First home buyers will be forced to save an extra $2000 towards a deposit just to keep up with the last three months of price growth, according to CoreLogic data exclusive to The New Daily.
The median house price in the eight capital cities is now $613,200, CoreLogic estimated, based on sales in the March quarter.
At the end of last year, this figure was $592,807, which means in just three months, as hopeful buyers saved madly, the goalposts shifted 3.4 per cent further away. And that’s only for a modest 10 per cent deposit.
All up, a young couple now needs about $61,300 for a 10 per cent deposit on a median-priced house in the city. In Sydney, it’s a staggering $88,000.
If they’re saving for a 20 per cent deposit, which many banks now prefer, they’ll need $176,000 for a median-priced Sydney home – up $8200 in three months.
If prices stood still from today, a couple saving for a 10 per cent deposit in a capital city would need to put away roughly $1200 a month for the next four years, presuming they earned 2.5 per cent interest, compounded monthly.
And this doesn’t include lenders mortgage insurance (LMI), which Australian banks have made compulsory for all borrowers with deposits below 20 per cent. Gone are the days of 0 per cent deposit loans unless you have a guarantor.
A median-priced house in a capital would require roughly an extra $13,500 in LMI, which the couple would presumably ask to be ‘capitalised’ into their loan – meaning they would pay an extra $67 per month on their repayments.
To avoid LMI entirely, first-time buyers would need to save a 20 per cent deposit of $122,640, based on CoreLogic’s median capital house price. That’s $4000 more than three months ago.
And then there’s stamp duty and the litany of other upfront costs that home buyers face. Stamp duty alone could add an extra $23,000 to a median-priced home.
As these figures show, a guarantor is probably the only way for many buyers to get into the market. Many institutions will lend 100 per cent or even 110 per cent of the home value if first-time buyers have a guarantor.
There is plenty of controversy over whether or not houses are more or less affordable than ever. For example, Jamie Alcock, an academic at The University of Sydney, wrote in The Conversation last week that mortgages are now more affordable, as record-low interest rates are nowhere near the 17 per cent highs of the 1990s.
Even if that’s true, the CoreLogic figures, coupled with the tighter lending requirements of the banks, prove that house price growth is making it harder for deposit savers to keep up.
And as Professor Alcock warned, when interest rates do inevitably rise, today’s ‘comfortable’ borrowers will become tomorrow’s highly stressed repayers.
Category: Social Trends
Union of Labor and Growth
John Evans is Head of the Trade Union Advisory Committee to the Organisation for Economic Cooperation and Development, which represents some 65 million organized workers worldwide. In this podcast, he says that the labor market works much like any other market, driven by supply and demand, and the latter is very dependent on how well the economy is doing.
“On the demand side, the labor markets globally haven’t fully recovered from the Great Recession after the [U.S. investment bank] Lehman Brothers crash in 2008. We still have 200 million people unemployed. We still have very sluggish growth. On the income side, what we’ve seen globally, but particularly in certain countries, is a generalized rise to greater inequality of labor incomes in the last 30 to 35 years.”
Is this only a problem for developing countries?
“I think it affects everyone,” says Evans. “The Gini coefficient increased very significantly in some of the industrialized countries. The post-World War II years was a period of falling income inequality, whereas now we’ve seen a jump back to some of the levels that existed in the 1920s.”
Evans says the IMF’s analysis of advanced economies shows that half the increase in inequality between the top decile and bottom decile is due to weaker unions and declining unionization. As such, there’s a strong case for advocating more broadly-based inclusive growth, which is what most institutions now say is their key policy.
“Sixty percent of people globally work outside formal employment. So, how the labor market institutions re-attach them to the labor force is crucially important.”
While technology is transforming the labor force, Evans says technology will have less impact in the short term on increasing jobs, but more impact on the quality of work, and potentially on income distribution.
“If we look at past waves of technological change in different countries—trying to make sure workers have new skills, that there are policies to help them move to new jobs, and that they have a sense of security and protection in that change process—it’s sometimes been managed well, and sometimes badly. But it’s certainly a feature of history.”
