Fixed rate mortgages are subsidized by the US government, that's why. The mechanism of the subsidy is extremely complicated, but it is not a small effect.
Before the creation of the enormous state-owned insurance corporations and government programs to drive down those fixed rate mortgage costs, American mortgages were usually short-term, with giant balloon payments. Those short-term, balloon-payment mortgages went bust in huge numbers during the Great Depression, creating pressure on the government to "do something."
Say what you will about American housing policy, but those 15- and 30-year mortgage arrangements are very stable.
The Macs drove subsidising the moral hazard of fixed rate loans into the public conscious, a subsidy for home owners, political suicide to take away. Better (politically) to rob from a generation or two to pay for reckless low interest rates.
The weird thing is that 5 year adjustable rates are higher then 30yr. fixed. That only makes sense if interest rates will go down over the next 5 years, which seems unlikely to me.
If you look at it from the bank's perspective it makes more sense. I got a 5 year and paid it off early. The bank got about 8% of my home value. My friend has a 30 year and the bank will get ~110% of his home value.
Damn, I would assume houses must be much cheaper in Australia than in the US? Or only the very very rich can afford to buy their own home? (Or is it amortized over more than 5 years, you just have a balloon you need to refinance?)
In the US, where 30-year mortgages are standard, the LARGE majority of homeowners would not be able to afford payments on their home amortized over only 5 years.
I dont have information that can compare Apples to Apples as such, as in US vs AU values.
But I can say that prices are rising rapidly here in Australia.
The already expensive Sydney market rose on average ~$1200 a day over the last quarter!
Melbourne isn't far behind!
We too have low interest rates!
Whats not clear is how people are paying for the houses. Where is the money for deposits coming from, and how are they servicing such huge loans?
Dual incomes and parents assisting would account for a lot of it. But what happens if/when the parents need the money back and the DINKies decide to have children and either lose the dual income or get slugged with child care fees!
I don't know about Australia, but it sounds like the comment you responded is saying that mortgages there are something like a US 5/1 ARM, not that they are paid off in five years.
That is, the interest rate is guaranteed for five years and then it periodically adjusts.
30 year mortgages are standard I Australia too. After your initial fixed interest period expires you will then pay the current floating rates or chose to refix for another period (of up to 5 years) at the current interest rates.
I looked for some official statistics, and while I'm not sure if I'm in the right place, it paints a rather different picture from yours. The figure for housing costs implies a typical home value of more like 300K USD or 400K AUD.
Also, if this is accurate, Australia is more of a nation of homeowners than of renters.
It also says housing costs for renters have increased 51% in 20 years (to 2018) which is an average of 2% annually.
"housing costs are defined as the sum of rent payments; rate payments (water and general); and mortgage or unsecured loan payments (if the initial purpose of the loan was primarily to buy, add, or alter the dwelling)"
Australia's housing market, like I'm guessing many others, is quite heterogeneous.
Sydney and to a lesser extent Melbourne are both completely unaffordable (A$1m+) to new home owners on an average income unless you're prepared to live in a unit or commute 2 hours a day to the CBD. Brisbane, Adelaide and Perth on the other hand are significantly cheaper and one could still afford a nice family home.
Also worth noting is that the huge boom in prices only really started in the early 2000s. People who bought prior to that period make up a disproportionate number of owner occupiers.
This appears to be a data provider oriented towards entities with large real estate portfolios, and they specifically say on their website that their "hedonic" index is not meant for affordability calculations, for what that's worth.
It's difficult for me to tell which index is in the article, but the note about the missing data under the chart implies to me that the article is (inappropriately) using the hedonic index. I wonder how much difference it makes.
'this month's figures from CoreLogic did not include Perth or regional Western Australia "pending the resolution of a divergence from other housing market measures in WA" '
"Rather than relying solely on transacted sale prices to provide a measure of housing market conditions, the CoreLogic Daily Home Value Index is based on a ‘hedonic’ methodology which includes the attributes of properties that are transacting as part of the analysis."
"The fact that median or other percentile based series cannot be used to track changes in value of a market portfolio does not make them wrong: it is simply that they have different applications than hedonic indices. For example, median price series are useful in answering economic policy questions relating to housing affordability."
Interesting points RE the hedonic index, I'm not sure what the intended use case is but we can approach it from another angle if you would like.
A more up to date government source has the following;
> Weighted average (mean) of the eight capital cities Residential Property Price Index... rose 16.8% over the last twelve months.
We could go on forever trying to work out the exact numbers. The main thing I want to do is show non-australians how quickly our prices have risen and are rising!
I moved to the US from the UK, where mortgages look more like Australia’s, and I still find it amazing you can fix such a low rate for so long here.