Helping first home buyers get a foot in the door

Helping first home buyers get a foot in the doorTackling housing affordability means shifting our focus from the size of mortgage repayments to how we help first home buyers get a foot in the door, says Deutsche Bank’s chief economist Adam Boyton.”There’s no quick fix to address affordability for first home buyers,” Boyton (pictured) says.Boyton and his colleagues at Deutsche Bank have analysed the share of income that a 20 per cent deposit requires – and the results are revealing. “A deposit has risen from around the annual income in the mid-1990s to almost twice the annual income today,” he says.Boyton says we are “looking at an issue of equity” – between those that do and do not own residential property. “There’s a strong intergenerational element to this story,” he says.Focusing on Sydney, Boyton has found household borrowing power increased by 286 per cent from 1995 to 2015 – roughly the same increase in Sydney house prices over that same period.More recently, “the reduction in interest rates over the past five years has been the main factor behind the increase in household borrowing power,” he explains.”If interest rates had remained at 2011 levels then household borrowing power would have risen by only 10 per cent instead of 45 per cent,” he explains.”The causes of this problem – the global collapse in interest rates – extend well beyond our shores, and therefore are difficult to deal with.”Boyton says measures such as first home buyers’ grants do nothing to ease affordability as they “generally end up in the pocket of sellers – and can act the same as an interest rate cut. All they do is increase demand, not supply, and so house prices go up.”It would take a 25 per cent drop in house prices over the next few years to bring the deposit as a share of income back to the 20 year average. In comparison, abolishing negative gearing would only lower house prices by up to two per cent, according to analysis by the Grattan Institute.”It’s important for Australians to realise that it will take around 10 years of wages growth and sideways house price growth to solve this problem.”In the meantime, we need to acknowledge that renting may become more of a long-term proposition.”While we are waiting for the housing market to correct, we need to rethink how we handle renting,” Boyton says.Rents are currently rising at the slowest pace since the mid-1990s which “would also suggest that a greater supply of dwellings is starting to have an impact”, and examples of how other markets treat renting are plentiful. “In New York, for example, you don’t need the landlord’s permission to put a hook in the wall to hang a picture.”Supply could also be “more responsive”, and this “invites a range of questions about whether house building is over-regulated. Is the building code flexible enough to drive down costs? Do we have the balance right between costs and sustainability over the long term?”These are the questions we need to ask to “encourage innovation” in how we build, Boyton says.”Even if the source of much of the recent growth in Australian house prices comes from beyond these shores, it does not mean that that there are no policy responses available. It is just that those responses are likely to play out over a considerable period of time.”