How Australia’s Two Iron Laws Are Putting Pressure On Every Generation | Cameron Murray
Each generation has its own housing problems. With interest rates currently rising, the late 1980s is a time we are going to hear more about.
This period saw mortgage interest rates soar from 9% in 1983 to their peak of 17% in 1990. This was difficult for home buyers. It also left us with the legacy of family conversations about “how hard buying a house was with 17% interest rates” and how “we didn’t waste our avocado money on toast like you do it now”.
It is true that home buyers in this period had difficulty paying their mortgages.
But any comparison between eras must recognize that prices were lower then because of high interest rates, just as today’s high prices are high because of low interest rates.
My view as a housing economist is that every generation faces the same two iron laws of housing markets. First, rents and prices tend towards the limit that tenants and buyers can pay. Second, the market moves in cycles and good times to buy don’t last.
But these problems seem different for each generation.
In the 1930s, it was working-class slum conditions in the wake of the Great Depression. As private housing markets satisfied the middle and upper classes, poor working class conditions began to force the hand of government to intervene in housing. A Review of 1947, The housing problem in Australianoted that during this period low-income groups were “severely neglected” and “could not afford modern quality housing and adequate food and clothing”.
Like today, rents tended towards the limit that people could pay, whatever the conditions.
In the post-war period, shortages of materials for new housing were the main problem. What was unique to this era was the government’s heavy-handed involvement in housing development and supply for the working class.
Governments acted as property developers and intervened in supply chains to make labor and materials available for the construction of retrofit housing.
This period also saw one last sustained increase in homeownership rates – from 52% in 1947 to over 70% in 1961. By 2016, homeownership had fallen back to 65%.
In the 1960s, conservative mortgages, requiring high deposits, savings requirements, stable jobs, and family structures, created a different limit on who could buy homes.
Related issues still exist today. The challenge of saving a down payment cuts across both sides of politics, leading to the announcement of Labor’s shared equity scheme and the coalition’s housing pension scheme during the election period. But the iron laws of housing suggest that any advantage will be temporary.
The modern era began in 1993 when Australia began managing the macro economy with monetary policy. Higher interest rates are used to reduce house prices and spending, and low rates to stimulate them.
This is why, in 2020, I predicted that house prices would rise 20% rather than fall 20%, despite the economic panic.
This led to an opportune time to buy. First-time buyers have benefited, and the number of first-time buyer mortgages rose to 171,000 in the 2020-21 financial year. The average over the previous three years was just 95,000.
The second iron law then came into effect. Real estate prices have increased. And as they did, the advantage of low interest rates dissipated. Now, as interest rates rise, the situation is only getting worse.
This is why the 0.5% hike in the Reserve Bank of Australia’s key interest rate this week has generated so much discussion. If your mortgage interest rate is 2%, going to 2.5% increases your interest payments by 25%. It’s like going from a mortgage interest rate of 10% to 12.5%.
Buyers today will be pushed to their limit, just as they were by the rise in interest rates of the late 1980s. This is the first iron law of housing after all. It is only now that high prices mean that the limit is reached at much lower interest rates. It’s not the avocado toast.