Housing Affordability and Gen Y
Feb 07, 2018
Housing prices have increased steadily for decades, but the last two years really blew the socks off real estate punters.
According to RiskWise Property Research, a housing boom and a huge share of investors in the market propelled property prices skyward, particularly for real estate ‘hot houses’ Sydney and Melbourne.
RiskWise CEO Doron Peleg says the fallout of the price explosion has been far-reaching.
“First, the Australian Prudential Regulation Authority (APRA) stepped in and introduced tighter lending criteria in an attempt to curb domestic and overseas investor activity,” Mr Peleg said.
“Second, our prime first-homebuying generations (Gen Y and Millennials) found themselves taking yet another step backward in their quest for home ownership.
“The ramifications of our young people missing out on their ‘white picket fence’ is still yet to be realised – but we’ll see it played out down the track when these generations progress through life without taking an asset into retirement or having the means to generate independent wealth through property.”
He said while there had been an improvement in the number of first home buyers in the market since the cinching of investor lending, the figures weren’t that reassuring, and unaffordability remained a crisis for the majority of the younger generations.
Mr Peleg said complicating the crisis was that young people were getting married and having children later.
“Living close to employment hubs is far more important to younger generations than living in outlying family-friendly suburbs,” he said.
“And, of course, it’s the highly-populated, highly-popular white-collar suburbs that are proving the most difficult for our young people to enter.
“Those who are able to secure lucrative employment at a young age may have the means to service a mortgage in a high-priced area. For the rest, there are limited options available.”
He said a survey of more than 1000 Australians run by Mozo (as reported by AFR) showed “around 30 per cent of parents, or more than a million families, assisted their children to buy a home, lending more than $64,000 per family on average. Two-thirds of them don't expect to be repaid, even in part, let alone in full.”
“Of course, the issues there are obvious … not everyone’s parents are in a financial position to bankroll their child, let alone multiple children, and it still may not address the issue of servicing the loan long-term,” he said.
“And, if we peek at the future of this family-based lending system, we have to wonder how it will affect the parents – the baby boomers – as they move into retirement having funded multiple deposits without repayment or a share in the asset.”
Mr Peleg said ‘Rentvesting’ was a popular strategy with young people, who bought a cheaper investment property in a location they could afford, then rented where they needed to live.
“This gives them the ability to enter the market whilst still living close to the amenities and employment they need,” he said.
“Negative gearing, tax deductions and rental income also boost their ability to afford their first home on an ongoing basis.”
A survey by Mortgage Choice showed around a third of property investors ‘rentvested’. However, he said, this outwardly effective tool had become more difficult with APRA’s policy changes, and with lenders now controlling their own risk with self-imposed limitations on investor loans.
Some lenders have ‘black listed’ loans for areas where oversupply is a potential issue; some have restricted or discontinued interest-only loans and investor refinancing.
Ironically, the restrictions that have been put in place to control price growth and give owner-occupiers a bigger share of the market have also made it difficult for young people to use this creative strategy to buy and afford their first property.
“Perhaps that’s for the best though, as the risks associated with buying an investment as your first property are higher, particularly due to poor cash flow and poor or negative capital growth risk,” Mr Peleg said.
He said the unaffordability issue was high on the Australian radar, and both the Liberal party and the Coalition recognised it as significant on the agenda. “Labor’s proposal is to limit negative gearing to new dwellings only, which has inspired a great deal of lively conversation and prophesying of the ramifications.
“However, in terms of housing affordability, the limiting of negative gearing appears to be a solid solution. The RBA is developing a paper on these ramifications, revealing that the complete removal of negative gearing would increase the average homeownership rate from 66.7% to 72.2%.”
In particular, the paper states that the changes are greatest for ‘young and mid-aged households’. Homeownership rates for low income people under 35 is expected to increase by 26.4%, while under-35s with higher incomes are expected to increase by up to 104%.
“Thus, removing or limiting negative gearing from this point forward appears to be the most effective and long-term solution to the housing affordability issue,” Mr Peleg said.
“Relying on the wealth of family cannot be sustained for generations; the attempts to squash investor activity make rentvesting a difficult first ambition.
“To create sustainable change that improves property acquisition for generations to come, and close the gap between the ‘haves’ and the ‘have nots’, we must look at revolutionising the negative gearing machine that has made it so easy for investors to contribute to our escalating housing values.”