REIA: “Housing is not affordable for FHBs”

ScreenHunter_01 Jan. 27 23.41

By Leith van Onselen

The Adelaide Bank/Real Estate Institute of Australia (REIA) has today released its quarterly mortgage affordability report, which conveyed the simple message: “Housing is not affordable for first home buyers”:

The December quarter of 2013 recorded a fall in housing affordability with the proportion of income required to meet loan repayments increasing 1.0 percentage point to 30.8%…

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With the exception of the Northern Territory, all states and territories recorded a downturn in affordability over the quarter with the largest in New South Wales, where the proportion of income required to meet loan repayments rose by 1.8 percentage points to 35.6%…

ScreenHunter_1493 Mar. 05 10.17

First home buyers made up 12.5% of the owner-occupier market compared to 13.6% in the September quarter of 2013. The figure is the lowest since the Australian Bureau of Statistics started to collect data on the activity of first home buyers and is also persistently low compared to the long-run average proportion of 19.9%, despite eight interest rate cuts since November 2011…

There is anecdotal evidence that younger Australians are opting for living in rental accommodation or with their parents longer and investing in property rather than becoming first home buyers.

With the removal of assistance (First Home Owner Grant, stamp duty concessions) to first home buyers of established homes in the majority of states and territories, younger Australians may be realising that there are better incentives to becoming investors rather than home owners. For some, this is the only way to get a foot in the door…

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Over the December quarter 2013, rental affordability improved slightly with the proportion of income required to meet rent payments decreasing 0.2 percentage point to 25.4%. Compared to the same quarter of 2012, the difference was identical.

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In a welcome development, the REIA has also abandoned earlier calls for demand-side policy measures, such as stamp duty reforms, access to superannuation and first home buyers’ assistance, and instead called to “ease the supply side problems that are putting pressure on housing affordability”.

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Comments

  1. And here’s the rub: FHBs are no longer pressing their cold little faces up against the window looking in with envy at security and comfort. They have abandoned home ownership.

    It will take an economic reset to change this now. A fat FHOG is unlikely to work as the vendor-only benefit is widely understood. Interest rate are already at depression levels. I see little alternative to a land price correction and all the woe this will bring.

    • The dream hasn’t been abandoned – simply deferred.

      The desire for shelter is a primal urge, it cannot be switched off… but it can be ignored for a few years (while you’re in your 20s).

      Low(er) rates (about 1% lower than today), 40 year loan terms, inheritances and family guarantees will eventually draw first home buyers back into the market.

      • CleverUsername

        Agreed, the desire is still there for me.

        No way i’m getting into this racket though. It’s dirty, but it’s fascinating watching it play out.

        I do sometimes feel like the sensible are being punished.

      • “…..The desire for shelter is a primal urge, it cannot be switched off… but it can be ignored for a few years (while you’re in your 20s).Low(er) rates (about 1% lower than today), 40 year loan terms, inheritances and family guarantees will eventually draw first home buyers back into the market…..”

        A shortage means some proportion of people “priced out”, period.

        The situation has not improved as you suggest it might, in the UK, where the problem is more mature than in Aussie:

        ‘Sheds with beds’ are London’s modern day slums
        http://www.bbc.co.uk/news/uk-17185294

        Generation Rent and the Broken Housing Ladder
        http://www.channel4.com/news/broken-ladder-generation-rent-microapartmen…

    • Strange Economics

      Its not a dream – its an addiction in the Australian psyche – how many restaurant dinners have you listened to people talk about property prices going up (great !). Hmm perhaps should buy an inner suburb restaurant instead !
      An addiction is something that you have to have, get depressed if you don’t, are willing to pay 50% of your income for, and give up all else. and think of nothing else.. In the US people buy internet shares instead, in some places they start a business, here we renovate..!

    • Agree with DC.
      I sense a change in perception and expectation.
      YOLO kids don’t believe in money or houses anymore…
      Why would they?

