So you think it’s the right time to dive in and buy a home.
I can’t tell you you’re wrong. I can tell you it would have been better to do it before prices began soaring, and that if they keep soaring it will get worse still.
That’s a jump of almost $100,000 in a matter of months — an awfully big price for procrastinating.
In Melbourne the typical price has climbed from $682,000 to $740,500. In Perth it has climbed from $471,000 to $521,500, and so on.
So why on earth wouldn’t you dive in, cut your living expenses to the bare minimum and try and buy a home while it’s the least bit possible?
One (slight) reason to relax is mortgage rates. Despite the increases in fixed four-year rates, three-year rates have barely moved. That’s because the Reserve Bank has promised to hold the three-year bond rate constant at 0.1%.
Buying has become a bigger commitment
The three-year bond rate determines the cost to banks of their three-year fixed rate mortgages.
The Reserve Bank has said it does not expect to lift its 0.1% cash rate until “2024 at the earliest”. Movements in the cash rate determine movements in variable mortgage rates.
But there is another reason for proceeding with caution and taking stock.
For our parents, buying a home was an exceptionally good deal, not only because homes were cheaper — until the end of the 1990s homes typically cost between two and three times household after-tax income, they now cost closer to five — but also because over time the loan became easier to pay off.
Housing prices as proportion of household disposable incomeCore Logic, ABS, RBA
That isn’t because mortgage rates were coming down — at times they were going up — it’s because during our parents’ times wages (and prices) were climbing.
It meant that even if someone of our parents’ generation just squeaked through one of the bank’s tests about their ability to make payments on a mortgage, a few years and lots of inflation and several big wage rises down the track those mortgage payments shrank compared to everything else.
Once, wage rises took care of repayments
Many of our parents paid off their mortgages early.
One way to look at this is that the bank’s ability-to-repay calculators were set too harshly. They failed to account for future hefty wage rises and inflation.
It’s probably also true that they were set more generously than they might have been in an implicit acknowledgement of what the assistant governor in charge of the Reserve Bank’s economic branch Luci Ellis calls “mortgage tilt”.
Mortgages were ‘front-end loaded’
When inflation was high, and as a consequence interest rates were high, wages that climbed rapidly with high inflation made the servicing burden “most acute in the very early phase of a loan, falling over time”.
- ^ $872,000 (www.corelogic.com.au)
- ^ $970,000 (www.corelogic.com.au)
- ^ 2% (www.domain.com.au)
- ^ constant (www.rba.gov.au)
- ^ Home prices are climbing alright, but not for the reason you might think (theconversation.com)
- ^ Core Logic, ABS, RBA (www.rba.gov.au)
- ^ mortgage tilt (www.rba.gov.au)
- ^ front-end loading (www.rba.gov.au)
- ^ Reserve Bank of Australia, October 1997 (www.rba.gov.au)
- ^ record lows (twitter.com)
- ^ Commonwealth budget, 2021-22 (budget.gov.au)
- ^ retirement incomes review (theconversation.com)
Authors: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University