The Property Chain

The Property Chain

In comparison to first home buyers – and even owner occupiers, investor activity has been dominant over the previous 12 months which is no surprise – banks are ‘bidding’ for buyers in a highly competitive market, reducing interest rates principally on fixed term loans outside of the RBA’s cash rate cycle and if the right property is sourced, current rental yields are also offering attractive returns. 

However, first home buyers have seen their savings eroded and as the latest ABS finance data outlines, intermittent FHB ‘cash injections’ or the oft quoted myth that rising yields are pushing greater numbers into the ‘market,’ is having scant effect on a sector for which saving a deposit and sourcing a suitably affordable property is no easy task.

It’s not being sensationalist to emphasize, that despite all our statements regarding improved housing ‘affordability,’ and half hearted attempts from both state and federal government to inflate the market with incentives that fail to offer long term solutions – the results for initial buyers are overwhelmingly clear and will consequently bear an effect on the future of both our real estate market and economy as a whole.

The latest figures from the ABS show the number of first home buyer loans in December 2012 fell to 14.9 per cent.  It’s the fourth consecutive month that this segment of the market has been in decline.  Further information from R P Data’s latest ‘media release,’ indicates housing finance activity by first time buyers is -17 per cent below the average figures recorded over the previous 11 years leading to 2012.

A further drop in variable rates currently being offered by a proportion of lenders, may inspire a bit of latent activity – however they are all ‘short term’ fixes and you have to wonder what effect will result when rates eventually rise – especially if wage growth doesn’t match pace.

According the R P Data’s calculation of ‘annual’ price changes (which they’ve ‘assumed’ based on 6 months of statistics) – house prices are already rising “faster than wages and disposable household income growth.” Any help first home buyers get on the borrowing side – they’ll inevitably lose on the other.

We’re losing a valuable demographic of property buyer which will have a ‘flow on effect’ across the property chain as a whole. As the changes push through the generation gap – increasing numbers will retire whilst still factoring as short term renters.

In lieu of first home buyer participation, the predominant activity in the inner city ‘affordable’ sector of the apartment market – activity which is filtering into capital city ‘median unit’ price rises (which APM suggest in Sydney alone, rose to ‘record heights’ over the latter half of 2012) – is being fed by investors.

Investors are managing to drive up property values in this sector all by themselves without the added injection of ‘home buyer’ emotion. Two investors going ‘head to head’ is something I commonly see whilst doing the auction rounds on a Saturday. 

Certainly most ‘off the plan’ and new unit developments are sidelined for this demographic (usually via off-shore funding) – however, investors are also predominant in the ‘established’ apartment market which would otherwise be favoured by first home buyers and perhaps provide a supply of accommodation an initial buyer would be willing to stretch their budget for, if ‘gifted’ the opportunity to do so. 

The percentage of ‘investor owned’ apartments in both Darwin and Brisbane falls close to 70 per cent– and in the other capitals, it comes in between 60 and 70 per cent. 

As we’re all aware, property to some extent connects together like a flowchart. Supply is fed in from the bottom to allow those upgrading – (and then downsizing) – a ready market to sell into in order to ‘make the move.’

However, when investors predominantly negatively gear into the asset class most favoured by first home buyers – which results in inflated property values – and State government fails to come to the party with ‘feasible’ affordable alternatives, our property ‘wheel’ of upgrading and downsizing becomes somewhat stagnated.

Investors tend to hold property for extended periods of time in order to build equity – many choose to invest as part of their SMSF and subsequently do not sell until retirement. Therefore the ready supply which would usually come from initial home buyers selling and upgrading, inevitably starts to slow.

For first home buyers able to stay in the family home longer, they may advantage from entering the property ‘train’ as an investor.  It won’t necessarily help the fluidity of the housing market, but it’s an option a limited number are taking advantage of. 

However, it’s clear from the 2011 census data that greater numbers are being forced onto the rental ladder and subsequently getting ‘stuck’ in the ‘yoyo’ of rising yields and a lack of affordable inner city options until they either meet someone with whom to combine wages – or gain access to the ‘mum and dad’ equity pot.

Proportionally we’re growing ‘older’ as a nation – census data tells us the number of 20-44 year olds has expanded on average by 4.6 per cent per year in the five year period leading up to the last census – however by 2020 it’s expected to slow to 1.2 per cent per annum – (a trend clearly demonstrated by the United Nations World Population pyramid which extrapolates the data out to 2050.)

 

Considering the predominant ‘home buying’ activity takes place within the ages of 22-44, it seems reasonable to assume that there’ll eventually be proportionally greater demand from those downsizing as we progress through these ‘buyer type’ changes.