  2. Forrest GumpMEMBER

    This is how a first home buyer buys a new home.
    1. Obtain the grant
    2.Buy/Build house
    3. Move in.
    4. After 3 months move back to Mum and Dad and rent out.
    5. Rent out for the next 5 years using the negative gearing refund on your tax return as the extra repayments off the loan

    This is the “new” method of home ownership.

    Goodbye “FHB” and Hello “FTI” (First Time Investor)

    • And what about a family creation? Do the new families go back to mums and dads? This is just ridiculous suggestion and very few do it, because it is not convenient for families with more than 2 kids or with kids who start a family, or with kids who want privacy etc….

      • The viability of this scheme does not depend on living with Mum & Dad (although that obviously helps). If you buy one home, let it out, and rent another home of the same rental value, you get the negative-gearing benefit that is denied to you if you live in the home that you buy. Furthermore, you can change your (rented) place of residence without incurring stamp duty.

    • This is a logical consequence of our perverse tax system. It used to be that the CGT exemption offered to owner occupies was more valuable than the negative gearing benefit offered to investors. Now it is the other way around. Of course, if you can claim both of them for A 5-year period, that’s even better!
      Also, Stamp Duty in Australia is about ten times higher than on an equivalent property in the U.S.

  3. HealthyInvestor

    All I know is that at the moment you can’t buy a house unless you have dual incomes.
    You can’t start a family until you are well into your 30’s. Most people have no savings. Unless you’re parents give you a hand and you rent your home out you will never ‘own’ a home. Most people who come to see me don’t understand why they can work as a brickie, build houses for a living and probably work enough in a lifetime to build 50 houses yet the best they can afford is a dump 1hr from any major city. It’s mind boggling. Lastly no one seems to understand why 80k in building materials translates into a 30 year 1.2 million dollar loan. So they just say hey… Nuts to that. I’ll buy a place outright overseas.

      • Thanks Flyingfox….I love Ashburton…Had some great encounters there as a young bloke.

        Everywhere’s expensive…How do local South Americans afford to live there? Asia? Too dodgy…I’d love to retire there for a bit but wouldn’t trust buying somewhere like Indonesia and it seems most other places are either too dodgy or already expensive. Memphis seems a good return.

        I’ve just bought a NSW regional coastal house..positively geared…might buy another. At least then I’ll hopefully have it paid off by retirement and will have the equivalent weekly rent of a regional house (whatever that might be in 15 years..presently $400/wk).

      • @rich42 Personally I really like NZ other than auckland but many parts are quite expensive. However some nice regional towns and farming communities still around.

        Don’t know much about south america but the truth is that you are right, locals may not be able to buy. But, this is anecdotical only, I suspect if you are up in the income chain, you will do alright in many of those places.

        Germany? Spain?

      • Thanks philbest…It’s appreciated…I’ll do some research…I’ve done it before but always think, man there’s not many bargains out there…add the sovereign risk and tax BS and I always come back to looking here. You’re right Aust is over the top…but…you can get regional bargains I’ve found. That’s where they’ll spill to from the cities as they get EVEN MORE ridiculously full.

      • Spain is super cheap right now, comparable to rust belt US cities. Unemployment is high, but maybe opportunities for a cashed-up Aussie would be better than for a local.

        It is hard to find a user-friendly RE site for German property, but here is something for Berlin:

        http://www.thelocal.de/property/?purchase_or_rent=&county=&municipality=Berlin&area=&type=3&number_of_rooms=&living_area=&min_price=60000&max_price=300000&min_rent_price=&max_rent_price=&property_submit=

      • And don’t forget to check out prices in Vancouver as a salient example of what happens when you give cashed-up foreign buyers looking to shift funds out of their autocratic homelands open slather on your property market.

      • Thanks Phil,

        Funny, for about the cost of very healthy deposit on a nice townhouse in middle Melbourne, you can get a place on the french riviera.

        Might look in Germany.

