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First home buyer boom masks a much bigger problem

Census data shows the overall rate of home ownership has remained pretty stable at close to 70 per cent since the 1960s, but it is a very different story for younger age groups.

For those aged between 30 and 34, for example, the home ownership rate has fallen from 64 per cent in 1971, to 50 per cent in the latest census data from 2016.

The surge in house prices over the decades is not the only reason for the change, as couples have also been getting married at an older age, thereby delaying the big purchase. But higher-cost housing is undoubtedly a key factor.

When the census is held later this year, it’s expected to show a further decline in home ownership among younger generations.

Why can’t the recent surge in first home buyers reverse this unfortunate trend?

Because history suggests that over the longer term, anything that increases Australians’ home-buying power ultimately leads to higher prices.

If every first home buyer has a slightly bigger budget thanks to a government grant, they end up competing with other first home buyers, who are also cashed up, and bid up prices.

The same goes for ultra-low interest rates, which are now turbo-charging the property market.

Many fixed interest rates are below 2 per cent, and the Reserve Bank says it does not expect to raise the cash rate until 2024 because it wants to support the fragile economy. Prospective buyers might therefore borrow a bit more to get an edge at auction, but when everyone else is doing the same thing, it just inflates prices.

That seems to be happening now, with figures from CoreLogic last week showing Sydney dwelling prices skyrocketed by 3.7 per cent in March, while Melbourne’s shot up by 2.4 per cent.

Prices probably can’t keep growing as rapidly as that for long, but the banks are convinced the wider property boom has quite a bit further to run.

ANZ Bank economists recently predicted Sydney house prices would surge by 19 per cent over 2021, and warned more Millennials were struggling to buy a home.

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They pointed out the biggest hurdle many first home buyers face is scraping together a big enough deposit. That’s unlikely to get any easier at a time when wage growth is minimal, savings account interest rates are near zero, and the COVID-19 recession led to disproportionate job losses among younger workers.

Financial regulators, meanwhile, have made it clear they are watching the buoyant housing market closely, and could intervene if they see a rise in risky lending. So far, however, a regulatory crackdown does not look imminent.

And even if regulators do intervene, some believe this could have the unintended consequence of holding back credit to first home buyers. That’s because the higher-risk loans that could be targeted by regulators may include those to people with skinny deposits — many of whom are first-time buyers.

All up, it seems inevitable that if prices keep rising at anywhere near their current pace, housing affordability will start occupying a bigger place in political debate.

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This is, of course, what happened in the last boom, leading Labor to promise to curb negative gearing and capital gains tax concessions at the 2019 election.

The Coalition nailed its colours to the mast on the issue, warning Labor’s plan would “smash” house prices. So it’s a safe bet the government won’t propose anything that might lead to lower property values this time around.

But if recent price rises continue, the growing costs of the property boom on younger generations will only become more obvious — notwithstanding the recent rise in first home buyers.

Ross Gittins is on leave.

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