The Looney Tunes debate on housing affordability

LooneyTunesWallpaper800

By Catherine Cashmore, a market analyst and journalist with extensive experience in all aspects relating to property acquisition. Follow Catherine on Twitter or via here Blog.

I’m know I’m not alone in feeling an immense amount of frustration at the circular debate amongst commentators in the mainstream media, that surrounds our first homebuyer demographic, and the question of ‘affordability.’

Last week, the November 2013 housing finance data was released showing continued strong demand in the mortgage market, with owner-occupier commitments 15.3% higher than they were a year ago – their highest level since December 2009.

Unsurprisingly, demand from investors continues to increase, rising 1.5% in November, and up by 35% over the course of the year – to the highest level on record – whilst on the other hand, first homebuyers remain at record lows, with a recorded market share of just 12.3%.

Whichever side of the coin you sit, “first homebuyers” like “housing bubbles” make a good headline, and therefore, instead of productive advocacy into improving the housing market so it’s equitable for all – we’re left once again battling a ‘Looney Tunes’ debate over whether housing is, or isn’t ‘affordable.’

Denialists:

For those in denial all sorts of excuses are found – the most common of which is the accusation that first home buyers are just ‘spoilt and picky’ – or as was sent to me in email last week by a fellow contributor on “Property Observer” – “you just have to save hard and start with a flat – isn’t that how it’s always been?”

Well to some extent ‘yes’ – when there’s a budget, compromises need to be made. But how it’s always been? “No.” It’s not how it’s always been.

  • Whilst in the late 1990’s a typical first homebuyer’s budget would have secured a modest family home, in a reasonably facilitated suburb, for 3 times median income. Today you’d be hard pushed to find accommodation on the fringes of our capital cities for a similar expense.
  • Thirty years ago the land component of a house and land package represented 20% of the total cost – today it is more like 60%.
  • Forty years ago, housing policy ensured land was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure. Today land prices have soared; unduly inflated by constrictive urban zoning policy, with infrastructure prices, loaded onto the upfront cost.

Furthermore, a CIE study commissioned by the HIA, demonstrated how imposed taxes on developments, when added together, come to 39% of the marketed house and land price.

By the time you add “necessary” ‘energy and safety standards,’ coupled with the cost of labour on top of already inflated land values, developers find it increasingly difficult to provide ‘affordable’ accommodation whilst still making a profit.

Glenn Stephens, Governor of the RBA, summed it up best in 2011, when, he addressed a Parliamentary Committee and exclaimed how he could “not understand why a country as big as Australia seemingly had a shortage of land” and could therefore not provide ‘cheap’ housing.

Notwithstanding, ‘we don’t’ have a shortage of land – we have poor housing policy driven by vested interests to keep inner city land prices high. I cannot find any other reasonable explanation.

Asking first home buyers to purchase into a market where, capital city house prices have been artificially inflated, from three times median income to nine times, should not leave us scratching our heads wondering why they don’t feel ‘OK” about it. It’s perfectly understandable.

Who is a first homebuyer?

According to the ABS, the average age of a first homebuyer is between “31-33 years,” and due to high entry costs, “partnering often precedes home purchase” (the majority of which already have children.)

Therefore unsurprisingly, only a relatively small proportion (19%) make up single households, and outside of those who pit themselves against stronger financial arm of the investment sector, to purchase an apartment, the options we’re currently providing our first homebuyers, fall dismally short of where that main demand centres – demand which often calls for more than tiny apartment which will last no longer than a year or so before an upgrade is necessary.

The data must be wrong…numbers can’t be this low?

Others challenge the data, with various claims that first home buyer numbers are only ‘significantly’ reduced, because a percentage are ‘slipping through the net,’ perhaps entering ownership as ‘investors’ or – due to dated brokering software – not being entered as first timers, unless applying for a state based grant or incentive.

On the latter point, I did speak to the ABS department of financial statistics directly about the notion that ‘significant’ numbers are missing, and further investigation is underway which I’ll follow up at a later date.

Albeit, currently they deny the implication, claiming it doesn’t accord with APRA’s instructions to lenders when collecting statistics – which stresses that a first home buyer, must be one in which ‘none of the borrowing parties has previously borrowed housing finance for owner occupation’ – making no distinction between an investor, or one who does, or does not, apply for the grant.

Therefore, outside of colloquial evidence, the above ABS statistics are the most accurate ‘current’ indicator we have of a downward trend in first homebuyer numbers – and for most ‘reasonable’ minds it should come as no surprise, considering we’re in an environment where the entry cost to obtain ownership is further impeded by rising prices, transaction taxes, and an uptick in unemployment raising concerns over job security.

