The eastern Melbourne suburb of Hawthorn is home to some of the nation's wealthiest residents.
They need to be. The median price for a house in this exclusive enclave is now $2.6 million, having jumped by $200,000 over the past 12 months on CoreLogic figures. Almost all of the homes sold this year in the suburb have achieved seven-figure price tags.
Hawthorn is also the home of federal Treasurer Josh Frydenberg, his wife Amie and their two young children. Pressed this week on whether his children would ever be able to afford to live nearby in their own homes, the usually confident Treasurer could not quite answer.
“We have seen a rise in housing prices but I think that the measures that we have introduced will enable more first-home buyers to get in the market,” he said.
“Obviously, there is both a supply and demand side to this equation. We don't have the levers … around supply as much as the states do, in terms of land release. But yes, house prices have got up.” He added household assets were five times higher than household debt, ensuring homeowners had the capacity to meet their loan obligations and low interest rates were helping more people get into the market.
CoreLogic data this week confirmed what anyone who owns a home or has endured a Saturday auction already knew – the national property market is on fire.
House values in Sydney jumped 3.5 per cent in May to be 15.1 per cent up since the start of the year. Only the Canadian Pacific coast city of Vancouver has experienced a sharper rise.
It's barely different in Melbourne, where values lifted another 2.2 per cent last month to be 9.4 per cent up since January 1. Sydney's median value is now just shy of $1.2 million, climbing by $1220 a day. Melbourne is at $908,000, inching up $770 a day.
That's just the nation's two largest property markets. Smaller capitals such as Hobart, Darwin and Canberra have seen an increase in values of more than 11 per cent this year. Darwin values alone are up more than 21 per cent over the past year. Dwelling values have also soared in tree-change country towns and sea-change bolt holes.
While the immediate focus has been on the past year, the last decade illustrates the growing wealth gap between those with a home and those without.
Data compiled by Domain shows that in 2011, about 15.5 per cent of all Sydney homes that year exchanged hands for at least $1 million. So far this year, almost 52 per cent of homes sold in Sydney exceeded the $1 million mark. It's a similar story in Melbourne, where a decade ago about 10 per cent of homes went for $1 million. So far this year, it's almost a third.
A global phenomenon
It's not only Australian home buyers facing a tough market. Property prices around the world are surging on the back of ultra-cheap interest rates and stimulus measures put in place to deal with the coronavirus pandemic.
n the United States, prices have climbed 13.2 per cent in the 12 months to the end of March. The Arizona capital, Phoenix, is leading the way with prices there up by 20 per cent. On the Pacific coast, San Diego prices have jumped by 19.1 per cent.
To the north, prices across Canada jumped 23.1 per cent in the 12 months to the end of April. From Quebec (20.1 per cent) to Vancouver (22.1 per cent), prices are on a tear.
In Britain, it is the regions that are taking off. Prices in Yorkshire (up 14 per cent) and across the north-east (up 13.7 per cent) are soaring compared to London, where they have lifted by a comparatively modest 3.7 per cent.
New Zealand has seen price rises that would make a real estate agent blush. Across a string of provincial areas such as Gisborne, Napier and Palmerston, values have jumped more than 30 per cent over the past year. In the capital Wellington, values have lifted by 23.7 per cent while in the nation's largest city, Auckland, they have jumped 15.6 per cent.
The explosion in worldwide home prices has rekindled the debate about housing affordability and the potential long-term generational damage.
Australia went into COVID-19 with some of the most expensive capital city dwelling prices in the world and there were already concerns about how low and middle-income earners as well as younger people would be able to buy without relying on the bank of mum and dad. Sydney's median house price was almost 12 times the median household income while in Melbourne it was close to 10 times. In the late 1990s, they were less than half that.
Even as the surge makes national news, no one seems prepared to take direct responsibility.
Reserve Bank deputy governor Guy Debelle this week said ultra-low interest rates were not only boosting house prices but supporting the broader economy and the jobs market.
The bank's focus is not on what it calls the “distributional” consequences of prices that make it almost impossible for young people to buy in and enriches those who already own properties. Instead, it is focused on the economy as a whole.
