Tuesday, March 2, 2010

It’s the price, stupid.

Housing prices, not interest rates rises, are the real cause for concern.

The latest rate rise announced by the Reserve Bank has been the subject of endless column metres of commentary by the media and economists, both in the run up to the decision and after it. David Koch is looking suitably concerned on the morning TV shows and the Federal Treasurer is threatening the banks with a thrashing with a wet lettuce if they pass on more than the official rise. We’ve seen it all before.

But as always, it’s timely to reflect on what the real problem is. The typical new mortgage, most reports suggest, is around $300,000. The latest rate rise will add about $46 a month. For families on tight budgets and with big mortgages, that can be touch and go. You could argue that smaller mortgages would take a lot of the pressure off, but that would mean buying lower priced housing. And even with a deposit of $50,000 and a $300,000 mortgage, you can’t find much for $350,000 anymore. So suggesting young or lower income families lower their housing choice standards is a bit of an insult. Try searching realestate.com.au for a house with 2/3 bedrooms anywhere near Brisbane for less than $350,000. They’re close to nonexistent.

Apartments don’t seem to be the answer either. The build-only cost for a new 2 bed apartment in a high to medium rise is roughly $300,000. Plus land, plus levies, plus compliance and some margin. You’re up to $400,000 starting price before you know it. No doubt that reality explains the steep decline in apartment approvals.

But consider for a moment the media obsession with the rate rise and the extra $46 a month for the average new mortgage holder. Then compare this with the almost non-existent attention to increases in head works and related charges imposed by councils and state governments, and their impact on affordability.

Here’s a sobering little calculation. If the rate rise equates to an extra $46 per month, what have these increases in headworks charges equated to? Let’s take a pretty conservative sum of $50,000. That doesn’t factor in anything for the increase in raw land costs due to supply constraints, nor the compliance costs of our ‘reformed’ planning and building regulations. The $300,000 mortgage notionally includes those extra costs. So if the mortgage was $50,000 less, on the basis that these regulatory costs had not been imposed, what’s the impact?

You ready for this?

A $250,000 principal and interest mortgage at 6.9% over 25 years is going to cost $1,751 per month.

The $300,000 mortgage will cost $2,101 per month. That’s an extra $350 per month. Sort of makes the extra $46 a month look cheap by comparison, but where has the media been on this issue?

Every time a new building regulation is introduced, whether it’s for water or environmental sustainability or other reasons, it finds its way into extra costs. The same applies to the massive escalations in head works charges imposed by councils. The same for land tax. The same for additional compliance costs (more lawyers and town planners fees) which result from our ‘reformed’ planning systems.

If our hypothetical $50,000 in extra charges number is conservative – and I think it is –it’s painfully obvious that the culprit here is how housing costs, and hence mortgages, have been pushed up by the supply-side pressures of headworks and compliance costs (inputs into final price).

When you work out that those costs translate into some $350 a month or more extra for young homebuyers, you really begin to wonder why the media have effectively let the regulators (the ones causing the damage) off the hook.

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