The window of opportunity for first-home buyers is slamming shut, as interest rate cuts and looser bank lending reflate Australia’s housing bubble.

A significant increase in people’s borrowing capacity saw national property prices jump 4 per cent over the December quarter.

And while there are signs the market has eased its foot off the gas pedal, the prospect of further interest rate cuts in 2020 suggest prices will continue to soar.

It’s therefore reasonable to expect that first-home buyers will once again be priced out of the market. In fact, this is what the latest round of ABS lending data appears to be telling us.

For while first-home buyers still represented a substantial proportion (29.7 per cent) of owner-occupier home loans in November 2019, their share of the pie is gradually shrinking.

The number of loan commitments to first-home buyers fell 0.9 per cent in November and 0.4 per cent in October, marking the first back-to-back fall since January 2019.

The value of loans to first-home buyers increased 2.1 per cent in November, to reach its highest level since October 2009. But this just shows fewer first-home buyers are taking on ever larger mortgages.

Which is perhaps unsurprising, given national prices last year recorded their fastest quarterly growth rate since November 2009.

A brief glimmer of hope

The rapid gains came after a significant market correction had temporarily offered first-home buyers a glimmer of hope.

Over a 21-month period, national property prices fell 8.4 per cent.

Given the country’s median dwelling price was seven times higher than the median income in early 2018, according to CoreLogic, such a fall was great news for first-home buyers struggling to save a deposit.

Tighter bank lending triggered the price falls. Australia’s financial regulator, APRA, introduced policies aimed at reducing investor activity in 2017, and the banking royal commission forced lenders to act more scrupulously.

The pace of price declines began to ease towards the end of 2018 and into the early months of 2019.

And then the Reserve Bank and APRA kicked the market into overdrive.

Cheap money and looser lending

First, the RBA dropped interest rates in June for the first time since September 2016. And then APRA lowered the hypothetical interest rate that banks must use to determine a borrower’s creditworthiness.

Research from the Grattan Institute suggests this last change made the biggest difference.

By analysing daily changes in property prices – rather than monthly – the think-tank found prices skyrocketed on August 12, when the first round of buyers to benefit from APRA’s changes “would have received pre-approval and found a property to purchase”.

Modelling by BIS Oxford Economics at the time found the average buyer’s borrowing capacity jumped 11 per cent after APRA’s changes, enabling buyers to bid up prices.

And another RBA rate cut in October added fuel to the fire.

A step too far

Warren Hogan, independent economist and industry professor at UTS Business School, told The New Daily in November that the RBA had tossed away all the good work the recent correction had achieved by cutting rates in October.

“This rate of recovery that we’ve seen over the past few months will see us go back to the peaks of the market in Sydney and Melbourne before the middle of next year,” he said.

“And then, of course, we get straight back to the issues of affordability and fairness, and about the the role of investors, about inequality – all the issues that we were struggling with three or four years ago that we nicely dealt with by gradually deflating this bubble.”

What’s more, lower rates not only inflate asset prices, they reduce the interest first-home buyers earn on their savings accounts.

This makes it even harder to save a deposit, at a time when annual wages growth has fallen to just 2.2 per cent.

The alternatives

The Coalition’s First Home Loan Deposit Scheme offers a helping hand to 10,000 lucky applicants. But that’s less than 10 per cent of the annual first-home buyer market.

Expanding the scheme wouldn’t help, either, as it would drive up demand and consequently turbocharge prices.

The only way to really help first-home buyers is to reduce the overall demand for housing by scrapping negative gearing and capital gains tax discounts.

But the government has shown little appetite for such changes. And neither, perhaps, have voters.