Housing is ‘affordable’ because mortgage rates say so…

As Michael Janda pointed out in his excellent report last week – housing affordability should not be confused with mortgage serviceability.

Mortgage rates are set up with different structures, dependent on circumstance, and subject to interest rate changes influenced by the macro environment.

  • They do not take into account the up front cost of a home and expenses incurred from associated utility costs.
  • They do not question rising rental prices, falling vacancy rates, wage growth, unemployment figures, or changes in household demographics and structure.
  • They make no distinction between the cost of building a home and the underlying value of land, or analyse constraints in supply, or make mention of the limited options available for low or single income households and families.

To assume on interest rates alone that housing is ‘affordable’ is lazy reporting and generally only applicable to existing owners.

Those who fail to make the above distinction commonly come from the standpoint of vested interest – or entered ownership at the beginning of the lending boom (in the early 2000s or before,) and have benefited considerably from a rapid period of inflation – which unsurprisingly enough, includes most of our politicians.

Housing is affordable because data from other countries says so…

Neither is it complementary to compare ourselves to international terrains which – having been through somewhat harder lessons than our own – are also battling to induce first home buyers out from underneath their ‘rental’ blankets.

Yet this is what Stephen Koukoulas attempted to do last week in Business Spectator when he ‘favourably’ compared Australia to Norway, Canada, Sweden and New Zealand.

All of these markets have suffered from large increases in levels of private debt whilst at the same time limits were placed on supply.

In Norway, Sweden and New Zealand, central banks have recently employed capital constraints in an effort to moderate demand, and Canada, with a household debt to income ratio of 163.7%, is being watched closely, as investors and economists start to voice alarm.

Letting house prices escalate, funded by a colossal amount of private mortgage debt, can be a dangerous game.

As I pointed out last week – in the USA prior to the sub-prime crisis, the median income in California was not enough to afford the average Californian home, or even a starter home. Once the financial crisis hit, rapidly falling prices quickly eroded any equity homebuyers had achieved.

Whilst on the other hand, states such as Texas, where house prices did not deviate from three times median income, values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.

….The renters that Terry Ryder rudely labelled ‘generation whine

Renters, on the other hand, have not benefited directly from low interest rates. Roughly 33% of Australia’s housing market is made up of tenants and since 2006, rises in the median cost of rental accommodation has outpaced both wage growth and inflation.

In Sydney, where supply is particularly constrained, APM recorded a 5.4% yearly increase to the median rental price, and according to a new report compiled by the Northern Territory Council of Social Service (NTCOSS), the average cost of rental housing in Darwin has risen by 7.9%.

Before we get into a further debate over whether or not rents are ‘affordable,’ it’s worth turning to a previous report from the now disbanded ‘National Housing Supply Council’ to highlight the real impact demand side policies like negative gearing have, when coupled with a gradual erosion of supply.

Reports highlight that the increase of rental accommodation in the private sector has not outweighed the decline in social housing – and from the stock added, most have rents outside of the affordable threshold for lower income households.

To assesse this, the NHSC broke income groups into deciles, and demonstrated of the ‘affordable’ private accommodation available,’ supply is quickly soaked up, leaving 60% of low income groups, paying more than 30% of their income on rent, and 25% paying more than 50% of their income on rent.

In Conclusion

Gains from high land prices, do not trickle down they flow up. This is what the ‘National Housing Supply Council’ was trying to emphasise in their reports, and what I went to great pains to point out last week in trying to answer the questions over what exactly a ‘housing shortage’ means.

Our market is not just about buyers, it’s about renters too – and our Governments are elected to ensure that the price of land is not unduly inflated by either the monopoly of this resource, or undue restrictions placed on its development.

Worrying still – the arguments over affordability encourage us to lose sight of the real issue – which is not localised to the first homebuyer sector, but the general crowding out of low income residents across all demographics – some of which drift in and out of ownership.

Reform is never easy, but there is a way to break the cycle and ensure land is fully utilised for the purpose intended, without prices blowing out to levels that can only be sustained through keeping interest rates low, or household debt high.

One way is through freeing the barriers hampering the type and supply of accommodation offered, and the other is through imposing a broad-based tax on the underlying value land – of which I went into more detail here.

The focus of attack should be not those individuals who have advantaged from the system, but on the law that allows the system to operate – and in response, the commentary should not focus on defending what is plainly obvious, but advocating the policies we need to fix it, and ensure our house and land market is equitable for all.

