, because they will either pass them on to tenants, or leave the market altogether. Both of these results will put pressure on rents to rise.

      Third card:
      As if by magic, the median sale price for houses and units in Sydney and Melbourne starts to fall in the second half of 2017.

      Hey presto! Our governments take a bow, take the credit and walk off the stage and toward the next election amid thunderous applause and thousands of votes.

      The third card trick:
      First home buyer housing prices tend to be lower than the median housing price in any city, so more first home buyer sales means more sales at the low end of the price range. Because the median house or unit sale price is the middle point of all the sales in any month, the rise in lower priced sales causes a decline in the median sale price.

      The tragic thing about all this is that housing prices are not falling at all, they just appear to be because the median price is falling. Increased demand for first homes will more likely lead to a rise in first home buyer prices rather than a fall, but the misleading median price hides this from us.

      The JOKER in the pack:

      There’s a Joker in the pack which none of our politicians has mentioned. Interest rates have been holding at generational lows for some years, and this is about to change. Not only has the Federal Reserve indicated that rates are going to rise in the USA, but our own governments are hitting the banks with new taxes which will directly increase the cost of borrowing.

      Hey Presto: Not only will the cost of borrowing start to rise, but banks will have less to lend. First home buyers borrow most of the cost of a home and are likely to be hit hardest when rates rise, just when they have committed to a new home and can already barely meet the repayments.

      A collapse in buyer demand could spread through all areas of the Sydney and Melbourne housing markets and lead to years of price stagnation, but because demand for accommodation in capital cities continues to rise, the demand will shift to rentals. The graph shows that our housing markets have always risen in terms of rents or prices – if one doesn’t increase, the other does.


      The years when both rents AND prices have fallen are very rare and have nearly always been associated with national catastrophes such as wars or depression.

      On the other hand, a pattern of price boom and bust followed by rent boom has occurred around every thirty years in our history - in the 1890s, 1930s, 1960s, and 1990s. All the data indicates that such a rent boom is imminent as price growth stops and by shuffling the deck rather than dealing with the real issues caused by continuing high demand and low housing supply in our major capital cities, our leaders are playing the wrong game.

      It is aspiring first home buyers who will suffer the most as rents and interest rates rise in the next few years – the very people our politicians are pretending to assist with their three-card trick.