“There are a number of tools that can be used to address the issue, but I don't think that monetary policy is one of those tools,” Debelle said on a podcast.
The Australian Prudential Regulation Authority oversees bank lending standards but isn't going to step in to help first-time buyers either, seeing its role as limited to cracking down when risky borrowing takes place.
Famously, it tightened policies in 2016 in a move that rapidly slowed house price growth when investors were pouring into the market. APRA chairman Wayne Byres says standards have yet to slip. He is not convinced the responsibility for dealing with soaring prices falls to the Council of Financial Regulators either, saying “it's a broader government responsibility”.
The Coalition is under pressure from backbenchers to consider controversial policies such as letting first-home buyers dip into their superannuation for a deposit.
Frydenberg said affordability was being addressed, pointing to a suite of recently introduced policies including changes to its First Home Super Saver Scheme. This enables people to put extra savings into their super and pull them out when needed to help buy a house. The maximum withdrawal had been $30,000 but the cap was increased to $50,000 in last month's budget.
But the budget also contained measures which, by themselves, feed into housing demand. They included the creation of the Family Home Guarantee under which 10,000 single parents over four years will get a government guarantee of up to 18 per cent of the value of a property, leaving them to come up with a deposit of as little as 2 per cent.
In addition, the government extended its First Home Loan Deposit Scheme to another 10,000 people for 2021-22. First-time buyers under this scheme need just a 5 per cent deposit.
In both cases, people who would ordinarily be unable to enter the property market because of insufficient savings will get a government leg-up. That's more potential buyers competing for properties, a recipe any auctioneer recognises as pivotal to a bidding war.
Tackling the housing crisis is emerging as a theme for the upcoming federal election. Opposition Leader Anthony Albanese has promised to put $10 billion into a fund to build tens of thousands of low-cost homes should Labor get in. Even bank bosses have urged governments to fast-track housing approvals.
But future promises of home building while current institutions and governments pass the buck will be of scant comfort to those dealing with the nation's priciest cities right now.
PK Property Group director Peter Kelaher says 2021 has been the “craziest” period he has seen in 30 years of business. In the past month, he has completed $60 million of home purchases for clients.
“This is the first time in a long time that I have seen the general marketplace not just in Sydney, but in NSW and most other states, firing on all cylinders at the same time,” he says. “It's just fuelling an emotional property boom.”
While there have been major booms in the past, notably after the global financial crisis, Kelaher says first-home buyers were previously able to buy in the outer suburbs. They've now been pushed into country towns, where property markets are running just as hot.
“The economy is going quite well, employment is coming up, so I am thinking we will have a steady market through winter. If stock is short in winter it'll keep being strong,” he says. “People are trading up and down. Downsizers who have realised they aren't travelling for years are in the market.”
The risks of rising prices
So far there are no major signs current homeowners have taken on more than they can handle to get into the market.
Ratings agency S&P Global tracks the proportion of loans in residential mortgage-backed securities that are at least 30 days in arrears. Its report this week shows in most of the country, arrears rates are falling. At the height of the pandemic, tens of thousands of homeowners took up mortgage holidays but the sharp recovery in jobs and the economy has meant the majority went back to their usual repayment plan.
In Victoria, the highest rate is in the Melbourne suburb of Altona East at almost 7 per cent. But it is an outlier, with the rate less than 2 per cent across the state and most of Melbourne.
The Sydney suburb of Cecil Hills has NSW's highest arrears rate at 4.36 per cent. Sydney's overall arrears are slightly higher than Melbourne's but still quite low.
A sign of how high house prices and government assistance have helped drive down arrears rates is being played out in the suburbs of Perth. Years of falling prices and stagnant wages growth meant many suburbs in the WA capital had high arrears rates. But they have all fallen over the past year by as much as a third.
Of greater concern, S&P notes more than 42 per cent of loans in these mortgage-backed securities have higher loan-to-value ratios. Two years ago, the proportion was less than 37 per cent.
But the agency observes low interest rates and government stimulus have made a large contribution to the market's overall strength.
