How Does Inflation Impact First Home Buyers?
So what is inflation and more importantly, what does it mean to us as First Home Buyers?
Inflation tracks the costs of an imaginary ‘basket of goods’ which is representative of the cost of goods and services in the community. The basket of goods is made up of things such as fuel, food, and new housing. It is easy to get a high-level overview of the basket of goods but to find out specifically which goods they are buying is harder than finding a clean toilet at a music festival. Believe me, I’ve tried.
This imaginary basket of goods goes up or down in price and is often represented as a percentage called CPI or the Consumer Price Index. CPI has risen by 3%, which means that the imaginary basket of goods has increased in cost by 3%.
Ok, so that’s what inflation is but what does it mean to us?
The Reserve Bank of Australia is mandated to keep inflation between an acceptable band of 2% to 3%. This is seen to be sustainable growth. Just like Goldilocks, the economy isn’t too cold and stagnating but it’s not too hot and overheating – everything is just right.
For years, the RBA has kept inflation in or below this band and Australia has enjoyed a prolonged period of financial stability.
Enter COVID, financial stimulus, and inflation.
For the purpose of this conversation, let’s leave the reason why inflation is high to the side and just deal with the fact that it is high and how this impacts us as First Home Buyers.
Inflation is currently at a 32-year high. The inflation forecast for this financial year is 5.75% and is forecasted to peak at 7.75% in December. This is way above the RBA’s targeted 2% to 3% band and it’s fair to say RBA governor Phil Lowe is jumpier than a cat on a hot tin roof.
So how does the RBA tame inflation? The RBA has one major lever to pull and that is interest rates. The RBA sets the rate at which they lend the banks money. The banks then throw their margin on top of that and lend the money to you, the consumer. If the RBA increases the rate at which they lend money to the banks, the banks have to increase the rate at which they lend money to you. Over 60% of Australians’ wealth is tied up in real estate so this has a major impact on the economy. Those who own homes have their interest rates go up, those who own investments increase rents, and everyone has less disposable income so they stop spending money on goods and services. This stops inflation, the RBA feels they have done their job.
It is far more complicated than what we have described above but for the purposes of this conversation, that gives you the general idea.
The impact on us as First Home Buyers is two-fold. First of all, our rents are going up so we have less disposable income and are therefore able to save less, meaning it is going to take us even longer to save up for a deposit. Thanks, RBA.
Secondly, the amount we can borrow is going down. For example, if you are a couple with 2 children earning a combined income of $200k per annum, the amount you can borrow has been reduced by a whopping $277k!
A single applicant in Brisbane with no debts used to be able to buy a property with $55k per annum income, this has now increased to $85k to $100k depending on where you want to live. Thanks again, RBA.
Add to this, the banks’ serviceability buffer has increased to 3%. What that means is if your repayments are 4.5%, the banks will work out how much you can borrow based on an interest rate of 7.5%. One of the great frustrations I hear from aspiring First Home Buyers is that they are already paying the same rent as the loan repayments but the bank won’t give them a loan. That’s the reason why.
But won’t higher inflation and interest rates mean that house prices will collapse making it easier for First Home Buyer to enter the market?
I’m not so sure and here’s why.
Increased interest repayments for investors have meant increased rents. The rental market was already tight, rents were already going up, this has put even more strain on an already competitive rental market, making buying a home a very attractive option.
We have a massive skills shortage in Australia. Unemployment is at a 50-year low of 3.5%. There are 470,000 job vacancies across the country that need to be filled. This is contributing to inflation as workers demand higher wages. The government recognises this and has turned the immigration tap on. Over 250,000 immigrants are expected to move here annually, and primarily where they move to are Brisbane, Sydney, and Melbourne. This is going to put further upward pressure on an already tight housing market.
On the ground, what I have seen is a cooling of the market. What this means is property prices are unlikely to go up by 25% year-on-year however they are not going backward. Land is still at a premium and demand is still outstripping supply.
As the saying goes, when is the best time to buy real estate?
20 years ago.
When is the second best time?
Any time you can.
Never has this been truer than right now. If you can afford to buy but don’t, you may find yourself unable to buy in the future.
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