58 Responses to “ “The Looney Tunes debate on housing affordability”

  1. Charles Ponzi says:

    Great article. Waiting for the moment when an intelligent debate on housing becomes mainstream.

    • mrd1980 says:

      You’ll be waiting a long time. This is Australia, Bogan Nation.

    • PhilBest says:

      I am in despair about this after years of repeated findings by every official investigation, that “supply” is primarily responsible; and every public discussion thread is swamped by “ban immigrants” and “we need a CGT”.

      Anyone suggesting “we need more freedom for developers to build new subdivisions” invites attacks along the lines of “we can’t afford any more infrastructure”; “we have to drive far enough to CBD jobs already”; “we’re running out of land”; “we’re running out of fossil fuels to run our cars to and from automobile dependent locations”, and “we’ll cook the planet even worse than we already are”.

      If only a few enlightened people could present a TV show on a weekly basis for a couple of years to discuss the actual facts, something MIGHT change. But the propaganda machine responsible for all the ignorance is huge and well-oiled.

    • OMG says:

      I don’t see what an intelligent debate will change.

      We can remove or limit NG and we can remove the UGB.

      Neither will change the reality of what is happening in the market.

      The difference between the situation now and in the 1970s for example is the type of migrant we now have.

      My folks, like most Europeans that arrived in the 1970s arrived with very little and it took them a couple of years to buy a home in the outer suburbs.

      Now, we have migrants from the “Mainland” that arrive and purchase a $2.2 million home in Balwyn and a 7 series BMW.

      Their next step is to buy 2/3 investment properties.

      Will this change? No.

      What do those that feel helpless do? Make a choice, you can’t afford to buy in Chatswood or Doncaster so you can look elsewhere, further out, or move to Adelaide.

      I’m sorry but this is the new reality. Those that don’t see this wiill get swept along with the current and continue to be aggrevated.

      • rich42 says:

        @OMG…Very sadly I agree with you and have started looking in regional areas to buy. I cannot see any chance Australian voters can possibly conclude they are destroying Australia and the futures of their own kids.

        In regional areas, rents, (a true function of supply and demand?) support prices. I’m buying.

        It is an absolute disgrace and a complete betrayal by our politicians. They will be long gone when the damage they’ve caused unfolds. If only green groups also had brains. They’d link population growth with environmental oblivion. The trouble is the environment is resilient. It doesn’t collapse straight away. We’ll continue destroying everything natural until we’re about four times carrying capacity (50 million). Then there are no solutions.

        Australia could not have played the past 30 years worse.

      • OMG says:

        I think the difference is that wealthy Europeans wouldn’t and didn’t want to move here, while wealthy Chinese would much rather be here than on the ‘Mainland’

        As for the environmental impacts, that is not something I am concerned about, if these people are not here then they still exist and contribute to total emissions, its not as if they don’t exist by not being here

        This is globalisation, it does not just have an impact on the location of jobs. The wealthy can pick and choose where they want to live and for the first time a large and wealthy group is choosing here.

        So expect prices to continue to rise in those areas in demand from the ‘Mainlanders” in Sydney, Melbourne and Brisbane. Complaining will not help you, take your course of action and either stay or move.

      • flyingfox says:

        Intelligent debate Step 1.

        Get over the rich Chinese buying in Balwyn.

        BTW I don’t think the demographics of immigrants has changed as much as you think. For everyone coming here with 2-5 M in spare cash, there are 10 more arriving with a very small fraction of that.

        While I agree with your sentiments in general, I don’t condone the illegality of some of the property transaction. Moreover, if these immigrants are not contributing in taxes (apart from stamp duty) then they should be taxed in some other form.

        BTW you should read Gunna’s comments re the marketing and availability of easy credit in HK and Singapore to buy Oz property. 2.2M @ 2% = $40K Easily affordable and you get arbitrage to boot. There in lies the problem.

      • OMG says:

        Thanks FF,

        I refer to Balwyn as it is one of the three main suburbs the Chinese have targeted in Melbourne, along with Glen and Mount Waverley.

        The article in Fairfax last month had quotes from an LJ Hooker agent in GW stating 90% of sales since mid 2013 had been to Chinese buyers

        I don’t think i’m being too hysterical or making this up, but anyways, whatever it may be there is a high concentration of demand from Chinese in these areas and its no surprise Balwyn has seen 45% price growth and Mount Waverley 22% in the past year

        Interesting about the availability of easy credit, I’ll have to read Gunna’s comments

        Three of my friends from the mainland have bought 1-3 properties since arriving here to study back in 2006/7, all money came from their parents abroad, this is the reality I see on the ground

        I don’t think the demographics has changed completely, but the same article mentioned the number of Chinese in Balwyn doubled from the 06 to 11 census and would have doubled since then, in Glen Waverley it was 25% in 2011.

