The “Affordability” of Unaffordable Homes

Very low interest rates help square the circle. This is not to say that such things as record immigration, land supply, lagged construction response and high and rising building costs are not important factors for the eye-watering prices people are paying for property. They clearly are. However, to help explain the heights that house prices are now probing, nationally, the inflammatory role of very low interest rates needs to be appreciated as well.

The Politics of It

Of course, few people involved in the housing market have any cause to argue against unusually low interest rates. Existing homeowners, and investors, obviously prefer the higher prices that low interest rates tend to bring, along with the low mortgage payments entailed. Banks depend on the strong sales turnover that low interest rates stoke. So too do mortgage brokers and real estate agents. Home buyers, meanwhile, like to be armed with the lowest mortgage rates possible. For these reasons (and a lot more) the government has scant incentive to ever suggest interest rates are “too low”. And so goes the time-honoured politics of it.

This also helps explain why the debate about high and rising house prices is looking everywhere but interest rates – for attention, and solutions. If only we could build more houses, or lower the immigration targets, or change the tax treatment of housing, or just outright ban foreign buyers…then houses would become affordable again. The list goes on, and on.

And this is after having already implemented a lot of policy that was presumed to help bring the market to heel. Like the removal of depreciation allowances on most real estate, the implementation of LVR restrictions (starting October 2013), requiring tax-registration of non-resident buyers and “bright-lining” existing capital gains tax.