      • HealthyInvestor

        We went to Houston last year and will be going back this year 😀 so that looks like the winner for us. Shame to lose your professionals to America but why would we live in Australia when we can live in America at 35 with a 3 story house that’s awesome as hell fully paid off in a nice as suburb for 1/3 the cost in Australia. I know it’s sneaky but I’ve been sending cash to the US by post to my uncle to buy a house for us. All we need now is a job and that’s it. All set. Also we’ve been told just get in grab a job then never leave. They won’t kick you out especially if you establish family and work. So yer that’s our plan. Perth can fk itself. Were not paying a 1.4 million dollar loan for an asbestos shack in vic park that was built in the 50’s lol

      • +many. Have been trying to convince the mrs but she wants to settle down. plus family is all near oz.

  4. Just did some extensive research, looked up the amount of 3+ bedroom homes in the Narre Warren area, there are 127 below $350k on the market

    Last time I checked you could get a 3 year fixed loan for $4.99%, three years ago these rates were 7.10%

    Somehow I’d say it is very affordable for FHB’s for buy a home, maybe they just need to adjust their expectations to match their reality

    • Charles Ponzi

      During the upcoming recession, I predict it will be the vendor who will have to adjust their expectations!

    • Somehow I’d say it is very affordable for FHB’s for buy a home, maybe they just need to adjust their expectations to match their reality

      Why?

    • I have adjusted my expectations to match my reality. I sold my home and ditched a 2hr each-way commute. Now I rent and cycle to work.

      • Perfect, I like the cut of your jib

        You could have whinged and moaned like the rest of the mothers club on here but instead you made a choice and got on with it

        Would like to have you as an employee

      • Nice one N.C.
        I’d like to have you as my tenant and my personal assistant.
        p.s. no bikes allowed inside. No bike hanging hooks to be installed either.

    • Did you OMG? Where was your first home? What BS. Easy to dismiss the young with that garbage.

      • Hate to give you credit, but I bet you had your finger in plenty of other pies too. The young now can’t afford it by putting everything they can into it.

    • 127 .. One hundred and twenyty seven….homes.

      Remember, these are the stock well below average… at below $350k.

      Now the figure shows median household income in Vic equates to $79,144.

      Let’s assume at approx $320k, that’s still 4 times before-tax combined income.

      The income ratio is high, because get this amazing insight…. it has to be paid back!

      So the entire youth of metropolitan melbourne…as long as they are coupled and thus 2 incomes…. can look forward to 127 houses in Narre Warren.

      Young blokes, forget this ne’er do well dumbass who was gifted everything.

      Live minimalist, do nothing but lift iron and save money, save around $150k then move to Thailand.

      Serviced apartments go for around $4-700 per month.

      The women still have waist lines.

      All you have to do to fulfil this is be an ESL teacher for 15 hours per week, use the rest to spend energy building up an online business.

      Then you’ll have a life of no alarms waking you, no commute times, cheap and health(ier) food and much lower tax.

      Starve the beast, these BB losers are parasites that need a host, they will perish without a host.

      Don’t be that host.

      • HealthyInvestor

        Clap clap.

        Agree. BB are their own worst enemy.

        They can get fked if they think we’re going to pay for their healthcare just because they don’t want to pay their capital gains tax or positive gearing tax.

        They are the stingiest generation ever with no thought for the future generations. Australia will be better off once they bite the bullet.

        They only people buying their houses are their kids who get them to give them deposits.

        The rest of the world is 10x better than Australia.

  5. Assuming self-similarity is a great guide, the first graph has hit Fraser Island. Once it hits Byron bay, it’s all down from there!

  6. reusachtigeMEMBER

    FHBs should stop whinging! There’s plenty of affordable housing up for sale in old public housing estates like Mt Druit!

    • Mt Druitt can be a little pricey because it has a train station.
      But you can rent a granny flat at the back of a house in Lethbridge Park, Whalen or Tregear for around $200 per week. As long as you have a job and a car and no kids then that can work out quite well.