        I’m not against any of this, just pointing out that this will directly impact prices and that the mainlanders I am friends with and know are not interested in only owning one property but are in a race against each other to acquire as many as possible

      • flyingfox says:

        @OMG I know what you’re saying. I rent near those areas you mentioned. My partner is keen on buying but I can get something for the same (ridiculous) price in say Ashburton, Camberwell as I do in Glen and Mount Waverly. Therefore I will look elsewhere when I want to buy. I have no desire to try and out bid someone hell bent on buying in those suburbs because of some innate desire.

        You are implying that the money forwarded to their kids from their parents is unemcumbered cash. All I am saying is that it may not be that black and white as per Gunna’s comments.

        Moreover it is a psychological thing with certain groups. They want to buy property because they see it as the only way to get rich. In the short term they are full-filling their own prophecy.

        But like you said, it’s a global world. You can live anywhere, work anywhere, invest anywhere.

        I do how ever have a problem if these transactions are illegal or these people are getting benefits without contributing via tax.

      • glissom says:

        A high enough broad base land tax makes capital gains unprofitable which will change investors behavior. They will either sink more into buildings rather than just land and profit from the improvements rent (which isn’t rent) instead of land rent (which is rent). Or they will stay out of the market and owner occupiers will get a chance.

      • OMG says:

        Thanks again FF,

        Sounds like we are around the same neighbourhood.

        You are right about Glen Waverley now being the same price as Ashburton, this has only occurred in the past five months since our exchange fell to 89 US centres in late July. Wonder if that tells us anything about where the demand came from?

        Anyways, these transactions that I am aware of are legal, students are used by their parents living overseas to buy properties here, this is legal, you may also notice in GW that many old houses are being knocked down and rebuilt, these were bought by OS Chinese and that is also legal

        As for tax, I am assuming they pay stamp duty

        And the money forwarded to these friends of mine was cash from accounts their parents hold in Singapore

      • flyingfox says:

        @OMG

        Well if it is all legit, I have no problems with it. I invest my money in something that gives me more of a return than housing speculation. They want to be landlords, so be it.

        I can retire in many many places with 2.2 M and live off of the interest from the rest.

        BTW do your friends that invested say last year realize that they have just lost 10%?

      • OMG says:

        The curious thing is they don’t want to be landlords, the second and third properties are empty

        How do you mean they have lost 10%

        They bought in various years, one bought her second in 2013

        Another bought three between ’08 and ’11

        The other bought in 2012

      • flyingfox says:

        @ OMG Well then, that is a waste. Eventually the fad will fade.

        If someone bought last year at USD = AUD using USD dollars, they have now lost 10% because AUD = 0.9 USD.

      • Schadenfreude says:

        OMG, you can tell your friends from me that they are a few sticks short of a bundle.

        I have many clients who have multiple developments across Balwyn, Glen Waverley, Burwood and Mount Waverley and many of them have lost money and are continuing to do so.

        This has all been a rush to put their cash into a perceived ‘SAFE HAVEN’…..however, just like the Japanese in the 80′s, they will learn the hard way.

        A fool and his money are easily parted.

      • OMG says:

        Schadenfreude,

        They weren’t silly enough to buy off the plan in one of the new developments

        They have bough houses and if they put these on the market now they will have earnt a very pretty penny

      • flyingfox says:

        @OMG You mean they will earn a pretty penny by selling to their peers?

      • OMG says:

        One last thing,

        These are rabid speculators. Property is first for foremost on their minds. Each dinner conversation turns to property and who recently bought, where, who owns how many and where they expect to buy their next one.

        They can look quite unassuming, questionable dress sense and some don’t have the best hair cuts, I felt for them initially as they were studying far from home, until I learnt how much was sitting in their accounts ready for the next buy

  2. Ino says:

    > … The renters that Terry Ryder rudely labelled ‘generation whine’

    I love this! Such graceful comeback to a rude arrogant knob.

    • AB says:

      Yes, the arrogance is strong in that one.

    • Explorer says:

      It’s OK to regulalry call ordinary Australians bogans on this blog, but heaven forbid someone calls a person who wants prices reduced before they buy a house a part of generation whine.

