Increasing Affordability of Housing for First Home Buyers
ANZ Submission to the Productivity Commission Inquiry on First Home Ownership
3 November 2003
The housing market in Australia 4
1Introduction and summary 4
2Trends in house prices 5
3House Prices and Borrowing Capacity 8
Measures to Increase Affordability for First Home Buyers 13
1Investment Saving Accounts 13
2Shared Equity Schemes 14
3 The Housing Lifeline 15
4Stamp Duty 15
The housing market in Australia
Introduction and summary
ANZ is pleased to make this submission to the Productivity Commission’s inquiry into First Home Ownership. ANZ is one of the largest providers of home loans in Australia, with outstanding loans of $68 billion as at 30 September 2003. ANZ made housing loans of $28 billion in the year to the end of September 2003.
The subject of the inquiry is broad ranging, and this submission does not cover all of the questions canvassed in the Commission’s Issues Paper.1 As a provider of finance for housing, ANZ aims to assist the Commission in understanding what has occurred in the housing market, particularly in terms of the relationship between interest rates, borrowing and trends in house prices. We also provide comment on some of the proposals already floated as possible policy solutions, and suggest consideration of a measure to assist first home buyers to save for a deposit, while acknowledging that measures to increase the supply of housing (such as planning policies and the release of land for new developments) will have the most substantial impact in terms of reducing house prices.
High house prices have created, for some people, a ‘deposit gap’. There is no shortage of finance for house purchases, but lenders cannot prudently lend to borrowers who cannot save and invest some of their own money in the house.2 As described in Chapter 2 of this Submission, the Australian Government can help bridge the deposit gap by allowing savings for home ownership to accumulate with favourable tax treatment.
ANZ also submits that while house prices have certainly increased rapidly in recent years, the ability of borrowers to repay their mortgages has not diminished, largely because interest rates have fallen at the same time that house prices have risen. ANZ submits that there is no reason to believe that house prices (in general) have been caused by a price ‘bubble’. Rather, house prices have been determined by the fundamental factors of demand and supply.
ANZ does not believe that house prices are caused by a ‘bubble’. Where there may be certain sub-markets where bubbles have been arguably present — inner city apartments, for example — this is not true for Australia as a whole, where house prices can be explained by an environment of low interest rates and rising incomes as growth in housing supply has remained steady.
For first home buyers attempting to accumulate the 10 per cent of the purchase price required (made up of a minimum deposit of five per cent of the purchase price plus purchase costs - primarily stamp duty), the fact that the required deposit grows at the same rate as house prices could make the task difficult. For them, a policy measure such as a targeted tax incentive for designated savings could be desirable.
Measures which provide first home buyers with windfall gains — such as cuts to stamp duty levied by State Governments — are likely to be largely capitalised into prices and hence unlikely to help affordability.
Shared equity schemes, such as recently proposed by the Menzies Centre, while possibly a useful device for some people to diversify their assets, are unlikely to put much downward pressure on house prices, and could in fact have the opposite effect.
Proposals for a ‘housing life line’ likewise have some merit, but they are really a specialised form of social security that will not affect house prices in a material way and so not contribute substantially to making first homes any more affordable.
The only lasting measures that will lead to a fall in house prices are those which increase the supply of housing, especially for first home buyers.
Trends in house prices
As is well known, house prices have increased rapidly in Australia in recent years. Figure 1.1 shows the annual change in house prices over the past 20 years, in both nominal and real terms. While never approaching the massive boom of the late 1980s (when house prices increased in one year by nearly 40 per cent in nominal terms, or just over 30 per cent in real terms), since the late 1990s nominal house prices have consistently grown at least 10 per cent per year, and more recently at double that rate. Growth in real terms was subdued at the turn of the decade by the effects of the GST on inflation, but most recently it has been very strong too. On any analysis, Australia has experienced a housing boom.
Source: REIA, ANZ
Figures 1.2-1.5 show that the boom has been spread across the country. It started in Melbourne around 1997 and three or four years later spread to Sydney, Brisbane and the other capitals. Even in Hobart, house prices rose by 24 per cent in the two years to June 2003, compared to a cumulative rise of just 3 per cent over the previous 5 years.
Source: REIA, ANZ
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