Sunday, May 1

The housing affordability that will matter

When people talk about housing affordability, they are not always talking about the same thing. There are three distinct housing affordabilities:

  • purchase affordability - how much it costs to buy a new or existing house at the time of the purchase,
  • repayment affordability- how much it costs to service a mortgage on a house, and
  • rental affordability- how much it costs to rent a house.

In this post I want to talk about the one that will be important over the next 18 months: repayment affordability. 

As interest rates were lowered following the COVID pandemic, these were capitalised into higher housing prices. This is a long run trend, since the peak home loan rates in 1990. As lower and lower interest rates have allowed borrowers to borrow more money, this has contributed to higher and higher house purchase prices. [Note, this is not the only contributor to growing house prices; for example, long-run growth in two income households has also been important].

But this is all about to change. It has been more than 30 years since Australia has operated in world of high inflation. Most of our nation’s policy thinking is now rooted in the low interest world of recent decades. Yet the latest headline inflation figure of 5.1 per cent suggests we might be about to re-experience high inflation (above the agreed target of keeping inflation within a 2 to 3 per cent per year range).

Higher inflation means the Reserve Bank of Australia (RBA) will lift interest rates to bring downward pressure on inflation. The ASX RBA rate tracker indicates there is a one-third probability that interest rates will increase on Tuesday this week. Rates will almost certainly rise by the first Tuesday in June. Over the next 18 months, the markets think that the RBA cash target rate will rise from the current target of 0.1 per cent to just over 3.3 per cent. That is a substantial increase.

What does this mean for variable rate home loans? The short answer is that they are likely to increase by a similar amount. By December they may be around 2.5 per cent higher, and by June next year they may be 3.2 per cent higher. 

According to the ABS, the average new home loan for an owner occupier was \$595,873 in February 2022, down from \$620,315 in January 2022. According to the RBA, owner-occupier variable home loan rates are typically around 2.5 per cent, per year. 

A 30 year, \$600,000  loan, with an interest rate of 2.5% has monthly repayments of \$2371. At a notional 5 per cent home loan borrowing rates in December 2022, the repayment increases to \$3221 per month. And at 5.7 per cent in September 2023, the repayment would be \$3482 per month. 

Even for people whose loan is half that amount, they will experience a dramatic increase in household costs. A 25 year, \$300,000 loan, at a 2.5% interest rate has a monthly repayment of \$1346 per month. At 5% interest rate, the repayment becomes \$1754. At 5.7% the monthly repayment is \$1878. 

If inflation breaks out as the market expects, and the RBA reacts as the market expects, repayment affordability will become the big concern of middle Australia over the next 18 months. 

Ironically, when interest rates on home loans appreciate, house prices are likely to depreciate. This means that purchase affordability should improve over the next 18 months (albeit, not as much as some would hope as house prices are often what economists call sticky-downwards). Reduced house prices will leave some recent home-buyers with a difficult decision. Do they stay with an increased mortgage they are finding difficult to afford, or do they sell their new house and take a loss because house prices have fallen (what is good for the buyer is bad for the seller).

Saturday, December 25

Christmas 2021 - a complete set of Covid charts for Australia

At Christmas 2019 I was newly retired and completely unaware of the global pandemic that was already nascent in Wuhan China. The past two years have been a rough, roller-coaster ride. The shock of the initial cases and deaths. Victoria's second wave. The serendipity that flattening the curve managed to achieve the elimination of local transmission. A slower start to mass vaccination in Australia compared with other high income nations. The arrival of the more infectious Delta variant, which proved challenging in NSW and Victoria, and the resulting interstate travel restrictions. And in the past four weeks, the arrival of the even more infectious Omicron variant. Largely as a result of Omicron, 14 per cent of all Australian cases occurred in the past week.









So far, the case burden of COVID-19 has been felt the most in Victoria, followed by NSW.

Recent case growth with Omicron can be mapped in a few ways. Let's focus on NSW, as it has a longer Omicron growth trajectory. We are seeing daily new case numbers double every 4 days or so in NSW. The effective reproduction number is around 2 in NSW (every infected person infects two others on average).
There have been 2182 deaths in Australia from COVID-19. More than half of these deaths were in Victoria. While the total is a relatively small number by international comparison, it is not insignificant.

