Wednesday, 11 November 2009

Are homes unaffordable, or are people just too greedy?

With interest rates starting to rise again in Australia, and house prices failing to drop much during the GFC, many commentators(eg. Ross Gittins) are joining the chorus of young (and not-so-young) renters bemoaning the cost of houses now being "out of reach". I suspect this is a perennial complaint, as I know that my parents were shocked when they migrated to Australia in the early 60s and found that the equity from the sale of their UK house was barely enough for a deposit on a Sydney home. And I could barely qualify for a mortgage to buy a cheap house (in Blackett) a few years after I started working full-time as a uni graduate (and I was still living at home rent free...).

Anyhow, lets look at the current situation:

Average weekly full-time ordinary time weekly pay for a person in NSW (as at May '08) is $1,142.50. According the the St George bank online mortgage estimator, a single person on that weekly income (using the default settings of having average living expenses of $14,568 pa plus a 350/month car loan) would qualify to borrow up to $367,000 on a standard 30-year variable rate home loan. In my experience St George uses fairly typical repayment:income limits (typical of 'old school' banking). So a person on AVERAGE income in NSW could easily 'afford' to buy a house in one of the cheaper suburbs. For example, median (ie. half the houses sold for LESS than this amount) house prices for the 6 months to Sep '09 for some example suburbs are:
Blackett $226,000
Mt Druitt $277,000
St Marys $284,000
Colyton $300,000

I wouldn't choose to live in one of these suburbs, but they're OK (my sister lived in St Marys for a while and I owned a rental property in Blackett for about ten years).

Some commentators are even going so far as to state that houses are 'out of reach' for a couple where BOTH people work full-time! In that case, AVERAGE male full-time OTE weekly income is $1,213.00 and for a female full-time worker OTE weekly income is $1,026.90, giving a combine income of $2,239.90. According to St George, that couple could borrow up to $853,000 putting a whole swag of the most expensive Sydney suburbs within reach (if they had saved up a 20% deposit):
Epping $740,000
Birchgrove $910,000

It appears that only houses in the MOST expensive suburbs would actually be 'out of reach' for a couple with both earning AVERAGE income:
Bondi $1,200,000
Hunters Hill $1,495,000

I think a lot of the people that are complaining about housing affordability (and hoping that house prices will drop 30%-40% before they buy) are simply unwilling to make the life-style spending sacrifices (eg. no eating out, taking staycations for a couple of years) required to be able switch from being renters to being home owners. In five years time I expect both house prices and rents will be higher than now -- and the same people will still be waiting for house prices to drop to more 'affordable' levels.

What do you think?

ps. Don't forget that home loan interest rates are now lower than at any time since the early 60s. Would you prefer current prices and home loan interest rates around 8%, or home prices 50% lower and interest rates of 17%?

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traineeinvestor said...

The cry of those who want cheaper housing is something I heard in the 1980s boom when I was a student, in the mid 1990s in Hong Kong, in America in the years leading up to the crisis and an Australia and New Zealand again.

Funny thing:

when the AU/NZ markets tanked in the wake of the 1987 sharemarket crash property got a lot more affordable but not many people were happy

when the Hong Kong market collapsed after the Asian crisis there were protests demanding that the government do something to help home owners

now that property in America is a lot more affordable, not many people seem to be celebrating that fact

There is nothing inherently wrong with saving for a deposit or even with renting long term. There are problems with tax payer funded subsidies (which just push up the cost of housing for everyone) and the impact of falling house prices on an economy in general

Chris said...

I'm sorry, but I fundamentally disagree, for the following reasons.
1. The St George calculator is based on NET income. The averages you have quoted are pre-tax figures. That makes a pretty big difference!
2. Assuming a 20% deposit. Lets assume that government handouts (such as the first home grants) cover the transaction costs. That might be a bit optimistic. That means that for the cheapest suburbs you mentioned, at about $300,000, a person would need to save a $60,000 deposit. If they are renting, I think an optimistic level of savings is 20% of gross income. That means $200 a week, or 5-6 years just to save a 20% deposit.

So 5 years to save a deposit, then 30 years to pay it off for an average person. 35 years just doesn't stack up to me.

As some background, I'm 27, earn about 3 times "average earnings", and have built a net worth of about $250,000. But housing in Australia just simply does not represent value to me, so I won't buy it, and choose to rent and invest the difference.

mOOm said...

There's nothing in that price range here in Canberra or Queanbeyan whichever suburb you look in (those cheap suburbs you mentioned). For $367k yes you can buy an apartment in the cheaper suburbs. The question is whether it makes sense relative to paying rent. To me it doesn't. But other people have different preferences. Now there are many places in the world where the rent/buy equation is much more in balance...

Anonymous said...

Based on your assumption that couples can take 30yr loan, it is indeed affordable.

My question would then be why use a 30yr loan as your assumption? Why not a 20yr loan or 10yr loan? If we change the loan tenure, would the housing affordability be compromised further?

Given that if most people start a family at 25 (and require a 2 or 3bedroom), do you think it is sensible to be in debt for 30yrs (or to put it bluntly, the whole of their working lifes if they are lucky to be gainfully employed thru-out the 30yrs). No doubt, you might say that their wage will only increase from there but that is not the point.

Like the stock market valuation, a PE of 15-20 is commonly treated as a fair multiple to pay for a piece of the action, but when it gets to PE of >20 .. it does really starts to stretch the imagination, even if we think the company is in the growth stage and demands higher valuation. said...

Chris - if you can't save more than 20% f your income for a deposit, then you can't afford home loan repayments.

Anon - sounds like greed. My parents took out a 30-year mortgage in the 60s. I took out a 25-year loan for my first property in the early 90s, and for our home in 2000. A 25- or 30-yr home mortgage is (and has been for ages), so that should be the basis for considering if homes are 'less affordable' nowadays than was previously the case.

Anonymous said...

Sounds to me like someone has most of their net worth tied up in one asset class, and needs to self-justify doing so... said...

I have around 50% of NW in property equity and 50% in stock market equity, so at the moment I'm having to justify not just leaving my savings in the bank savings account for the past decade ;)

Anyhow, this post is more about whether at current prices and interest rates housing is any less affordable than it was for previous generations of home owners, not the pros and cons of real estate as an asset class.

Chris said...

How about some real data? Look at the median house price index (ABS6416.0 use table 10 for 1986-2005 values ) and 6302.0 for AWOTE. Lets ignore the difference between comparing a mean and a median. From 1982 to 2009, the house price index has increased by a factor of 5. AWOTE has increased by a factor of 2.85. Isn't that case closed? said...

Chris - just one more parameter you forgot about -- interest rates.

Look up the RBA cash rate for 1982 and 2009, add 2% to get close to average variable home loan interest rate, and work out the relevant monthly repayment for a 25-year mortgage as a percentage of AWE. Home affodability is all about being able to get a mortgage and servicing the repayments, NOT a simplistic calculation of price/AWE. Case reopened ;)

Tony said...

I call bullshit on the whole "affordability" debate. Everytime it's mentioned in the news there seems to be a sense of entitlement that home ownership is a right. One commentator even complained that some poor people may never own a home. Gasp. Shock. Horror.

The reality is that if you can save 20% deposit the mortgage is within reach.

IMO the problem is that people don't want to do the discipline required to save the deposit. This in turn leads to 5% deposit loans which mean people can buy more than they could otherwise afford - which puts upward pressure on prices.