However, if the flow on ‘home buyer’ effect doesn’t follow through, the ‘mis-match’ of household size comparable to property type will continue to stagnate our property ‘buying and selling terrain’ and further tie down supply in the areas most want and ‘need’ to reside – areas within easy commutable distance to city suburbs, jobs and essential amenities (schools, hospitals, doctors, public transport systems and so forth.)

Our census data already demonstrates that most lone person households are tottering around in accommodation that’s far too big for their requirements. Building an abundance of one bedroom apartments won’t suffice – only 14 per cent of the total single person households (of all ages) opt for one bedroom units. We therefore need a wider diversity of options (something I’ll expand upon in another column)

If we were building ‘homes’ that were viable for first home buyers to gain a foothold that would not only maintain consistent market demand in order to build equity for those wanting to ‘upgrade’ after seven or so years, but also provide feasible accommodation for this demographic to ‘settle’ for an adequate period of time – then having an ‘investor’ dominated inner city terrain could perhaps be ‘balanced’ somewhat so as not to affect the flow of our home buyer ‘property chain.’

However, as we all know, the ‘new’ home options are either limited to outer suburban estates lacking in infrastructure which every ‘Joe’ on the street recognises is an essential component needed at the ‘start’ of each project if we’re to lure ‘home buyers’ outwards, or alternatively – inner city high-rise ‘rabbit hutches’ which as I pointed out here, are neither desirable home buyer options and regardless – are also investor dominated terrains.

The lack of feasible and affordable ‘new’ alternatives – erosion of savings due to rate cuts – and the consequential ‘property stagnation’ is all producing a ripple effect of unfortunate consequences. 

The financial burden of fostering a rental nation in terms of tightening vacancy rates and competitive rising yields is obviously ‘unwise’ in terms of our national ‘well being’ however, there is no ‘one’ golden answer to solving the ‘home buyer’ property crisis,

A number options should be considered – including ‘reserving’ a proportion of high quality ‘new’ inner city accommodation for our home buyer demographic alone – reducing the ‘heat’ in the investment sector by way of tightening negative gearing incentives on multiple purchases, and considering changes to stamp duty as outlined in the Henry Review.

One thing we should not do is ignore the problem, or try and solve it by way of easy ‘inflationary’ credit.  

 

 

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Does increasing supply ‘per-se’ really assist in the provision of affordable accommodation?

When I first arrived in Australia from a relatively small town in the UK, the high-rise developments that were starting to dominate the inner CBD skyline provoked a sense of excitement. The thought of residing in one evoked pictures of sweeping views, a kind of modern day luxury ‘hotel’ with a concierge and roof top gym.  I was still coming to terms with the local real estate landscape and my concept of what created an ideal ‘home’ for an Australian buyer was bias in the extreme. 

I had numerous pre-conceived ideas formed by my experience of the UK housing market – one of which was the difficulty in adapting to the thought of living in a weatherboard house.  To my UK ‘cold climate’ brain, living in a house made of wood was a concept that should have died out with the war.  I now deal with a proportion of property buyers who will only consider a weatherboard dwelling – no doubt tying it in with their own concept of what makes a ‘home’ – usually envisioning an attractive Californian bungalow or single block fronted Victorian.

My first ‘real’ experience of high-rise accommodation didn’t disappoint.  It was the ‘Royal Domain’ development in Melbourne – one of the ‘up market’ dwellings close to the top floor of which I was granted a private inspection. The apartment itself was fairly ordinary – had I walked through at ground level and been given the asking price, I’d have baulked at the offer.  The fittings and fixtures were lacking in quality for the buying demographic it aimed to attract – not that you would have noticed – the main attraction was the view.  I joked to the agent at the time that should I live there, I wouldn’t bother with a TV – I’d buy a good pair of binoculars instead. It promised to be far better entertainment.

The million dollar ‘plus’ price tag was one thing, the owners corporation fees another. Eighteen thousand a year – clearly to be expected considering the block size and additional on site ‘features’ – but despite the agent spruiking the developments ‘investment potential’ it didn’t require real estate experience to assess it was about as good an ‘investment’ as a retirement home.

The apartment above sat vacant – it had been purchased by an off-shore businessman from China who only occupied it for events such as the Grand Final or Melbourne’s Spring Cup. The market for this particular type of property was discretionary at best, and anything but consistent. 

I’ve written numerous columns addressing the inadequacies of our high-rise culture in addressing the need for affordable accommodation. The reason I do so today, is in response to a debate I had with the ACTU’s Matt Cowgill who took up the challenge to express the broadly shared logic that increasing supply ‘per-se’ is the answer to a growing demand for affordable, well located, accommodation.

Matt used different priced potatoes to demonstrate his well established economic theory of ‘supply vs demand.’ 

“..there are three types of potatoes: kipfler, desiree, and regular. Kipflers are expensive and not that common, whereas regular potatoes are cheap and plentiful. Desirees are somewhere in the middle.”