      The style of discourse has featured regularly in headlines by the contributors or editors of the blog. It sets the acceptable tone for everyone.

  3. Janet says:

    “..our Governments are elected to ensure that the price of land is not unduly inflated by either the monopoly of this resource, or undue restrictions placed on its development.”
    You might want to reconsider that sentence, Catherine!

    • Snail Cafe says:

      Yeah, I guess self interest and corruption within our pollies and leadership “battles” leave a gaping void where there are no plans or good policy’s in regard to this Land issue Janet.
      Spot on CC,…keep up the good work and keep encouraging Jess Irvine to stay with it also, slowly but surely things have to change…but sometimes a generation has to be disadvantaged before things change

  4. Andy! says:

    Go Catherine, love your work.

  5. speculator says:

    “By the time you add “necessary” ‘energy and safety standards,’ coupled with the cost of labour on top of already inflated land values, developers find it increasingly difficult to provide ‘affordable’ accommodation whilst still making a profit.”

    Australian developers have the largest profit margins in the world (>25% on residential developments), they hoard land, manipulate supply, …

    The reason housing is expensive is the fact that Australians see housing as an investment that will double soon anyway – whatever price they pay. Sure, they want to pay less, but they don’t mind paying a lot because it will double soon anyway.

    People see a house as investment, not as cost of living – that’s what makes houses expensive and people happy when prices are rising.

  6. Rod77 says:

    At some stage Australia’s run of continuous growth will end. The recession will be severe and no one will talk about high house prices for a long long time.

    • rich42 says:

      That will start when there is nothing left to sell, everyone’s in maximum debt and the falling dollar causes massive inflation. That’s now.

    • Andy! says:

      Australia has defied the laws of physics with its perpetual motion property price inflation machine for well over a decade. As much as I hope property prices become amazingly affordable I cannot see it happening due to all the complicit scum in control (RBA, government, planners, banks, media, etc).

      • Rod77 says:

        We lost over 30K full time jobs last year. This year does not appear to be going well either, before we get to the investment cliff Arrow are about to boot a few hundred Alcoa in Vic looks ready shut down the professional services firms are shedding jobs. I would say if we lose 100k full time jobs this year with the continuous immigration we will easily be at 8% unemployment come Xmas.
        You cant negative gear a property on $30 a day, or pay the rent for that matter either.

  7. bennoz says:

    we need another city!
    decentralize the jobs and watch people move – i would! in a heartbeat !

    attract big business, white collor jobs to newcastle / wollongong and watch the exodus begin !

    • TheRedEconomist says:

      Agreed… I’d be out of Sydney town in Heartbeat

    • Andy! says:

      Absolutely!!

    • Moody Cow says:

      This is the opposite of what is happening in Adelaide. The government here is obsessed with the square mile in the middle. They are endlessly redeveloping it and every new project seems to involve the city centre. Meanwhile, hospitals, courts etc. in the suburbs are being left to decay or are being downgraded. All major events end up being relocated to the city.

      Perhaps the series of articles derived from the census results explain why. There is a relatively small group of affluent people who live near the city, work in the city, and are often work for government or close to it, and hence divert all the goodies to their playground even though the city centre is becoming ever less relevant to the lives of the majority.

    • Crocodile Chuck says:

      This is what the FttP NBN was about. Uniform topology nationwide, with the ability to upload huge files from anywhere.

      But since the Libs got in, we’ll get the ‘Dog’s Breakfast’ version……….

    • N.C. says:

      Need to go further out than that… or take it in another direction entirely. What if our next major nation building project was to build 6 lanes of highway under the Blue Mountains, to open up the Central Tablelands?

  8. Hugh Pavletich says:

    Catherine … thank you for an outstanding contribution … again …

    Hugh Pavletich
    Co-author Annual Demographia Housing Survey

  9. Escobar says:

    Catherine

    “Notwithstanding, ‘we don’t’ have a shortage of land – we have poor housing policy driven by vested interests to keep inner city land prices high. I cannot find any other reasonable explanation.”

    No other reasonable explanation regarding affordability?

    I think you said it here:
    “only a relatively small proportion (19%) make up single households, and outside of those who pit themselves against stronger financial arm of the investment sector”

    That is, cheap money and favorable tax policy (NG, CGT) are the other reasonable explanations.

    Also more to your point, you’re assuming the level of immigration and cheap loose money is about right – and that all we need do is increase supply.

    An argument could be made to restrict demand from immigration and tax policy & interest rate / borrowing policy.

    But I take your point.

