RBA: Saving a deposit the biggest housing barrier

The Reserve Bank of Australia’s (RBA) submission to the House of Representatives Standing Committee on Tax and Revenue’s inquiry into Housing Affordability and Supply suggests that saving for a deposit is the biggest hurdle to home ownership.

The RBA shows that while the ratio of house prices to income has soared, especially across Sydney and Melbourne:

House price to income ratio

Actual mortgage repayments have shrunk as a proportion of income thanks to falling interest rates:

Mortgage serviceability Housing loan repayments

According to the RBA:

It cannot be concluded from the ratio of average prices to average income alone that home ownership has become ‘unaffordable’ for a typical first‐home buyer household.

Since most homeowners borrow to finance their purchase, a complementary metric of how affordability is changing is the cost of servicing mortgage debt, relative to income. Mortgage serviceability depends on prevailing mortgage interest rates, as well as housing prices and income. The decline in interest rates over the past few years has lowered the cost of servicing a typical new mortgage as a share of median income). On this metric, housing affordability has improved considerably…

Total interest payments have fallen as a share of income, while scheduled principal payments have increased. This is a feature of standard mortgage contracts, where repayments are held constant over the life of a loan if interest rates also remain constant. Under this payment structure, repayments of principal are higher in the early part of the life of the mortgage when interest rates are lower. In addition, by maintaining mortgage payments steady as interest rates fall, existing homeowners can pay off their principal faster than the mortgage contract requires. For the households that make these voluntary additional repayments, this implies that current repayment rates are affordable given their incomes and other financial obligations…

The bigger problem for first home buyers, according to the RBA, is that the size of the deposit required has ballooned:

This is because lower interest rates increase capacity to borrow and pay for housing for both current owners and potential first‐time buyers. Housing prices therefore tend to be bid up, which increases the size of the deposit first‐time buyers must accumulate and/or reduces the size/quality of the property they can purchase. Relatively low income growth over the past decade has also made it harder to accumulate the deposit. The estimated average deposit required for first‐home buyers has risen as a share of income over the past decade, as has the time to save for a deposit for buyers in most cities…

Average first home buyer deposit Time to save housing deposit

When we talk about ‘housing affordability’, the focus should really be on the ability of first home buyers to enter the housing market and pay-off their homes. In my view, their situation has gotten worse, as evident by:

  • The long-term decline in home ownership among under 35s;
  • The huge deposit required to obtain a mortgage;
  • The big rise in the ‘bank of mum & dad’; and
  • The casualisation of the work force, rising labour underutilisation, and low wage growth.

While it has never been cheaper in aggregate to service a mortgage, it has also never been more expensive to save for a deposit or pay off the loan.

Unconventional Economist

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