Evans believes governments are looking at labor markets as crucial to delivering jobs and reducing inequality. Research by institutions like the IMF and World Bank has found new results about labor markets, and policymakers are listening. “The models we’ve seen in some countries of good social dialogue, social partnerships, and high levels of trust between both management and workers and their unions, and also a recognition of that by governments, is making the process better.”
Why spatial inequality in Australia is no joke
As in many other countries, income inequality in Australia has grown over the past two decades. At the same time, Australia is one of the most urbanised countries in the world, with more than 60% of the population concentrated in just six major cities. Incomes in these cities are very spatially segregated, with high and low earners concentrated in different suburbs.
In new research, I used census data to examine these patterns. Focusing on the incomes of men aged 25-54 in our six largest cities, I found that income inequality among men has grown substantially since 1991 – particularly during the 1990s.
This has been associated with increases in the relative income gaps between different areas within the cities. The share of inequality associated with location has also increased over time – an indicator of increasing segregation.
To the extent to which people draw on the resources of the people who live in their local area, this spatial segregation has potential implications for social cohesion and intergenerational inequality. There are also substantial differences across cities. Sydney was substantially more unequal than other cities over the whole period.
The census tells us the gap has widened
These results are based on detailed tabulations from the five censuses from 1991 to 2011. The focus on men aged 25-54 is partly for data availability reasons, but also permits a simpler focus on those income trends associated with wage growth and workforce-age income support payments.
The research examines how incomes vary across the local areas in our six largest cities. These areas are defined using the Australian Bureau of Statistics “statistical local areas” (SLAs) designation.
In Sydney and Melbourne, SLAs correspond closely to local government areas, while they are generally smaller areas in the other states. The income measure is the single census question on the person’s total income (before deducting taxes) – answered in categories.
Statistical interpolation techniques are used to generate a smooth income distribution and to compensate for a change in the payments of income support between 1991 and 1996. More details can be found here.
The graph below shows trends in city-wide inequality since 1991.
In each city, male income inequality grew substantially during the 1990s. It flattened out after 2001 (generally increasing slightly up to 2006, then falling back a little after the global financial crisis). In all years, incomes were substantially more unequal in Sydney than the other cities, with this gap widening over the period.
In part, this reflects the larger size of Sydney. However, Sydney is now only slightly larger than Melbourne. Most of the gap is likely due to the high wages in parts of the financial services industry centred in Sydney.
Within the sub-regions of each city, inequality also increased, following a similar pattern. However, the growth in income inequality within local areas was less than the overall growth in inequality. Corresponding to this, the gap between the average incomes in each region also increased.
This is indicated in the graph below, which shows a measure of between-region inequality – the extent to which the average incomes in each area differ. Using the “GE(1)” measure of inequality, this more than doubled between 1991 and 2001. It then increased slightly up to 2006 and fell back slightly after the GFC.
The overall combination of these trends is that the share of city-level inequality associated with location has grown over the period. For the GE(1) measure, this share increased from about 15% to 18%. That is, spatial segregation between rich and poor has increased over time.
Are we segregating ourselves?
One simpler way of describing the spatial concentration of incomes is to consider the situation of the top 10% of Sydney men – those with annual pre-tax incomes of $141,000 or more in 2011.
What fraction of these rich men lived in the low-income areas of Sydney? If we define low-income areas as the SLAs with the lowest average incomes and containing 20% of the male working-age population, then we find that only 5% of rich men lived in these areas in 2011.
So while it is true that some rich men live in the areas that have low average incomes (and maybe they might meet poor men), they are four times less likely to do so than the average man (5% vs 20%). And this segregation has increased over time. Back in 1991, 6.2% (rather than 5%) of rich men lived in these poor regions.
The other cities are also segregated, though not quite as much as Sydney. Looking at the top 10% of earners in each city in 2011, the percentage of these who were in poor local areas was 5.6% in Melbourne and Brisbane, 5.9% in Adelaide, and around 9% in Canberra and Perth.
Dark shades of inequality
This data also allows us to consider which areas are more segregated or mixed. This is mapped below for Sydney and Melbourne.