  7. “Housing is not affordable for first home buyers” should have finished the sentence with “but who gives a rat’s because local and foreign investors have more than taken their place, and are far more useful anyway as they are more capable of pushing up prices.”

  8. On the drop in FHBs as a percentage of total buyers, isn’t this well documented as a data collection issue? ie: FHBs that don’t qualify for a grant are not being reliably counted.

    Also, I’m not sure that using the average loan size is a great way to measure home affordability. If average LVR increased without house prices or incomes changing, that would impact the figures but have nothing to do with housing affordability. The best way, in my opinion, is to measure the percentage of household disposable income required to service a loan with size of a fixed percentage of the median property price. But we’ve gone over that one before.

    • The best way, in my opinion, is to measure the percentage of household disposable income required to service a loan with size of a fixed percentage of the median property price.

      Isn’t this affected by changes in average mortgage duration and interest rate volatility?

      IMO affordability means different things to different people.

      • Yes, it is affected by rate fluctuations, so is the REIA metric.
        It is not affected by mortgage duration if you hold assumed duration constant when calculating the data.

      • But the ratio of household incomes to price is not affected by either of these. Not saying it is perfect, just a different way of looking at the same thing.

      • The price/income ratio should be known as the drug dealers’ affordability index because it’s only really relevant if you don’t pay income tax and buy houses with cash.

      • The price/income ratio should be known as the drug dealers’ affordability index because it’s only really relevant if you don’t pay income tax and buy houses with cash.

        That’s stretching it just a little, isn’t it. Like I said, affordability means different things to different people.

        To someone that wants to own their house as soon as possible, the price to income ratio is more important than other measures. By the same notion, to someone who just wants to get into the market, all that matter is the interest on the loan.

      • If we are talking about affordability and whether FHBs are priced out of the market, surely we are talking about someone who just wants to get into the market and for whom affordability of cap+interest mortgage repayments is the main issue. The index I suggest does ignore affordability of deposit, so i admit it has its limitations.

        The drug dealer moniker may be a stretch but an index that ignores finance costs is a stretch, so I think it fits.

      • If we are talking about affordability and whether FHBs are priced out of the market, surely we are talking about someone who just wants to get into the market and for whom affordability of cap+interest mortgage repayments is the main issue.

        Like I said, it depends. I’m a first home buyer and the price to income ratio is more important to me.

        BTW, if you are normalizing mortgage lengths and assuming principal + interest than you are implicitly taking the price/income ratio into account with the variability introduced by the interest rate.

      • Sounds like “affordability” isn’t an issue for you in that a price increase wouldn’t price you out of the market.

        Yes, purchase price affects mortgage repayments.

      • Sounds like “affordability” isn’t an issue for you in that a price increase wouldn’t price you out of the market.

        Like I said, means different things to different people.

        Yes, purchase price affects mortgage repayments.

        So we agree on something. Different measures tell you different things. If you get priced out, the banks will just introduce longer mortgage durations or cheaper rates.

        Does it make it more affordable? You will be able to make repayments yes, but when will you own the house?

        Another measure would be total cost of loan over total income over the duration of the loan.

      • Yes, there are different measures for different purposes. Even drug dealers need to buy a house, so I didn’t say mine was the only measure, I just think it’s the best for measuring affordability for the majority of people.

        Perhaps I should have added more detail; my measure would be based on a standard LVR and duration, making it the same as your “total cost of loan over total income over the duration of the loan” if you are using disposable income.

      • Even drug dealers need to buy a house, so I didn’t say mine was the only measure, I just think it’s the best for measuring affordability for the majority of people.

        Then can I call interest only loans, welfare loans?

        Perhaps I should have added more detail; my measure would be based on a standard LVR and duration, making it the same as your “total cost of loan over total income over the duration of the loan” if you are using disposable income.

        By your measure, do you think affordability has been the same over the past decade? two decades?

      • I don’t follow the logic in calling them welfare loans.

        Affordability in 2012 was on the 30 year average for someone taking out a 25yr 80% loan, ignoring the (un)affordability of the deposit.

