An introduction to the four great housing market lies

The price to income ratio for homes is soaring. Australians are able to pay the mortgage because rates are so low.

How come house prices keep going higher when virtually every analyst forecast a slowdown in growth this year?

House prices are now so stretched that even one of the ­nation’s biggest home builders, Mark Steinert of Stockland, has raised the idea of reforms on ­property tax breaks. Home loan king Aussie John Symond has also ventured forth with a carefully phrased suggestion that a new ­review of negative gearing might be sensible.

But hold on, don’t regulators continually express calm in relation to key factors driving house prices? Everyone from the ­Reserve Bank of Australia to housing industry professionals quote numbers that are flawed. Let’s call them four great lies of the residential market. Here they are:

Mortgage costs

Luci Ellis, deputy governor of the RBA, said recently the Australian market was somewhere “in the middle of the pack” when it comes to the issue of the ability to repay mortgages. She quoted high-­income families in a strong position to repay and illustrated the underlying strength of mortgage offset accounts.

But it’s a fallacy. The price-to-income ratio for homes in Australia is soaring. Australians are able to pay the mortgage each month not because their incomes are high but because the rates are so low. We still have the lowest interest rates in a generation. There are even some economists clinging to the notion there will be more cuts. The point is our mortgage services costs are reasonable now — when rates move higher, and they can only move higher from here, this line of thinking will be revealed as deeply flawed.

Put it this way: if interest rates doubled from 1.5 per cent to 3 per cent they would still be less than any long-term average rate — historically, it would be no big deal. But in terms of mortgage servicing costs, especially in an exceptionally low-growth wage environment, this will be a major problem.

20 per cent deposits

Yes, this is the hardest one to ­believe of all the recent statistics. It comes from an APRA report mid-week, which says 79 per cent of new mortgages had a deposit of 20 per cent or more. But the report deals in averages — the average home loan, for example, according to APRA is $250,000. No doubt the figure is accurate — unfortunately for those assessing the valuation of metropolitan properties is valueless.

Worse still, commentators calculate savings schemes for first-home buyers on the back of these numbers — they say it takes eight years to save for a $200,000 deposit on a median-priced house in Sydney. What a load of baloney! First-home buyers putting $200,000 cash on the table have very rarely saved for eight years but usually they will be helped by their parents — a statistic which is not tracked.

Interest-only loans

Actually, interest-only loans are now standing at $300 billion — they are very nearly 40 per cent of the market. Yes, they have slipped ever so slightly as a percentage of the overall market, but as a single factor it is very significant.

Let’s put it another way; 40 per cent of new mortgages going out the door at the major banks are taken by people who have no ­intention whatsoever of paying down the principal. They are banking 100 per cent on price ­appreciation to make money.

Worse still, interest-only loans are promoted to investors who are heavily focused on negative gearing. In other words, they are happy to make a loss on annual running of the property because they get tax deductions. But what if the prices don’t go up and the losses continue in the annual running costs of the property? Interest-only loans are the market’s fault line.

We’ve been here before

You might expect property experts to have longer memories than they seem to display. We have had plenty of patches in the property market that have strong parallels with this year. But they have not occurred with record-low interest rates at the same time.

Having said that, the researcher has to go back quite some time to get anything that really matches the 18 per cent lift in prices Sydney has pulled in over the past year.

For example, if you go back to the post-Olympic market in Sydney in 2003 you can see that house prices jumped 17 per cent in 12 months to $454,000. Soon afterwards the Sydney market had an extended period of drifting prices.

Go back further still and there is a year when Sydney prices jumped 24 per cent — that was 1989 as hordes of investors lost heart in the post-1987 stockmarket and switched cash into property. Lies, misunderstanding and earnest but misleading statistics … welcome to the Australian housing market.