The darker shades indicate local areas with more within-area inequality – though for small regions such as this, it is more appropriate to use a word with more positive connotations such as “heterogenous” or just “mixed”. The more mixed areas are generally those with higher average incomes (plus some areas with high ethnic heterogeneity).
This is driven by the fact that most regions include at least some men with low incomes, but high-income men are unlikely to live in the more homogeneous outer suburbs.
The concentration of high-paying employment and the poor transport linkages of Australia’s major cities undoubtedly play a large part in driving this.
Author: , Associate Professor, Social Policy Research Centre, UNSW
Sydney Population Now Over 5m
Sydney’s population has officially reached 5 million, according to figures released today by the Australian Bureau of Statistics (ABS). This is one key reason why demand for property is so strong here.
ABS Director of Demography, Beidar Cho, said that at 30 June 2016, 5,005,400 people lived in the NSW capital – up 82,800 from the previous year.
“It took Sydney almost 30 years, from 1971 to 2000, to grow from 3 million to 4 million people, but only half that time to reach its next million,” she said.
Today’s figures show that Melbourne is Australia’s fastest growing capital city. Its population grew by 2.4 per cent in 2015-16, ahead of Brisbane (1.8 per cent) and Sydney (1.7 per cent). Australia’s slowest growing capital city was Adelaide, at below 1 per cent.
The fastest growing area in Australia in 2015-16 was ACT – South West, which grew by 38 per cent. This area includes the recently developed suburbs of Wright and Coombs. Other areas experiencing fast growth included Pimpama (35 per cent) on the Gold Coast, the coastal area of Yanchep (29 per cent) in Perth’s north and Cobbitty – Leppington (28 per cent) in Sydney’s outer south-west.
- Australia’s estimated resident population (ERP) reached 24.1 million at 30 June 2016, increasing by 337,800 people or 1.4% since 30 June 2015. This growth rate was unchanged from 2014-15.
- All states and territories experienced population growth between 2015 and 2016. Victoria had the greatest growth (123,100 people), followed by New South Wales (105,600) and Queensland (64,700).
- Victoria also grew fastest, increasing by 2.1%, followed by New South Wales and Queensland (both 1.4%), the Australian Capital Territory (1.3%) and Western Australia (1.0%). The Northern Territory had the slowest growth (0.2%), followed by South Australia and Tasmania (both 0.5%).
- The combined population of Greater Capital Cities increased by 276,500 people (1.7%) between 30 June 2015 and 30 June 2016, accounting for 82% of the country’s total population growth.
- Melbourne had the largest growth of all Greater Capital Cities (107,800), followed by Sydney (82,800), Brisbane (41,100) and Perth (27,400).
- Melbourne also had the fastest growth (2.4%), ahead of Brisbane (1.8%) and Sydney (1.7%).
- Sydney’s population reached 5 million in 2015-16. While it took almost 30 years (1971 to 2000) for Sydney’s population to increase from 3 million to 4 million people, it took only another 16 years to reach its next million.
Houses aren’t more unaffordable for first home buyers, but they are riskier
Climbing house prices seem to scare people but houses are relatively more affordable today than they were in 1990, it’s actually interest-rate risk that’s the bigger problem for first home buyers.
If you look at latest numbers on house prices, as a measure of affordability, they use a “median measure” – that is, the ratio of median house price to median salary. According to the latest Demographia survey, the price of the median Sydney house is 12.2 times the median salary, and it is 9.5 in Melbourne.
But it’s simply misleading to compare median-based measures of housing across different time periods in the same location. These simple median measures do not take into account differences in interest rates in different time periods.
A house in 2017 that costs nine times the median salary, when mortgage interest rates are less than 4%, is arguably more affordable than a house in 1990 that costs six times the median salary. Interest rates in 1990 were 17%.
Consider this simple example. In 1990 a first home buyer purchases an average house in Sydney priced at A$194,000. With mortgage interest rates at 17%, the monthly mortgage repayments were A$2,765 for a 30-year mortgage. But in 1990 the average full-time total earnings was only A$30,000 per annum, so the buyer’s mortgage repayments represented over 111% of before-tax earnings. In 2017 a first home buyer purchasing a Sydney house for A$1,000,000, with interest rates at 4%, is only required to pay A$4,774 every month, or 69% of their before-tax average full-time total earnings.
