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Housing Costs: Purchasing a home
MOST IMPORTANT REASONS FOR PURCHASING A HOME(a), 1991
(b) Includes other category and reason not stated.
Source: Housing Characteristics and Decisions: A Comparative Study of Sydney, Melbourne, Adelaide and Canberra (cat. no. 8710.0).
Borrowing the money
Most Australians borrow money to buy their home. Banks have always dominated the home lending market and until 1994 were increasing that dominance. However, their share of the market has recently been reduced slightly by other lenders, such as mortgage managers. The statistical picture is somewhat distorted by a number of building societies becoming banks.
Before the deregulation of the financial industry in the mid 1980s (when foreign banks were allowed into Australia and foreign investment was liberalised) and before the ceiling of 13.5% on housing interest rates was removed in April 1986 from new loans, home loans were fairly inflexible. The number of loans issued between 1976 and 1986 remained relatively stable. Home loans were typically offered at a variable interest rate for a period of 20-25 years. Furthermore, lending institutions protected themselves by conservative policies. For example, they required borrowers to have a savings record with them, to contribute at least 25% of the value of the house and that repayments did not exceed 25% of the borrower's income3.
Since deregulation, more flexible housing loans have become available. These include various types of low start loans (where the interest rate initially paid is less than a traditional mortgage but increases later in some form) and fixed rate loans (where the interest rate is fixed for a set period, thereby protecting the borrower from interest increase over that period)3.
Prior to the removal of the interest rate ceiling, housing loans were a less attractive investment for lending institutions because of the requirement to lend below the market rate of interest. Consequently, limited funds were available for housing loans. After removal of the ceiling, higher interest rates increased the supply of housing finance4. During the 12 months prior to April 1986 an average of 24,200 dwellings were financed per month. During 1988 an average of 33,200 dwellings were financed per month.
However, between 1988 and 1990 interest rates that reached as high as 17% and substantial increases in house prices, particularly in some cities, reduced the demand for housing loans. The rapidly rising prices led to a widening deposit gap for prospective first-home buyers. The deposit required to obtain a loan increased at a faster rate than they could save5.
The early 1990s were characterised by more stable house prices and steadily decreasing interest rates. These factors improved housing affordability and led to a dramatic increase in the number of dwellings financed (see Australian Social Trends 1994, Housing affordability). For the month of March 1994 the number of dwellings financed reached a peak of 57,200. The monthly figures for 1996 ranged between 32,900 and 42,600.
Despite the greater accessibility of home finance, low income earners may nevertheless find themselves unable to save the deposit and meet repayments for a loan. A survey carried out in Sydney, Melbourne, Adelaide and Canberra in 1991 found that, among rental tenants, issues of affordability were the most commonly cited reasons for not having bought a home2. (see Australian Social Trends 1994, Housing affordability).
NUMBER OF DWELLINGS FINANCED PER MONTH(a)
(a) Based on trend data.
Source: Housing Finance for Owner Occupation, Australia (cat. no. 5609.0).
How big a debt?
The ABS housing finance collection collates and publishes home finance data on loans from major lending institutions made by people purchasing homes for their own use. The number of loans made each month and the total amount borrowed each month can be used to calculate an average amount borrowed (these figures are not necessarily the precise average per dwelling because a house with two mortgages will be counted as two separate loans).
First home buyers borrow slightly less money on average than non-first home buyers. In 1996, the average amount borrowed by first home buyers was $95,100. Buyers other than first-home buyers borrowed $100,300 on average.
The average ordinary-time earnings (earnings excluding overtime) of full-time male employees can be compared to the average loan taken out for newly erected dwellings. This reveals that over the period 1983 to 1996 the average loan has increased from about twice average annual earnings to about three times. This suggests that people are borrowing and spending proportionally more on a house than they did in the past. Part of this relative increase in borrowing may be related to the increase in the labour force participation of women (45% to 54% over the period 1984 to 1996). Researchers have suggested that this may be linked to the affordability of consumer loans, particularly housing loans6.
Part of the relative increase in borrowings is attributable to the booming prices that occurred in the mid to late 1980s when house prices increased at a faster rate than the Consumer Price Index (CPI). This boom was due to an increase in demand for real estate due to factors such as high migration levels, easier access to finance, and the decrease in stock market prices that made real estate attractive to investors4.
Another factor that may partly explain the relative increase in borrowings is that the ‘average’ home has changed, even over the last 10 years. Building in brick has continued to increase in popularity while the use of timber has declined. The average house has grown bigger; in 1981, 17% had four or more bedrooms compared with 23% in 1994. Increased car ownership has made car accommodation a common feature; while recently, ensuite bathrooms have also become common features. Even over the relatively short period between 1990 and 1994 the proportion of separate houses with more than one bathroom has increased from 26% to 29% (see Australian Social Trends 1995, Trends in housing).
SIZE OF AVERAGE BANK LOAN FOR A NEWLY ERECTED DWELLING PURCHASED FOR OWNER OCCUPATION AND AVERAGE ANNUAL ORDINARY-TIME MALE FULL-TIME EARNINGS
Source: Housing Finance for Owner Occupation, Australia (cat. no. 5609.0) and Average Weekly Earnings (unpublished data).
The economic advantage of home ownership
As home purchasers pay off their mortgage, the proportion of their mortgaged property that they own increases. This proportion is commonly called their equity. Since equity increases with time, it generally increases with the age of the mortgagee. In 1994, the median equity of home purchasers aged 25-34 was 45% while that for home purchasers aged over 65 was 97%. Outright ownership is therefore more commonly enjoyed by older people: in 1994 outright owners had a median age of 59 and 81% of them were aged 45 or older.
In 1994, 42% of houses were owned outright. Because they no longer have to pay mortgage repayments, these households enjoyed reduced housing costs and so effectively improved their economic position. Among outright home owners, only 5% of households spent more than 30% of their income on housing costs (these households mainly had low incomes and were most likely occupied by retirees). Home purchasers were the most likely to spend more than 30% of their income on housing costs: 29% overall, though the rate increased to over 60% among low-income purchasers.
PROPORTION OF HOUSEHOLDS SPENDING MORE THAN 30% OF THEIR INCOME ON HOUSING COSTS(a), 1994
(a) Comprises rates (general and water) payments, rent, mortgage repayments, body corporate fees, repayments on loans for alterations and additions, and repairs and maintenance expenses.
Source: Australian Housing Survey 1994 (unpublished data).
MEDIAN PERCENTAGE EQUITY OF HOME PURCHASERS(a)
(a) Only includes households that were purchasing their dwelling and that stated the outstanding loan and estimated value of their property.
Source: Australian Housing Survey 1994 (unpublished data).
1 The National Housing Strategy 1991, Australian Housing: the Demographic, Economic and Social Environment, Issues Paper No. 1, AGPS, Canberra.
2 The National Housing Strategy and Australian Bureau of Statistics 1991, Housing Characteristics and Decisions: A Comparative Study of Sydney, Melbourne, Adelaide and Canberra, cat. no. 8710.0, ABS, Canberra.
3 The National Housing Strategy 1991, Financing Australian Housing: The Issues, Issues Paper No. 3, AGPS, Canberra.
4 Australian Bureau of Statistics 1996, Housing, Australia: A Statistical Overview, cat. no. 1320.0, ABS, Canberra.
5 Australian Bureau of Statistics 1992, Housing, Australia: A Statistical Overview, cat. no. 1320.0, ABS, Canberra.
6 Connolly, G. ‘Causality between consumer loan affordability and the female full-time participation rate in the Australian labour force’, Australian Bulletin of Labour, Vol. 22, No. 3, September 1996.