      • I don’t follow the logic in calling them welfare loans.

        Since the banks plus debtors will be be bailed out from the public purse if things go pear shaped. And we were calling names….

        Affordability in 2012 was on the 30 year average for someone taking out a 25yr 80% loan, ignoring the (un)affordability of the deposit.

        By what measure?

      • When were we calling names?

        By the measure of proportion of household disposable income required to pay the mortgage.

      • By the measure of proportion of household disposable income required to pay the mortgage.

        I find that very hard to believe. However perhaps if your using current interest rates since they are the lowest in history.

        When were we calling names?

        When we started to refer to anyone with the ability to cash purchase a house as a drug dealer. I am sure the Chinese will take offense.

      • Rates are low, that makes mortgages and therefore houses more affordable for anyone that requires a mortgage to buy a house.

        I never said that everyone who can pay cash is a drug dealer. I’d prefer it if you didn’t twist my words.

    • Rates are low, that makes mortgages and therefore houses more affordable for anyone that requires a mortgage to buy a house.

      And we are back at square one. Like I said, this is a very volatile measure. By something is affordable for a maximum of 1/5th the duration of the loan, doesn’t make it so. However I am still surprised because atleast against past census data gross incomes, affordability was decreasing.

      http://www.macrobusiness.com.au/2012/08/rba-wags-the-dog-on-housing-risks/screenhunter_10-aug-15-10-51/

      I never said that everyone who can pay cash is a drug dealer. I’d prefer it if you didn’t twist my words.

      Not twisting your words. You said

      The price/income ratio should be known as the drug dealers’ affordability index because it’s only really relevant if you don’t pay income tax and buy houses with cash.

      By implication this means that those who pay by cash are likely to be drug dealers.

    • However I am still surprised…
      See Graph 2 here.
      The chart you linked to is based on median mortgage payments and is affected by peoples’ behaviour independent of housing affordability (eg: if everybody borrowed at higher LVRs so they could buy a boat as well as their house, those figures would be change without any change in affordability). The chart I referred you to would not be affected in this way.

      By implication this means that those who pay by cash are likely to be drug dealers.
      Now that is stretching it just a little. Drug dealers not paying income tax and being able to pay cash does not imply that everyone who pays cash is likely to be a drug dealer. When you order a ploughman’s lunch, do you wonder if people think you’re a ploughman? Of course not. Just because something is named after a particular group of people it doesn’t mean that everyone associated with that thing is part of the that group.

      Edit: link not working, here’s the full address: http://www.rba.gov.au/publications/bulletin/2012/dec/pdf/bu-1212-2.pdf

      • The chart I referred you to would not be affected in this way.

        The methodology for the chart isn’t explained well. Was a standard duration used to compute the loan repayments. The reason I ask is

        Lower nominal interest rates also reduced the
        degree of ‘front-end loading’ in housing loans –
        whereby the servicing and repayment burden is
        disproportionately large in the early years of the
        loan – thus increasing the maximum possible
        loan serviceable with a given level of income, and
        therefore increasing prospective buyers’ spending …

        When you order a ploughman’s lunch, do you wonder if people think you’re a ploughman?

        No but there is a reason they are called ploughman’s lunch.

        Drug dealers not paying income tax and being able to pay cash does not imply that everyone who pays cash is likely to be a drug dealer.

        This the label you chose. Not me. Why not call it the cash buyers index?

    • The methodology for the chart isn’t explained well. Was a standard duration used
      Yes, believe a 25-yr duration is used. Don’t have time to find the reference right now. You can search through the reference list at the end if you really want to (believe I had to go Inception style and burrow through several layers of references within references to find it previously).

      Why not call it the cash buyers index?
      Call it the Humpty-Dumpty index if you want, makes no difference to me. My point was that an index measuring the price to gross earnings ratio without considering finance costs or tax burden is a good measure of affordability for only a very small set of people, because the vast majority of people would be buying with a significant mortgage and paying that mortgage with after-tax dollars.

