I don’t buy that interest rates are too high. Interest rates are normal. The problem is that new homes cost too much because of the price of building blocks are too high.
That’s why they are unaffordable. If new homes were half the price, as some say they should be, interest rates at 15% would be affordable.
So the problem is not the cost of money. Also the costs of new homes ome building is cheap. They are only dear because people want to build bigger higher specification homes. Now that is unaffordable many don’t want to downsize their dream. But it is only unaffordable because of land prices. They are way too high.
New home building costs have not doubled in the last 10 years, but land prices have gone up 400%.
Nobody can tell me why land prices are too high, they just fall back to
supply and demand,with Australia having abundant land that could be developed.
State Governments have largely failed in their duty to provide adequate land for building, and have not developed a competitive land retail industry to market the land.
The problem is that State Governments get paid big money in Stamp duties based on land values because of it, so why should they want to fix the problem? They get paid more for not fixing the land shortage issue.
A lot of the cost of a new house price is made up of Infrastructure costs. Why should that be a cost for a new home buyer? They are already going into debt for 25 years or longer, and the taxes on the house construction and add-ons required make every new home built a bonanza for State and Federal taxes.
So whilst the RBA decision to raise rates in November pushed construction loan interest rates higher, it alone was not the main cause of the current housing construction slump.
The HIA also says that the withdrawal of the bonus First Home Owners Grant stopped the housing recovery.
But the First Home Owners Grant is the root cause of the rise of housing costs. Stimulating building and construction without adding to supply only served to increase house inflation and that means higher interest rates to cool the market. So a housing stimulus is the last thing we need.
As an example when the FHOG was launched a 640 sq metre building block was $64,000. Three months later it was $90,000. A year later it was $178,000. So what good is the $7,000 grant? It destroyed housing affordability. And that was in 2002! All it did was make people who owned their homes “feel wealthy”.
New Land developments at half of current land prices will revive the housing industry. When the HIA and new home builders and Governments get that through their heads we will be able to move forward.
The cost of new homes have become too high and when credit was easy, home buyers simply went into higher debt. That is now playing out as home loan arrears are on the rise in conforming and non conforming lending, and full doc loans as well as low doc loans. In other words people have got themselves into financial hot water because interest rates were too low for too long. If we make them higher still, then home will become cheaper and so will land to build on.
The first home owners grant and easy credit made it easier for people with no savings to buy a home. This alone created demand that forced up prices.
So the First Home Owners Grant that was supposed to compensate first home buyers for the GST home construction price increase never did the job it was supposed to do. It actually compounded the GST and make homes unaffordable for many Australian families which will now be doomed to rent for life.
Low cost land banks developed so that new homes prices can become affordable. How do I rate affordability? 35% of the average wage should be the price that a first home buyers can buy their first home for. That is what it was in the sixties and early seventies. Right now house prices are double that, and that is too much for new home buyers.
Rick Adlam [HomeMate] has been working in the homebuilding since 1985 as a new home consultant with Iconic builder AV Jennings. He has also worked in home design consultancy with Dixon Homes, VillaWorld, Galaxy Homes, Merlin Homes, Simonds Homes, Award Homes and Orbit Homes. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers
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