Housing is enough of a worry – don't scare us with warnings of rising interest rates | Greg Jericho

Worrying about higher rates – let alone those we haven’t had since 1996 – is a bit odd right now

To the surprise of no one the latest residential house price data released by the Bureau of Statistics this week showed that house prices across the nation fell 1.9% on average over the past 12 months. It continues worries that prices will keep falling and wreak havoc on our economy. At such times we should at least be able to console ourselves by knowing that fears about a sudden big increase in interest rates are unfounded.

Given the falls in housing finance, the latest data showing a drop in house prices was expected, and it likely to continue for some time to come:

The falls were driven by Sydney and Melbourne as prices in Brisbane, Adelaide, Hobart and Canberra are actually rising and the falls in Perth are slowing. And while Darwin’s prices dropped 4.4% over the past year, the size of its market means it has little impact on the national average:

The data comes as the focus on the housing market continues to increase – whether it be the OECD looking at the risks associated with our indebtedness or ABC’s 7.30 running a series of reports on the issue this week.

One reason it is such a quandary at the moment is that house prices in the two major markets are falling at time interest rates and unemployment are low – usually the type of conditions associated with rising prices (as indeed was the case over the past two years).

But one other aspect that did not come with that reduced unemployment was stronger household income growth, nor perhaps better job security.

The quarterly job figures released by the ABS this week found that in the past three months nearly half of the new jobs were “secondary jobs”.

This is somewhat concerning, but it should be noted that this related only to the seasonally adjusted figures, which can be a tad erratic – in trend terms secondary jobs only accounted for 23% of all new jobs. But even still that is a large amount given just below 7% of all jobs are secondary ones.

The growth of secondary jobs is rather more variable than that of primary jobs, but the past year has seen a large surge in such jobs:

It has meant that since the middle of 2016 there has been a significant increase in the percentage of jobs that are secondary ones – and it is now at the highest level recorded (although such record only go back to 2013):

We shouldn’t go overboard worrying about this growth – after all it only takes the level from 6.2% to 6.8% of all jobs, but even so that is about 93,000 more secondary jobs than would have been the case had the ratio stayed as it was in 2016.

It feeds into the story of underemployment in the economy. The main reason people take a second job is because their primary job does not provide them the hours or pay they need or desire, so a rise in secondary work is not something to cheer.

And with the continuing issue of underemployment and flat incomes growth, the concern with housing has been that rises in Sydney and Melbourne created a bubble and that it may now be on the verge of bursting.

That is why it was somewhat of a surprise to see the 730 story on tightening lending standards on Tuesday night end with a line from the founder of Aussie Home Loans, John Symond, saying: “If interest rates went to 10% over the next couple of years, people couldn’t handle that. It would wipe people out like a tsunami.”

Well, yes. And if an actual tsunami hit Sydney Harbour, people would struggle to handle that, but it is just as unlikely.

Worrying about higher interest rates – let alone rates we haven’t had since 1996 – is a bit odd right now.

While there are some interest rate hawks who want rates to be lifted because they think we need to normalise things a bit, we are only talking 100 or 200 basis points.

And even that is very unlikely.

Consider that the current average standard variable mortgage rate is 5.35%. It would nearly need to double to get to 10%. For that to happen in a couple years would be not only unprecedented but would actually need the RBA decide that it did wish to destroy the economy.

But even if we give Symond some leeway, where “a couple” really is three or five years, it is still unlikely to occur:

It would require a pace of rate increases that would leave those that occurred during the mining boom for dead.

It took six and half years during an incredible boom period for the average mortgage rate go from 6.05% at the start of 2002 to 9.6% in August 2008. During that time not only did we have a major boom in commodity prices, investment and employment, wages and inflation also grew well beyond anything we are seeing now.

From the middle of June 2005 to the end of 2008 wages never grew by less than 4% annually. Right now wages are growing at just 2.2%.

To see interest rates go up to 10% not just in the next five years, but in the next decade we would need one of the biggest booms in Australian economic history.

And the reality is were such a boom to occur, the RBA would not need to get interest rates up to 10% to have the same impact required to dampen spending.

Yes, interest rates are low now, but house prices in Sydney and Melbourne have increased so much that monthly repayments are well above where they were in 2008 when interest rates were at their highest this century:

And because income growth has been weak, people are still paying a sizeable proportion of their earnings on mortgage payments despite low rates.

A Sydney couple who just bought a house for the median price over the past year of $969,000, and assuming a 20% deposit and a 30-year loan would be repaying $3,974 a month if they were paying the average discounted mortgage rate of 4.6%.

If the couple was a male on average full-time salary and a woman getting 50% of the average women’s full-time earnings (which would give them a combined income of $127,500 – in the ball park for the median household income for two adults and two kids) they would need to pay about 37% of their earnings on mortgage repayments.

That is a level similar to what was the case in 2005 when the rate was 6.7% – over two points higher than it is now:

Indeed, since the middle of 2013, a change has occurred where, rather than moving in sync with interest rates, the amount of income going to mortgage repayment has increased even while interest rate has fallen or stayed flat.

The reason of course is the house price boom.

It means that an interest rate rise now has a much greater impact, because those who have bought in the past five years are already squeezed pretty hard (the news is much better if you bought before then though!).

The RBA knows this. They are not going to jack up rates and kill the economy, and right now with house prices falling, wages growth weak, inflation growth barely within its target range there is no need to raise rates.

There is enough to worry about housing without having to worry about what would be if rates suddenly rose. For now the risk is on the equity side – dealing with lower property values than with having to worry about a sudden increase in repayments.

Greg Jericho is a Guardian Australia columnist

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Greg Jericho

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