So, relatively, houses are substantially more affordable today than they were in 1990. The lower interest rate means the costs of servicing a mortgage is lower today than it was 25 years ago, or even 50 years ago.
However, those lower interest rates also mean today’s first home buyers face greater perils than their parents or grandparents.
Interest-rate risk
Interest rate risk is the potential impact that a small rise in mortgage interest rates can have on the standard of living of homeowners. This does not consider the likely direction of interest rates, rather how a 1% change in interest rates affects the repayments required on a variable rate mortgage.
When interest rates rise so do mortgage repayments. But the proportional increase in repayments is higher when interest rates are lower. For example, if mortgage interest rates were 1%, then increasing interest rates by another 1% will double the interest costs to the borrower. When interest rates are higher, a 1% increase in interest rates will have a lower proportional affect on their repayments.
If we go back to the example from before, the interest rate risk of the first home buyer from 1990 is much lower than that of the 2017 buyer. If mortgage interest rates rose by 1% in 1990, repayments would rise by only 5.7% to $2,923. For the 2017 buyer on the other hand, a 1% increase in interest rates would see their repayments rise by over 12% to $5,368 per month.
This has the potential to financially destroy first home buyers and, due to the high reliance of the retail banking industry on residential real estate markets, potentially create a systemic financial crisis.
Interest rate risk has an inverse relationship to interest rates – when interest rates fall, interest rate risk rises. As a result, interest rate risk has been steadily increasing as mortgage interest rates have fallen. Given that we have record low interest rates at the moment, interest rate risk has never been higher.
Putting it all together
Compounding all of this is the general trend of interest rates.
In 1990 mortgage interest rates were at a record high and so our first home buyer could reasonably expect their repayments to decrease in the coming years. They could also reasonably expect that, as mortgage interest rates fell, demand for housing would increase (all else being equal) and so would house prices, generating a positive return on their investment.
But our 2017 first home buyer is buying when interest rates are at record lows. They cannot reasonably expect interest rates will fall or for their repayments to go down in future years. It’s also unlikely that house prices will increase as they have for previous generations.
So while the current generation of first home buyers find housing much more affordable than their parents, they face substantially higher interest-rate risk and a worse outlook for returns on their investment. If we wish to address the concerns of first home buyers we should look into these issues rather than exploiting misrepresentative median-based measures of house affordability.
Apart from addressing issues with the supply of housing, governments need to investigate ways to reduce interest rate risk over the longer term.
Author: Associate Professor, University of Sydney
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We would make the point that income growth is static or falling, prices relative to income are higher in many urban centres, and the banks are dialing back their mortgage underwriting criteria (especially lower LVR’s, reductions in their income assessment models and higher interest rate buffers). All of which work against lower interest rates, which are now on their way up, so this article seems myopic to us!
However, we agree the interest rate risk is substantial, and more than 20% of households are in mortgage stress AT CURRENT LOW Rates. We also think the risks are understated in most banking underwriting models, because they are based on long term trends when interest rates were higher.
You’ve got to fight! For your right! … to fair banking
British governments have been trying to improve financial inclusion for the best part of 20 years. The goal is to make it easier for people on lower incomes to get banking services, but this simple-sounding target brings with it a host of problems.
A House of Lords committee will shortly publish the latest report on this issue, but the genesis of financial inclusion policy can be traced back to the late 1990s as part of the Labour government’s social exclusion agenda. The scope and reach of this strategy has since expanded beyond a focus on access to products and now seeks to improve people’s financial literacy to help them make their own responsible decisions around financial services.
The goal of increasing the availability of basic banking has become a tool for tackling poverty and deprivation worldwide, among governments in the global north and global south and among key institutions. In 2014, the World Bank produced what it described as the world’s most comprehensive financial exclusion database based on interviews with 150,000 people in more than 140 countries.
