Falling rates actually make it harder for FHBs: AHURI

A new study from the Australian Housing and Urban Research Institute (AHURI) has found that while lower interest rates might seem like a boon for mortgagors, the demand they create for property actually ends up hindering, rather than helping, first home buyers.

According to Financing first home ownership: modelling policy impacts at market and individual levels — a study undertaken for AHURI by researchers from Curtin University, University of Sydney, and RMIT University — there is a strong correlation between falling interest rates and a reduced ability for people to buy their first home.

The study modelled the relationships between different housing finance conditions and the ability of Australians to buy their first home.

The academics found that, between 1994 and 2017, the average interest rate on owner-occupier mortgages fell by almost 5 per cent, making home loans more affordable.

However, as a result, demand for properties grew, pushing up competition and resulting in higher house prices. Indeed, the research found that over this 25-year period, house prices more than doubled.

According to the analysis, almost one-third of the price rises were caused by lower interest rates, with factors such as housing availability, wages, and population growth accounting for the remaining two-thirds.

Over the same period, the home ownership rate fell from around 71 per cent to just 66 per cent.

Speaking of the findings, the research lead author Rachel Ong ViforJ (from Curtin University’s School of Accounting, Economics, and Finance) said that lower interest rates have actually locked people out of the market.

“Falling interest rates may seem appealing to first home buyers, but in real terms, it only increases competition and pushes prices higher, sometimes out of reach for those trying to get into the market for the first time,” she said.

According to the study, 84 per cent of aspiring first home buyers did not have enough savings for a home deposit, with 71 per cent unable to meet the mortgage repayment requirements, preventing them from entering the housing market.

Moreover, nearly nine in 10 aspiring first home buyers are locked out of home ownership due to borrowing constraints.

However, the research noted that if there is a persistent rise in interest rates, this could lead to a decline in house prices that would encourage more young or lower-income households to enter the market.

Professor ViforJ noted that there were several schemes in place to support more first home buyers into market at the moment, such as the government’s Home Guarantee Schemes.

However, the researchers found that while a mortgage guarantee scheme could assist 22 per cent of qualifying first home buyers, a shared equity scheme would assist much more; around 41 per cent of eligible home buyers.

The AHURI report suggested that a quarter of the 41 per cent would be in the bottom 20 per cent of Australia’s socioeconomic status areas.

“Our research indicates that while both schemes will help some households into first home ownership, the Help to Buy shared equity scheme is likely to be more accessible to people on lower incomes than the Home Guarantee scheme,” Professor ViforJ commented.

“It’s important to understand that while these schemes would support people living in lower socioeconomic status areas, they would likely also boost demand for housing in these entry-level markets.”

As such, she said it was “imperative the introduction of any such schemes is matched by an increase in the supply of local housing in order to avoid fuelling further house price rises”.

[Related: Budget slammed for not addressing the housing crisis]