“What would happen if some kind of bug struck the supply of kipflers, halving it overnight?”

Matt pondered, and in doing so, demonstrated that potato lovers would turn their demand to the closest equivalent – whether it be settling for a ‘regular’ type or moving from a ‘Kiplers’ potato consumer, to a ‘Desiree’ potato consumer. 

Needless to say, Matt’s theory is that property markets are connected and therefore fulfilling the needs of the ‘affluent’ will reduce competition at the lower end of our market arena making sure supply is readily available for the intended ‘price’ demographic. In this particular discussion, we were using the abundance of new tower blocks in Melbourne as the proposed property ‘type’ example.

The theory when used with potatoes is sound – if I was shopping in my local supermarket and a certain brand of vegetable I needed for my evening meal were unavailable, I would settle for ‘the next best thing’ – whether higher or lower priced – and ‘make do.’ If a good supply were available I may choose a more expensive brand, thereby leaving a greater supply of the ‘regular’ type for those shopping with a lower budget. My choices, if consistent enough and mirrored for a long enough period of time by a large enough demographic of consumers, would evidently bear an effect on the price – the assumption is more supply equates to lower demand and a lower price. 

Therefore, why doesn’t the theory hold with our current CBD ‘high-rise’ supply of property? And more importantly, why are a large proportion of our towers sitting empty, with vacancy rates in the region of 8 – 10 % (SQM) and rents that hardly offer ‘affordable’ value when compared to the established terrain?

 Let me offer my own analogy – If a devastating tornado hit my local neighbourhood and I found myself without a roof over head I would also ‘make do’ – however that’s not the reality of our buying market. Most home buyers work devilishly hard to save an initial deposit and therefore expect to see their somewhat ‘pre-conceived’ idea of ‘value’ represented in their purchase.

Whether you think a property buyer’s demands are unrealistic or not is irrelevant – we’re talking about a ‘consumer’ market, not desperate homeless individuals who are prepared to bid on any old thing just because it fits into their budget. Therefore, if additional property is going to fulfil the needs of home-buyers – (or for that matter renters – assuming renters are also looking for a ‘home’) – it needs to be done so with that intention initially.

I’ve since inspected numerous high-rise/high-density developments – both in the CBD and the inner and middle ring suburbs where new apartment blocks are commonly 5 stories or more. Some are impressive in design – however, the majority are a huge disappointment. The quality of construction often shows ‘cracks,’ and has clearly been developed to a strict ‘squeeze as many in as possible’ budget.

The reason I’ve walked through so many, is because I deal with clients from all ranges of the property buying spectrum – covering budgets of $300,000 to $3million + and spanning a broad range of individual buyer ‘types,’ The overwhelming conclusion remains, that this type of property was not built with the home buyer in mind, and due to the lack of diversity in supply, fails to attract many local investors either.. a point I’ll expand upon below.

A proportion of buyers come to me with ‘high-rise’ (and a view) solidly envisioned, however even if they have a discretionary budget to allow a purchase in one of the better quality developments, once presented with the alternatives their finance will allow – such as a period terrace or townhouse – along with an assessment of the fees and ‘drawbacks’ high-density apartment living necessitates, their initial preference pales in comparison. 

Obviously, most local home buyers prefer houses to apartments – and for the ‘high-rise’ price tag of a 2+ bedroom apartment, there’s far more ‘bang for buck’ in established accommodation which doesn’t come hand in hand with the additional risks of the view being built out, a queue to get out the car park during peak hour traffic, the extortionate owners corporation fees and 150 immediate neighbours the majority of which are renters (many students) transitioning through various stages of their property ‘career.’

For lower budget buyers – unlike the bulk of new stock on offer – our older established apartments seem to have been built with the ‘home buyer’ in mind and are therefore more attractive – usually offering larger floor plans in smaller block sizes.  Therefore when ‘home buyer’ apartment shopping does occur, this is the type of accommodation that’s generally preferenced. Hence why the majority of ‘home buyers’ prefer established over new. They can get better ‘bang for their buck.’

As for first home buyers shopping with a budget in the $300,000s – let me quote from one such buyer who had a vision of her first home being in an inner-city ‘high-rise’ or ‘high-density’ development due to her desire to situate in the CBD.

“..the latest trend in Melbourne is to build tiny New York-style apartments and then charge amazingly high prices for them. Most of the places advertised in or near the city for $350,000 or less are in student housing buildings and boast two small cupboards that might just accommodate a single bed each, and a slim hallway which doubles as a kitchen and living area….. In this sub-$400,000 price range, a L-A-R-G-E two-bedroom apartment is considered to be 44.5sq m, which would make an excellent studio apartment or a reasonable one-bedroom apartment”

The author is now fully aware that $350,000 for the ‘new’ (or even 10 year old) supply on offer is not ‘value for money,’ – yet a few suburbs out, in a different market all together, she can afford an established comparatively larger apartment with good proximity to shops and train station, with the substantial cash advantage of being devoid of the high owner corporation fees which fund a swimming pool she’d have probably have been too busy to use. It just required a little guidance to open her eyes to established alternatives she is prepared to settle for.