Muddy waters
However, broad and enthusiastic acceptance of such policy efforts has prompted doubts about the simplistic narrative of inclusion and exclusion. This way of thinking does not capture the complexities of the links between the use of financial services and poverty, life chances and socio-economic mobility. It also ignores the sliding scale of financial inclusion, from the marginally included – who rely on basic bank accounts – through to the super-included with access to a full array of affordable financial services.
You can see the complexity and contradictions clearly in innovations such as subprime products and high-cost payday lenders. They have made it increasingly difficult to draw a clear distinction between the included and the excluded. Mis-selling scandals and concerns over high charges have also shown us that financial inclusion is no guarantee of protection from exploitative practices.
Even the pursuit of better financial education offers a mixed picture. Critics have raised concerns that this shifts the focus away from structural discrimination and towards the individual failings of “irresponsible and irrational” consumers. There is a grave risk that we will fail to tackle the root causes of financial exclusion, around insecure income and work, if policy follows this route.
In the midst of this focus on customers, the government’s role has been reduced to supporting those education programmes and cajoling mainstream banks, building societies and insurers into being more inclusive.
Given the central role that financial services play in shaping everyday lives, a hands-off approach from the state is inadequate. It fails to address the injustices produced by a grossly inequitable financial system. Our recent research examined how the idea of financial citizenship might offer a route to improvements. In particular, we looked at the idea of basic financial citizenship rights and the role that might be played by UK credit unions, the organisations which, supported by government, seek to bring financial services to those on low incomes.
The idea of establishing rights was put forward by geographers Andrew Leyshon and Nigel Thrift in response to the growing lack of access to mainstream financial services. The goal would be to recognise the significance of the financial system to everyday life and set in stone the right and ability of people to participate fully in the economy.
That sounds like a laudable aspiration, but what could a politics of financial citizenship entail in practice?
Drawing on the work of political economist Craig Berry and researcher Chris Arthur, we argue that the policy debate should move on to establish a set of universal financial rights, to which the citizens of a highly financialised society such as the UK are entitled regardless of their personal or economic situation.
- The right to participate fully in political decision-making regarding the role and regulation of the financial system. This would entail, for example, the democratisation of money supply and of the work of regulators. Ordinary people would have to be able to meaningfully engage in debates about the social usefulness of the financial system.
- The right to a critical financial citizenship education. Financial education needs to go beyond the simple provision of knowledge and skills to understand how the financial system is currently configured. It should provide citizens with the tools to be able to think critically about money and debt, as well as the capability to effect meaningful change of the financial system.
- The right to essential financial services that are appropriate and affordable such as a transactional bank account, savings and insurance.
- The right to a comprehensive state safety net of financial welfare provision. This could include a real living wage to prevent a reliance on debt to meet basic needs and could go all the way through to the provision of guarantees on the returns that can be expected from private pension schemes.
Establishing this set of rights would be a major step towards enhancing the financial security and life chances of households and communities. The weight of responsibility would shift from individuals and back on to financial institutions, regulators, government and employers to provide basic financial needs. As one example, just as people in the UK are given a national insurance number when they turn 16, so the government and the banks could automatically provide a basic bank account to everyone at the age of 18.
The UK credit union movement does make efforts towards these goals, but it cannot fully mobilise financial citizenship rights largely due to its limited scale and regulatory and operational limitations. For the rights to work, they will need the support of the state, of financial institutions, regulators and employers. That would enable the country to build something less flimsy than the loose structure we have right now, which piles blame onto the consumer and relies on voluntary industry measures to pick up the slack.
Australia is adding an extra million people every three years
Thursday was a demographer’s dream. That’s when the Australian Bureau of Statistics released Catalogue No. 3101.0, which contains a whole bunch of thrilling data.
One of the highlights is that, as of September last year, Australia had 24.22 million people, an increase of about 348,000 in just 12 months. That’s broadly equivalent to adding the combined population of Hobart and Darwin.
This growth rate is relatively high by western standards. We’re still a popular destination for migrants with net overseas migration (the difference between arrivals and departures) contributing 55 per cent of total growth. The rest is provided by natural increase (the difference between births and deaths).
But it’s not unprecedented. We’re expanding at 1.5 per cent a year, which is below that of 2007-2009 and 1950-1970 when growth exceeded 2 per cent.