  10. Explorer says:

    This discussion is like the discussion about market valuation of the stock market using CAPE (Shiller) or Tobin-q.

    It might all be mean reverting in the long term, but it is no guide to whether you ought buy a house today or defer the decsion for 12 months or until prices are more reasonable multiples of median incomes.

    It almost always ignores the circumstances and desires of the majority of those over 30 who already own real estate, or expect to inherit (often a half share in this era of smaller families) a house.

    It ignores other measures of affordability based on interest rates, years of work to repay, the history of 30 years of reducing interest rates impact on borrowing capacity and capitalisation rates.

    There may well be a reduction in nominal prices at a time of great international uncertainty or significantly higher unemployment (the first off are not, generally speaking, home buyers) but when, and will the prices fall to lower than they are now, and will my repayments not fall because of the consequent reduction in interst rates to stimulate the economy in such circumstances?

    There may well be a period of no growth in real prices as nominal prices merely stabilise or grow slower than inflation, but does that mean that it is better not to invest now?

    There are many reasons for buying a dwelling even when prices may appear to be likely to mean revert at some future, unknown, point in time. Stabiilty, lifestyle, reducing costs of moving, security now and in old age, access to particular schools, “forced” saving, risk of equal or greater loss in other investments eg cash through inflation, stock market through a crash, bonds through a company or even government collapse.

    At some point in time the “don’t buy now mantra” will be right, but it is on the way to costing those who followed it at any time in the last 6 years a lot of money. It might still be proven right if there is a huge crash at any time, or ther might be an opportunity cost if prices decline enough to bring nominal prices back to former levels for a while at some future point in time.

    But maybe, in spite of all the “overvaluation” based on historical metrics, the time to buy is now if the time is right for you for some of those other reasons, or even just for speculation/investment.

    What ever you do you are taking a risk.

    • drsmithy says:

      At some point in time the “don’t buy now mantra” will be right, but it is on the way to costing those who followed it at any time in the last 6 years a lot of money.

      Only if they were buying property to make money from capital gains (and, even then, only if they sell before the crash).

      Otherwise they’ve saved money renting equivalent properties for (substantially) less than buying.

      • PhilBest says:

        Exactly. Even if they have “missed out on capital gains” meanwhile.

        The only point at which they would end up “falling behind” is if the cost of renting was actually higher than the cost of buying. But how likely is this with a majority of landlords making an operating loss even though many of their properties were bought long before the current peaks?

    • flyingfox says:

      At some point in time the “don’t buy now mantra” will be right, but it is on the way to costing those who followed it at any time in the last 6 years a lot of money.

      Prove it! From the OCT 2013 RP data release, it was the opposite if anything. People buying in the last 5 yrs and selling in that quarter were more likely to loose money than make money.

      I showed the maths, need to find the post.

    • Free_Market_Delusion says:

      Very well said.

      Ultimately NOBODY knows the future for sure, they maybe right about eventual outcomes but they will invariably be wrong about the timing.

      All I know is that there is ZERO political will to do anything about it.

      So if you want to buy a house the only thing you can do is manage the risk based on as much information as you can find/understand.

      You must look at the downside and the upside risks.

      Think very carefully about the repayments. For example I determine if I can afford 50% increase in payments. Might sound excessive but that is how I manage that particular risk.

      I don’t think there is an ultimate answer of when to buy a house.

      I really thought there was but there simply isn’t an perfect time to buy unless you can go back in time. All one can do is make the right compromises that suit your particular needs.

      • glamb says:

        “I don’t think there is an ultimate answer of when to buy a house.”

        I was in the UK during the GFC. Sure, just after the GFC the house prices had dropped to ‘affordable’ levels, but the banks were not lending money to anyone! Most banks required 40-50% LVRs.

        So for all those people holding off buying until the ‘price is right’ might be in for a shock – as they still will not be able to buy a house when the price drops.

  11. TT says:

    Hi there.

    I am curious about how median house prices are determined. Adelaide apparently sits around $392k but if I look for anything < 20km to the CBD it's well above this. If I go out over 20km to places to Elizabeth and 40km to Aldinga I can find houses in this bracket.
    Are there any stats that look at house values limited to a defined distance to the CBD? I feel that 20km should be the outer limit for 'metropolitan' living.
    Thanks!

  12. Turnitup says:

    It all becomes clearer when you let go of the notion that governments are there to ensure a fair go for all.

  13. gregonomic says:

    Rent strike, anyone?