Both will come to end, although the RBA this week maintained interest rates will stay on hold until 2024 while the federal government's own budget forecasts deficits for the rest of the decade.
Commercial banks are also playing a role. Lenders have reduced the sticker-price shock of high mortgage repayments on increasingly expensive homes by extending the length of time people have to pay.
Until the GFC, the traditional mortgage ran for 25 years. Now borrowers can be expected to have 30 years of repayments. It might seem a win for the buyer, who can make smaller payments, but it's a bigger win for the lender.
For instance: if you borrowed $450,000 at 2.4 per cent over 25 years, the monthly repayment would be about $2006. Over the life of the loan, you would pay $152,000 in interest and bank fees.
Now extend that loan out to 30 years. The repayment has fallen sharply, to $1765 a month. But the amount paid in interest and bank fees rises to more than $185,000. The borrower has a home and the bank has captured $33,000 in risk-free cream on a $450,000 loan.
Where lenders have not been able to assist is an issue the federal government and RBA are struggling with: stagnant wage growth. In the past, rising wages have helped owners pay down their loans more quickly. This is where the run-up in house prices could prove a long-term issue.
Assume our borrower with the 30-year, $450,000 mortgage is earning $100,000 a year. Their $1765 monthly repayment gobbles up about 30 per cent of their take-home pay. If they enjoyed a 3 per cent average annual pay rise over the next decade, their 2030 pre-tax income would be closer to $136,000. The $1765-a-month repayment would fall to 21 per cent of their take-home pay. Income inflation has reduced the burden of the mortgage.
Yet if our borrower averages only 2 per cent wage rises over the next 10 years, the mortgage's share of take-home pay would be more than 23 per cent. All this is predicated on interest rates not increasing over a 10-year period.
What happens next
One of the biggest factors in house prices, here and overseas, has been the collapse in interest rates. Central banks, in a desperate attempt to protect their economies through the pandemic, have delivered trillions of dollars of support via ultra-low rates and quantitative easing.
This has translated into a string of Australian lenders offering variable and fixed interest rates under 2 per cent. The last increase in official interest rates in Australia was back in November 2010. Since then, more than a million first-home buyers have taken on a mortgage – almost 307,000 in Victoria and 219,000 in NSW – encouraged by various state and federal government incentive schemes and low rates.
Over the past year alone, 46,500 Victorian first-time buyers and 35,900 in NSW have entered the market. None know what an interest-rate rise means to their repayments.
The run-up in prices has occurred despite population growth across Australia, and most of the world, falling through the pandemic. Australia's population is expecting its smallest growth since World War I. A net 96,600 people are forecast to leave the country this financial year with another 77,400 to roll through the departure lounge in 2021-22. Both Sydney and Melbourne have lost residents to the regions or other parts of the country.
Analysts believe that, eventually, the heat will come out of the market. Just not yet.
Another 10 per cent rise this year and a similar increase in 2022 are considered likely. But it's how it ends – in a bang or a whimper – that is of interest to homeowners and potential buyers.
AMP Capital chief economist Shane Oliver, who says fear of missing out is a key contributor to the current surge, can see a gradual end.
He notes poor affordability will drive out buyers, particularly those looking for their first property. There are already signs of that with a slight drop in first-time numbers over the past two months (only to be replaced by investors).
APRA and the RBA will tighten standards, even if not officially.
The drop in migration, the end to government stimulus programs and a realisation among those forced to work from home through the pandemic that they do not have to live in Sydney or Melbourne will all slow growth.
Finally, the biggest factor continues to be interest rates. “While variable rate hikes are probably two years away at least, three and four-year-plus fixed mortgage rates have started to move up with the rise in bond yields and further increases are likely. This is significant, as fixed rates now account for around 40 per cent of new housing finance,” Oliver says.
“So it's likely that the 30-year tailwind for the property market of falling interest rates has now run its course.”
That might be the saving grace for those struggling to get into one of the world's most expensive property markets.
* Source - The Sydney Morning Herald - Shane Wright and Jennifer Duke