At a state level, Victoria was the big winner adding some 125,500 new residents, followed by New South Wales (110,000) and Queensland (68,000). Over the 12-month period, Victoria broke through the six million mark. For comparison, if Victoria was a US state it would rank 18th just behind Indiana.
The impact of net overseas migration is not evenly distributed. New South Wales, which houses 32 per cent of Australia’s population, attracts almost 40 per cent of net overseas migration, while Victoria with around 25 per cent of the nation’s population, punches well above its weight with 36 per cent. The vast majority settle in either Sydney or Melbourne.
Another interesting element is movement between the states. Each year, people move, for a host of reasons, interstate. The difference between those arriving and those leaving is termed ‘net instate migration’ and over the years state premiers have frequently attached their economic management credentials to positive figures.
At present, Victoria and Queensland are the ‘winners’, Tasmania and the two territories can claim a draw, while New South Wales, South Australia and Western Australia are the ‘losers’.
Some of these trends are fairly well established, others relatively new. For example, at the height of the mining boom, Western Australia was a net importer of people from the other states. With the boom a distant memory, it’s now a net exporter.
Lest Victoria get too cocky, it should be remembered that in the 1980s and early ’90s, when many thought the state was in almost terminal decline as a so-called ‘rust belt’ state, net outflows (mainly to NSW and Qld) were in the tens of thousands a year.
Australia is also ageing, which will have longer-term ramifications. Life expectancy is greater and our fertility rate is below replacement.
We’re not as bad as Europe, where in some countries population decline is imminent. But it’s still a very real issue that has governments mindful of the fiscal implications of a society where more of us are older than 65.
Even in the few years from 2012 to 2016, the proportion of the Australian population aged 65 and over increased from 14.14 to 15.27 per cent, while the proportion aged 24 and under declined from 32.48 to 31.92 per cent.
Finally, the ABS gave us some predictions of future population and the number of households required to accommodate it.
By 2036, we’re projected to increase to 32.4 million and, by 2056, to 39.8 million.
Most of that growth is expected to be in the big cities, with Sydney increasing from almost five million in 2016 to 6.6 million in 2036 and to 8.12 million in 2056, and Melbourne growing from 4.6 million in 2016 to 6.4 million in 2036 and to 8.16 million in 2056.
Notice something?
Yep, by 2056 Melbourne is projected to have overtaken Sydney.
Will it happen?
It could, but it’s not guaranteed. Melbourne has been gaining on Sydney for many years now, but a range of economic, social and cultural factors could threaten that. Back in 1991 few people would have foreseen Melbourne becoming Australia’s growth capital.
In any event, Sydney has large centres of population on its doorstep (the Central Coast, Blue Mountains, Wollongong and even the Hunter Valley region) that could potentially be called into play if Melbourne began to mount a serious challenge.
Chris McNeill is a demographer and urban economist with Essential Economics, a consulting firm specialising in the economic analysis of people, places and spaces.
The forgotten cost of the housing boom: your retirement
The house price boom is going to costing us thousands of dollars in retirement, according to a new report.
The entire retirement income system is based on the assumption that home ownership is affordable, and that anyone stuck in lifelong renting will be helped out by state governments.
But these assumptions are “increasingly dubious”, prominent economist Saul Eslake has warned.
The Australian Institute of Superannuation Trustees, which represents all not-for-profit super funds, commissioned Mr Eslake to dig into the potential impact of rising housing costs on retirement.
In 2013-14, about 88 per cent of households headed by Australians aged 65+ spent less than 25 per cent of their gross income on housing — down from about 92 per cent in 1996-97, the economist found, using official statistics.
Worse still, the proportion of 65+ households with housing costs of more than 30 per cent gross income has doubled from 5 to 9 per cent over the last 15 years.
This is partly because Australians are buying and paying off homes later in life because of price growth, Mr Eslake warned.
Many of us will never make it onto the property ladder at all, trapped for life in the private rental market, which a recent report estimated can cost an extra $500,000 in retirement.
Outright home ownership has fallen from 61.7 per cent in 1996 to 46.7 per cent in 2013-14, Mr Eslake found using official ABS data.