  14. Locus of Control says:

    Just a point from a FHB’s perspective. Maybe the problem isn’t that FHBs can’t afford a house+land, maybe it’s just they can’t justify the purchase/ years of their life required to pay it down. That’s the case for this FHB.

    House-sharing is cheaper than buying with all its attendant costs (mortgage interest, rates, taxes, insurances, maintenance, etc.). Do I really want to give more money to governments in taxes?

    “Furthermore, a CIE study commissioned by the HIA, demonstrated how imposed taxes on developments, when added together, come to 39% of the marketed house and land price.”

    There’s your reason for government inaction on house prices right there. If house prices increase, even if that nominal 39% tax remains constant, in absolute terms the taxes raked in by governments will increase.

    Curiously renting offers more security than a mortgage. If I became sick, unemployed, incapacitated, etc. I could pay rent at current prices for another ten years from savings. A mortgage – maybe I could keep paying it for six months, but no longer. Plus I can move for a job more easily if I’m renting .

    I can spend the next 20 years of my life paying down a mortgage or I can rent, travel, move around, have money over to invest in diversified areas. & believe me, I have the discipline (I can only hope I have good fortune too) to save enough for a small place for when I retire forty years from now, plus an amount over for living expenses in retirement.

    On their death bed does anyone ever say “I wish I spent more years working to pay for my mortgage”. Prob’ not. But that’s what overvalued housing entails. On my deathbed I want to say “I lived a frugal but comfortable life, travelled widely, studied broadly, worked hard, met my needs, but not always my wants and so lived as sustainably as possible.” So that’s the way I live my life.

    Oh and in terms of comparisons b/w previous generations and now.

    My grandparents were gifted land (in Perth) when they married (age: late twenties), lived in a shed for two years running a business adjacent and after two years had saved enough to build a four bedroom house (1950s/ 60s). They’d paid it off within ten years and later bought a cheap holiday home down the coast for about six month’s worth of savings because their caravan was too cramped and stressful with four children. They still own the business (which they lease providing them with retirement income – a six figure sum) and the holiday home (worth half a million now). Yes they sacrificed (lived in a shed for two years) but they did not sacrifice twenty years of their life and they still enjoyed holidays and could afford to have and care for four children.

    My parents bought a near-new home in their late twenties (mid-1980s)in a large regional centre at a multiple of about four times dad’s income. The house, despite high interest rates of the early 1990s, was paid off by the mid-1990s. Mum’s salary went towards the mortgage for the first 2-3 years, before she left the workforce to care for children, so the bulk of the mortgage was paid for on one income. My parents did not skimp to pay the mortgage – they had hobbies, study, magazines, holidays, bought books and generally lived a fulll life.

    Me. A median house costs about seven times my income and even a two bedroom apartment costs about five times my income. To pay the mortgage, even at low interest rates, would involve forgoing holidays and many discretionary purchases that my parents/ grandparents would once have bought without thinking twice (books, magazines, membership to sports clubs, etc.). Buying a holiday home for instance, is out of the question. And before you ask my expenses are pared back to basically food, rent, fuel and the odd utility bill. And that would be all I’d be buying if I had a mortgage too. I suppose that’s the reason why retail is in the toilet.

    • flyingfox says:

      +1

    • Free_Market_Delusion says:

      Just curious about your age?

      Quite a lot I agree with but I’m now 40 years old so in a sense I have already done a lot and now I want to settle down and have my own place where I can do things I want to do. Most of my hobbies require a large shed and more than 500m2 of land.

      Larger properties can be rented but they end up being much larger than required and more aimed directly at people with horses. Bottom line they are relatively expensive for renting more than $2000 per month.

      I have looked at renting a factory for my hobbies but factories are really expensive to rent. Cheapest single car factory $550 a month and to get decent sized its well over $1000 per month.

      • Locus of Control says:

        Age: mid-twenties.

        But I can relate to your circumstances. I have friends who are mid-forties/ fifties, don’t want to move any longer, want to settle in one place with a bit of land for a small orchard/ vegie garden or something and are finding things bl***y difficult in the current market. These are people who want a house for the sake of a home, not as an “investment”. I feel for those people as well as those on low incomes and those with dependents (young and old) to support in the current environment.

        I guess I was makng two points.

        1) I can find no value in property at present prices, esp. in a globalised world where jobs are transient. Transaction costs and prices (overall – holding, borrowing, etc.) would have to be cheap for me to buy at current values because with work I could not tell you with any certainty whether I’ll be in the same job tomorrow, in two years or in ten years. Maybe yes, maybe no, I need the flexibility as do many workers these days. The “joys” of puttting pictures up or planting a garden just doesn’t offset the overwhelming purchase/ transaction/ tax/ borrowing costs for me.

