How younger Australians are being shut out of the property market

One of the most sobering facts about Australia’s increasingly unaffordable property market is that getting a mortgage is becoming something of a luxury item.

As experienced banking analyst Jon Mott pointed out recently, about 8% of credit from Australian banks now goes to owner-occupier households earning less than $120,000.

That segment represents around 60% of the population, so it is a very large segment to represent such a small amount of the available lending.

By contrast, 9% of credit goes to housing investors who earned more than $500,000 and represent just 1% of society.

Effectively what this means is that large parts of an entire generation of younger Australians are likely to be locked out of the property market for a considerable time.

Costs for new supply rising

The reasons for such a lack of affordability include global high construction costs which have restricted the supply of cheaper house and land packages, prudential rules around mortgages and falling living standards in general.

While a lack of supply is seen as one of the main issues, there is no point in builders constructing homes that people can’t afford to buy and finance.

According to Mott, the inability of younger people to buy houses is also hitting productivity because younger people face greater barriers to starting businesses.

Lack of property ownership restricting productivity

Those barriers include less capital being available for business lending and the difficulty of getting a business loan without offering a property as security.

One possible answer would be for APRA to give younger borrowers an advantage by allowing banks to hold less capital against loans to first home buyers.

This would have the effect of lowering capital requirements and making loans to younger people more profitable for the banks.

Further reducing consideration of student debt when granting loans could also be useful.

However, even if these steps were taken there is no guarantee that large parts of a younger generation wouldn’t still struggle to have access to home ownership or at least their access would be put off until they’re older.

Price is the big sticking point

In overall terms it is the price of housing that is the major issue and increasing supply is really the only long term answer to that problem.

Another important point is that housing is just one potential investment class for young people and many have already decided to tackle this issue in a different way by becoming heavy investors in financial products such as exchange traded funds (ETFs), in some cases also using gearing to increase tax deductions and improve long term performance.

Rather than justifiably yelling at clouds about unaffordable real estate, re-directing efforts into investment alternatives seems like a much better and more practical solution.

Specific alternatives arriving

One interesting result from this is that investment platform Pearler is now offering an ETF based superannuation product with very low fees that is only offered to people born from 1970 onwards.

By using index funds, Pearler has been able to reduce fees to well below 1% – typically somewhere between 0.4 to 0.6%, depending on the individual ETFs selected.

I suspect they will not be the last financial products company jumping on this particular bandwagon, with passive investing in which fees are kept low being one of the more positive opportunities still available for younger age cohorts.

In the final analysis, there’s not a lot of difference between buying a negatively geared investment property compared to the geared purchase of units in a listed real estate investment trust, other than the latter can be achieved with a much lower initial cost and added to affordably over time.

Arguably the “starting small and growing over time” investment model would be more affordable, safer and more flexible – with the added bonus of being able to be sold quickly and perhaps added to an inheritance to finally achieve a home purchase, albeit at a later age than their parents and grandparents would have been able to achieve when property was much more affordable.