First home buyers have become collateral damage

There are two groups of people in Sydney and Melbourne: those that own a property, and those that want to own a property.

The former love that property prices keep rising; and the later have become increasingly frustrated by the property bubble.

In a normal world this frustration would have an end point, meaning that at some stage interest rates would start rising, or the unemployment rate would begin to increase, and the property bubble would inevitably burst.

That hasn’t happened this time around.

Why is that? Well in this column I want to highlight two issues that have influenced a generation.

Firstly, that it is incredibly dangerous to hold interest rates at record low levels indefinitely.

And secondly, that policy makers do indeed know exactly what they are doing to the property market, and who they are hurting in the process, but they’re doing it anyway.

Eye-watering growth

According to CoreLogic RP Data, house prices in Sydney’s inner west have risen by almost $1 million over the past 10 years.

News Limited press recently reported that a median house in Sydney’s Haberfield or Summer Hill in 2006 was $650,000, but they’ve both grown in value by 9.6 per cent each year to hit $1.63 million this year.

Houses in Croydon, Enfield and Burwood Heights, were also $650,000, on average, in 2006, but hit $1.6 million this year after 9.4 per cent average annual value growth.

This is extraordinary.

The growth “makes sense”

There are few key drivers of this growth. First and foremost, interest rates have been falling for many years now, and are at this point stuck at historic lows. The second is that most people are employed.

The unemployment rate has been at or around 6 per cent now for several years. In fact it peaked in late 2014 at around 6.5 per cent (still well outside “danger zone” territory).

Finally, investors keep pushing the market higher. I hesitate to use the word term “Ponzi scheme”, but that’s essentially what’s been happening.

That is, it’s in investors’ best interests to keep inflating prices, so that’s exactly what keeps happening.

The forces that keep pushing property prices higher are very real, and many of those forces aren’t going away anytime soon.

Back story

All of the above factors: low interest rates, strong employment, and investor-driven demand, all work together.

If one “falls”, the whole system is in danger of breaking down. Most critical, though, I believe, is Australia’s record low interest rates (cheap money).

The Reserve Bank has kept the official cash rate under 2.5 per cent since early last year. That kind of stimulus is unprecedented. It’s also very necessary. Here’s why.

Australia’s terms of trade (the income we command for our exports) peaked in 2012, but it’s now below financial crisis levels.

The government, and of course the Reserve Bank, had to find an area of the economy to pick up the slack from the mining boom. They chose construction.

That includes producing government infrastructure, commercial property, and residential property.

It’s largely been successful, but there’s a problem. Low interest rates have been used to fuel this boom and it’s resulted in ridiculously high property prices.

Here are just two examples: figures from Rich and Oliva estate agents show prices in Burwood, in Sydney’s west, have risen 86 per cent in 3 years. Prices in Concord have also risen 75 per cent over the same period.

Sorry, first home buyers, but you know how it is

The saying goes, ‘a rising tide lifts all boats’. So for first home buyers, the amount of savings needed to get onto the property ladder has risen significantly, because most house prices have risen significantly.

There has been a ‘greater good’ though. Without a boom in property prices and construction activity, the Australian economy was at risk of sinking into recession.

We know this because even with pockets of enormous levels of activity, Australia’s growth rate has only managed to sit at, or slightly below, trend levels.

What do I mean by “enormous” levels of economic activity? Well check this out: Fairfax press reported earlier this year figures from RLB NSW showing "Sydney firmly remains the construction king for Australia, with the greatest number of cranes erected in the residential, commercial and civic sectors".

This piece went on to say that there were, “more cranes looming over the city in any time since RLB launched its index in August 2012, and a 35 per cent increase in numbers in the past six months alone.”

Tying it together then, the post-mining boom economy has benefited from a low interest rate-fuelled construction boom, and an associated lift in consumer spending as households enjoy the spoils of a property bubble. It’s saved the economy from going backwards.

However, first home buyers have paid the price. They don’t stand a chance of buying the kind of home that would have been within their reach 10 years ago.

On flipside the economy has maintained speed, and those 40 and above who have paid off their mortgage, or lived in their home for a decade or so, now have a huge capital gain to exploit.

RBA had no choice

It’s the idea of the “greatest good for the greatest number”. There are always real losers though. This time around it’s young adults.

They have been sacrificed to keep the economic wheels ticking over. Many a seasoned property investor, and real estate agents too no doubt, have made their fortune.

We also know that in recent years the gap between rich and poor has also widened. So while the broader policy goal has been achieved, it’s caused significant collateral damage along the way.

What now?

There is hope that the relatively low dollar, the government’s triple-A credit rating, reasonable jobs growth, and relatively high savings rates will help keep the Australian economy well afloat for the next few years.

That’s a fair enough statement. Indeed it’s the growth of the services sector, and consumer spending, that will be key to this growth.

Equally what we have to accept is that we’ve created a generation of Australians that have grown up thinking debt is a benign form of finance.

Just look at this research from UBS as reported in the Courier Mail last week, “[UBS] noted there had been “sharp rises” in debt levels, relative to GDP, across the public sector, households and businesses.”

It went on to say, “household debt is now at 125 per cent of GDP, while business and government debt levels clock in at 84 per cent and 47 per cent respectively.”

This is totally unsustainable, and, frankly, financially dangerous.

To add insult to injury, Australians’ wealth is eroding. People are working less, and wages growth is the lowest in recorded history.

The bottom line

Things are great for Australians who bought property ten years ago, have a secure job, and a nice pension fund.

Things are pretty ordinary for Australians who can’t find enough work, are not saving, and are struggling to pay their rent. The distance between these two groups is now wider than it’s been for some time.

As the new financial year gets underway and there remains little, if any, prospect of a near term increase in interest rates, for now, at least, there’s never been a more exciting time to be rich.

 

David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator. You can follow him on Twitter: @DavidTaylorABC.