      • Yes, believe a 25-yr duration is used. Don’t have time to find the reference right now. You can search through the reference list at the end if you really want to (believe I had to go Inception style and burrow through several layers of references within references to find it previously).

        Will have a look over the weekend.

        My point was that an index measuring the price to gross earnings ratio without considering finance costs or tax burden is a good measure of affordability for only a very small set of people, because the vast majority of people would be buying with a significant mortgage and paying that mortgage with after-tax dollars.

        Firstly, as far as I am aware, disposable income ratios are used. Gross income is skewed even worse because of compulsory super etc. This was one of the short comings of using national gross disposable income.

        Secondly, my point was that any one metric on it’s own only tells you a part of the picture. Just look at Figure 2. The volatility can be > 50% from the mean. Saying something is more affordable today because interest rates on a 30 year variable loan are the lowest in history, doesn’t make it so.

        Not only that but your average is heavily skewed by the past decade. Lets say we compare the “affordability” between 1982-1992, 1992-2002 and 2002-2012?

    • See here for what I believe is the same data but for the four major capitals rather than national. It says it’s for a 25-yr loan.
      http://stockland.ice4.interactiveinvestor.com.au/Stockland1002/InvestorPresentation/EN/pdf_pages/page_0054.pdf

      Secondly, my point was that any one metric on it’s own only tells you a part of the picture.
      Yes, and if you look at only one metric you should probably choose the one that is most applicable to the situation and people you are interested in. If we are talking about affordability for FHBs and potentially pricing them out of the market, I don’t think we are particularly interested in cash buyers.

      Lets say we compare the “affordability” between 1982-1992, 1992-2002 and 2002-2012?
      Yes, mortgages were quite unaffordable for most of 2002-2012 but are now (as of 2012) back at the 30-yr average. You could say they are less affordable than during most of the nineties. You could equally say they are more affordable than at any time since 2003, save for a brief period during the GFC response with emergency rates. You can compare the current situation to whatever time from history you want, to get whatever result you want.

      • See here for what I believe is the same data but for the four major capitals rather than national. It says it’s for a 25-yr loan.
        http://stockland.ice4.interactiveinvestor.com.au/Stockland1002/InvestorPresentation/EN/pdf_pages/page_0054.pdf

        Ok.

        Yes, and if you look at only one metric you should probably choose the one that is most applicable to the situation and people you are interested in. If we are talking about affordability for FHBs and potentially pricing them out of the market, I don’t think we are particularly interested in cash buyers.

        And I don’t think we’re interested in an instantaneous metric either. We do have a variable mortgage rate and mortgage duration is 25-30 years. There are a lot of other social factors that come into this as well which have been discussed to death so no point repeating.

        Most people would reasonably compare affordability to their parents gen or previous gen. And by even your metric, affordability has been on a downward slope since late 90s until the RBA juiced things up.

        Yes, mortgages were quite unaffordable for most of 2002-2012 but are now (as of 2012) back at the 30-yr average.

        And mortgages have been below the 30 year average for the majority of the 30 years except the past 10.

        You can compare the current situation to whatever time from history you want, to get whatever result you want.

        And you can compare any statistic you want to get whatever result you want. We agree on something.

      • And I don’t think we’re interested in an instantaneous metric either.
        I think we are, if we are interested in affordability at this point in time. You can say that affordability will drop if interest rates go up, if you want to take a crystal-ball approach.

        affordability has been on a downward slope since late 90s until the RBA juiced things up
        It was on a downward slope to 2008 and has been on an upward trend since then (ignoring the post-GFC spike). Low rates are here to stay, maybe not quite as low as they are now, but I can’t see the cash rate rising significantly any time soon. We need to get used to it because if interest rates remain low (which they will) and real wages don’t fall significantly (they may fall a fraction), then real property prices won’t be coming down significantly any time soon. But that’s me taking the crystal-ball approach, so if you disagree we will just have to agree to disagree.