“Compared to 15 years ago when almost three out of five home owners owned their home outright, home owners with a mortgage are now in the majority.”
This is a serious threat to retirement balances, as renting in later life is a drain on income streams, and many more retirees will use bigger and bigger chunks of superannuation savings to pay off the remainder of their mortgages, he predicted.
“In other words, there is a clear link between deteriorating housing affordability and the adequacy of Australia’s current retirement income stream.”
While price growth is not the only explanation, it’s a big factor, Mr Eslake wrote. Other reasons include less state government investment in social housing, and adults spending more time in formal education.
So, not only are irrational prices in Sydney and Melbourne squeezing out first-time buyers, they are likely to punch big holes in the federal government’s coffers when today’s struggling buyers become tomorrow’s age pensioners.
Home Renovations: Australia’s Next Building Boom?
The latest edition of the HIA Renovations Roundup report predicts that home renovations will become an increasingly important part of the residential building industry over the next few years.
According to the March 2017 edition of the HIA Renovations Roundup report, renovations activity grew by 2.7 per cent in 2016 to $33.06 billion. The pace of growth is projected to slow to just 0.3 per cent in 2017, before reaching 3.2 per cent in 2018. Further growth in 2019 (+2.4 per cent) and 2020 (+2.5 per cent) is expected to bring the value of home renovations activity in Australia to $35.94 billion.
“2016 marked the strongest year since WWII for new home building starts in Australia but our forecasts indicate that activity is set to decline on this front over the next three years,” commented HIA Senior Economist, Shane Garrett.
“In this context, our industry will become more dependent on work related to home renovations activity. Many are surprised to learn that renovations currently account for about one third of all residential building work. By the end of the decade, renovations activity is likely to represent some 42 per cent of all residential building activity.”
“Detached house building in Australia reached very high levels between 1985 and 1995. This large stock of homes is becoming increasingly ripe for major renovations work. Added to the mix are remarkably low interest rates and the big home equity windfalls in Sydney and Melbourne – pretty ideal conditions for renovations demand.”
“At the moment, the one key difficulty for the renovations market is the fact that turnover in the established house market is falling. This is an important driver of demand, and prospects for renovations growth would be even stronger if transactions on this side of the market started to increase again,” concluded Shane Garrett.
We would make the point that with incomes static, and mortgage rates on the rise, household incomes will be under more pressure. As a result some may choose not to move but renovate, but will they have the means to pay for it?
The Rule of Thirds
On average, according to our surveys, one third of households are living in rented accommodation, one third own their property outright, and one third have a mortgage. Actually the trend in recent years has been to take a mortgage later and hold it longer, and given the current insipid income growth trends this will continue to be the case. Essentially, more households than ever are confined to rental property, and more who do own a property will have a larger mortgage for longer.
Now, if we overlay age bands, we see that “peak mortgage” is around 40% from late 30’s onward, until it declines in later age groups. The dotted line is the rental segment, which attracts high numbers of younger households, and then remains relatively static.
But the mix varies though the age bands, and across locations. For example, in the CBD of our major cities, most people rent. Those who do own property will have a mortgage for longer and later in life.
Compare this with households on the urban fringe. Here more are mortgaged, earlier, less renting, and mortgage free ownership is higher in later life.
Different occupations have rather different profile. For example those employed in business and finance reach a peak mortgage 35-39 years, and then it falls away (thanks to relatively large incomes).
Compare this with those working in construction and maintenance.
Finally, across the states, the profiles vary. In the ACT more households get a mortgage between 30-34, thanks to predictable public sector wages.
Renting is much more likely for households in NT.
WA has a high penetration of mortgages among younger households (reflecting the demography there).
Most of the other states follow the trend in NSW, with the rule of thirds clearly visible.
Victoria, for example, has a higher penetration of mortgages, and smaller proportions of those renting.
We find these trends important, because it highlights local variations, as well as the tendency for mortgages to persist further in the journey to retirement. This explains why, as we highlighted yesterday, some older households still have a high loan to income ratio as they approach retirement. To underscore this, here is average mortgage outstanding by age bands.