        2.) Is the sacrifice worth it? At what cost to me? If I had the place paid off in ten years as my parents did (paid off mid-thirties) with time available to save for retirement or invest in myself (hobbies, travel, study) or a business, which I might add is what my parents and grandparents have achieved (so I am not “more entitled” than the previous generation), maybe I could justify it. I’ve saved for seven years straight and now have about 50% of a median houseprice in savings/ investments. It would probably take me 15-20 years to pay the balance off a mortgage for the standard of dwelling my parents/ grandparents purchased (i.e. near-new, low maintenance, not requiring major renovations/ restoration work). Bugger it. I can rent something comparable and have the same standard of living they enjoy(ed) at a fraction of the cost.

        I suppose the third point is the rest of the economy suffers when the majority of people’s earnings are sacrificed to home-owning. The tourism industry suffers because people don’t take holidays, education suffers because people don’t have time/ money available to upskill, discretionary retail suffers, etc. yes, housing construction employs people, but how many more people could be employed if people didn’t plough it ALL into one house?

    • CleverUsername says:

      +1

      I feel you. What to do? Rent a small house walking distance from work, parks, shopping and entertainment, or move to an apartment on the outskirts with increased travel time/decreased leisure time with a 30 year ball around my neck? For what, a really long-shot gamble?

      I am gradually trying to distance myself from the property ownership ‘dream’. It’s a tough sell, especially for my other half, but not much choice in the matter.

    • Snail Cafe says:

      You are wise beyond your years, thanks for the great post…..all being well and fair in the future you should get a leg up through inheritance but I think
      you are wise enough to not even mention that at this point in time.

    • tonydd says:

      What the above series of comments have in common is that each persons needs are varied and the social pressure is to conform ie do just one thing the correct, sensible, prudent, responsible, intelligent, rewarding and the ‘don’t you love your family’ thing.

      Good for you enjoy and be happy.

      However what we discover is that housing is a function (or used to be) of employment. It’s been easy to buy let’s see how they go paying for it.

    • pconners says:

      Very interesting insight Locus.

      To add to your anecdote, my folks bought a quarter acre block in Peppermint Grove in 1972 for $26,000. Median house price now $3.7m, an increase of over 140 times an annual rate of over 12%. Dad was an engineer, mum worked briefly as a school teacher.

      The parent’s of my best friend growing up were school teachers. They had a place in City Beach. Median house value today: $1.7m.

      None of these situations are remotely possible in today’s market.

      • flyingfox says:

        None of these situations are remotely possible in today’s market.

        Yet people continue to pile into property believing just that …

  15. CleverUsername says:

    Potential FHB here. The law has been skewed to benefit those already on the gravy train, who just so happen, due to the ageing population, to be the same people that are gradually forming an increasingly disproportionate share of the voter base.

    So if the politicians are sitting pretty, and the same goes for the voter base, what incentive is there to change absolutely anything? Unless the people that elect the government actually see something wrong with the situation, the circus will go on.

    Until then, I will stash my money in my mattress and/or use it to travel the world.

  16. rkrish999 says:

    I lived in Australia in mid 1980s to mid 1990s. There was a boom there in 1980s and it slowed down by 1993 or so. I could afford a modest home even during the boom. Then I moved to the USA where I live now. Same story here – a big boom till about 2005 (luckily I bought my home in 2000) then a crash from which USA is still recovering.

    IMO Government should never encourage housing as investment (whether negative gearing in Australia or interest tax deduction in USA). The basics of life such as safety, shelter. food and health should not be subjected to uncontrolled market forces like say your iPhone and Laptop.

    When I lived in Australia I heard similar stories – 2% interest in HK vs 12% and 13% in Aus. So the HK Chinese could borrow there and buy up homes in Aus. etc.

    The world has changed in the last 30 years and many many jobs are no longer paying well enough. The corporate chieftains who have no ideas to improve their products/services have one “idea” always to fall back on – “cut costs”. This usually means they ship jobs overseas and layoff locals in countries like Aus and USA.

    The top end shouts: you are whiners – work harder, work smarter etc
    The bottom end shouts: raise minimum wages, give us work to do etc

    I the solution as the end of out of control capitalism. The silver lining is that countries like Aus and USA are run by governments elected by the people. So sooner or later we will have governments that will put a check on out of control capitalism. Lets see how this plays out …