Where there has been some good news is in the death rates. Last year during Victoria's second wave we saw 4.3 deaths for every 100 diagnosed cases.

Currently, we are seeing 0.51 deaths per 100 cases in Victoria and 0.38 in NSW, a tenfold improvement on the Victorian second wave on 2020. This can be attributed to a number of factors including mass vaccination and better treatment regimes.
A key policy concern with COVID is the capacity of the hospital system to cope with the peak demand. So far, all hospital systems have managed, albeit with some pressure during the Delta wave in the second half of 2021.

The present concern for hospital systems is the rapidly increasing case numbers associated with the Omicron variant. While the international evidence is that Omicron cases are less severe there are a couple of points of concern. The first is that the unvaccinated in Australia are unlikely to have any natural immunity. The second is that while Omicron might result in less severe disease, the volume of cases may still overwhelm the hospital system. The NSW data suggests that we are not seeing the same rate of hospitalisation (but there are a few caveats here). The picture should be much clearer by new year's day.


Another pressure from the emergent Omicron outbreak is on testing systems. We are seeing increased testing and positivity rates (noting that positivity rates may be impacted by the recent availability of rapid antigen tests).



Finally, let's look at vaccination rates. After a slow start, Australia is among the most vaccinated nations in the world.

As usual, the code for these charts is available on my GitHub site. I use covidlive.com.au as the data source for these charts.

Saturday, December 12

Impact of COVID-19 on the Australian Economy

Compared with the rest of the world, Australia has managed the COVID-19 pandemic well. Cumulatively, there have been relatively few cases and deaths per capita, and there is currently little if any local transmission of the virus. 

Nonetheless, the Australian economy has experienced its largest contraction in at least 60 years. In the next chart, we can see the blue line, representing growth in the size of the economy, dips lower than ever since the ABS has been collecting this data.

While the economy is no longer in recession, it remains 3.8 per cent smaller than it was a year ago. Normally, it grows by around 2 per cent each year. 

Supporting economic growth has been substantial government spending on payments to individuals. Unemployment benefits have almost tripled from where they were, and total Commonwealth social assistance payments are up by around $15 billion every quarter.


Household expenditure, in part supported by government payments, has contributed to the economic improvement in Q3 2020. But spending by category is very mixed, and the spending patterns for Victoria, with its extended lock down, differ from the rest of Australia. Of interest is the increased spending on food and alcohol, and the decreased expenditure on hotels, cafes, transport and vehicles. The impact on health spending is also worth noting.
































We can also see the impact of the COVID-19 recession on industry sectors. We can use the Gross Value Added (GVA) table from the National Accounts to identify the industry sectors that have been most impacted by the pandemic. Construction services are down \$2.5 billion/quarter, as is air transport. Accommodation and food services were down \$4.5 billion in Q2 and \$2 billion in Q3. Property operators and real estate services were down \$2.5 billion in Q2 and \$1.5 billion in Q3. Administrative support services are down \$3.5 billion/quarter. Health care and social assistance had a \$3 billion drop in Q2, but this recovered in Q3. The airline industry has suffered the biggest percentage drop.


















We can also see the mixed impact of COVID-19 on the economy in the retail turnover data. Again we can see the impact of the second lock down in Victoria.


 

Turning to the labour market, the unemployment rate has risen from 5 to 7 per cent as a result of the pandemic. With the unemployment rate for men and women rising similarly. 


The participation rate was hugely impacted by the pandemic, but much of that impact has now reversed. In April and May, proportionately more women left the labour market than men.


While part-time employment numbers appear to have recovered, the number employed full-time remains below the pre-pandemic levels. The number in the labour force has largely recovered.










In aggregate, men and women are working fewer hours than before the pandemic. In April and May, women experienced a proportionately larger reduction in hours worked compared with men, but this is no longer the case. 




In terms of ages, it looks like younger workers have been most impacted by COVID-19.



The extended lockdown has had a bigger impact on the Victorian labour market.