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The gap between Australian house prices and incomes is only likely to grow

Greg Jericho
·4-min read

Australians love of housing continues with even more vigour during the Covid recession – powered by government incentives and record low interest rates, which look set to remain low for many years.

In November a record $23.96bn in new housing loans were taken out. This record reveals how weird this recession is – there is higher unemployment, but it is mostly driven by forces that have little to do with the underlying strength of the economy.

Related: Australia has huge growth in job vacancies – but that doesn't mean it's easy to find one | Greg Jericho

It means that for those still with a full-time job things are pretty good – especially if you are thinking about buying a home.

And so in November last year, the level of new housing loans was 24% above where it was 12 months earlier:

The big boost has come from owner-occupiers – up 31% over the 12 months compared to just a 4% growth for investors.

This lack of investor loans however is just a continuation of what has happened since 2016 when the surge of apartment building came to an end. In November the total of owner-occupier loans was 38% above what it was in January 2017, while investor loans were down 38%:

And among owner-occupiers the big surge has come for those looking to build a new home.

It has to be said that the government’s homebuilder grant of $25,000 for new builds and substantial renovations has worked as intended.

Since it came into effect in June last year, the number of home loans for the construction of houses has doubled from 3,491 in June to 7,107 in November.

So great has been the surge of home loans to build houses that in November the number of such loans was well above even the level that occurred during the GFC when the Rudd government also introduced measures to boost housing construction:

And yet there has also been a big jump in the purchase of established homes. This is less to do with government policies and grants and more to do with the record low interest rates.

It is true that even before the pandemic interest rates were at record lows, but the impact of the Reserve Bank dropping the cash rate to 0.1% might have had the opposite psychological impact that pushing it to 17% in 1989 had.

Back then rates were already high but that final increase knocked the stuffing out of those with a mortgage, and it scared the hell out of those thinking about taking out a home loan.

Similarly, if you were ever worried about holding off taking out a loan because of fears about interest rates, the RBA cutting the cash rate to 0.1% removed them. Even the most risk averse borrower was thinking now it’s the time to take out a loan.

For many this has not just meant a home loan but also a car loan – the number of which has completely recovered from the drop in April last year:

Partly this is because the option of a big spend on an overseas holiday has completely dried up, and as a result loans for travel remains barely above zero:

But will these low rates last?

We know that increases in home loans lead to an increase in house prices, and the Reserve Bank would not wish for a divergence of house prices while unemployment remains high – for such a level is unsustainable and risks a collapse once government grants end.

It also will lead to a decrease in housing affordability as incomes will not keep pace with house prices.

In the past that would have meant an increase in rates, but not now.

Shane Wright reported on Monday in the Sydney Morning Herald that the RBA is instead looking at tightening lending standards should house prices continue to rise.

It will need to do this because there is no prospect at the moment of any increase in wages and inflation that would force the RBA to lift rates.

The most recent market inflation expectations suggests inflation growth will be well below the RBA’s target of 2% throughout this year:

Last November, the Reserve Bank announced that it “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”.

This was a change on its previous advice that it would not do so until it was “confident that inflation will be sustainably within the 2–3 per cent target band”.

As of now, actual inflation has not been above 2% for over five years – and when it was wages growth had been long above 2%:

The RBA has noted that to get inflation back above 2% “wages growth will have to be materially higher than it is currently” and this “will require significant gains in employment and a return to a tight labour market”.

In essence that means unemployment back around 5%. As a result the RBA “is not expecting to increase the cash rate for at least three years”.

And so home loans are likely to continue to grow and so too will the gap between house prices and household income.