If by chance she had found a high density ‘L-A-R-G-E’ apartment suited to her lifestyle, she may have come down with a bump when trying to acquire finance – it’s well known banks have strict lending criteria for first home buyers trying to purchase small apartments in high-density accommodation. Each lender has their own restrictions relating to internal floor space and most require a larger deposit to offset the risk.  Clearly the banks recognise high-density accommodation is not always easy to ‘offload’ in a default situation.

I have no doubt there are exceptions to every rule – and no doubt ‘happy’ high-rise high-density dwellers do exist, but what about Matt’s theory of reducing competition for the lower priced units if the ‘luxury’ or ‘middle income’ price bracket were well supplied? 

Well as I pointed out last week – individuals who can afford to invest in property are hardly leaving lower priced stock for the ‘home’ buyers on a compromised budget. Because of our current negative gearing tax benefits – the best established property in our inner suburban market which does appeal to the first home buyer demographic is a hotbed of investor demand, with over 90 per cent opting to place their dollars in this sector. Investors understand, if they purchase properties ‘home buyers’ also desire, the ‘value’ of their property is likely to attract interest throughout all stages of the ‘property cycle’ and therefore speculation is rife. First home buyers are caught out at every inner city hurdle – they face restrictions for new, and somewhat un-equal ‘deepest pockets wins’ competition for established.

So who is benefitting from the abundance of new and ‘proposed’ high-density developments?  Well, the typical investor of ‘new’ accommodation is the foreign demographic who face no restrictions when purchasing ‘off the plan.’ In China – unlike Australia, older developments are poorly constructed and undesirable bearing little attraction for home buyers, however the newer developments are highly coveted and when investing here, a similar ‘bias’ is often assumed.  

Investors of these developments are seeking a good yield – however, a percentage of foreign investors also allow their property to sit vacant – once again it’s a cultural bias with the mind set of keeping the interior in ‘as new’ condition for a future sale.

If someone can explain to me how building apartment blocks which are nether affordable or desirable for a large proportion of home buyers – and despite our tight rental market, contain a large proportion of units left to sit vacant – can bring down the cost of accommodation or ease a tight established terrane. I’d be the first marching the streets in favour of the plan. 

As it is, it seems they were never built for ‘home buyers’ in the first place. A couple of years ago when the ‘boom’ of Melbourne’s’ high-rise construction kicked in The City of Melbourne’s website described the new developments as being “relatively small one and two bedroom apartments largely targeted at the student market and owned by investors.”  So has high-rise combated affordability for a diverse property shopping demographic? No – because it was never built with the intention of doing so.  Our property market is no longer about home buyers – it’s a money making wheel with every Tom Dick and Harry hoping to make a buck in the process.

Catherine Cashmore

 

Negative gearing – how does it really affect the market for home buyers and renters?

It’s always interesting to see the outrage provoked in the real estate industry by housing affordability reports – whether they come from the Annual Demographica survey or publications in magazines such as “The Economist” which analyse the relationship between house prices and rental income. 

If nothing else, it’s the poll opposite reaction to that provoked when median increases in capital city values are released. Such data is immediately celebrated along with an inaccurate assumption that the increase has produced an equivalent dollar by dollar rise in individual ‘house prices.’ There is rarely clarification as to what the figures actually mean.

The former publications somewhat agree with the suggestion that Australian housing is either ‘unsustainably’ over priced – or to express it in more general terms – ‘unaffordable.’ 

Sensationalist headlines they may be, but no matter how exaggerated you perceive the claims, the crunch remains that we ‘need’ as a community to provide housing for a growing population of low income earners – and therefore affordability and supply are understandably ‘red hot’ topics of concern.

In response, Australian property agents and economists dig out graphs along with various ABS and RBA statistics to ‘prove’ when ‘compared’ to other ‘comparable’ international markets we’re not so bad after-all – no bubble fear here!

“Australia is now broadly in line with other comparable countries, having risen relative to other countries since 1980 when it was at the lower end..”

…state the RBA in their latest study of house price to income ratios. And I’m sure many have grown tired of being ‘lectured’ on the many ‘viable’ reasons ‘why’ we’ve seen prices and subsequently household debt increase.  Reasons such as the inflation of duel income households, ease of lending, lower borrowing rates, wage and population growth to name but a few.

These ‘comparable countries’ include the UK, New Zealand, Denmark, the Netherlands, Canada etc.–and whilst it may be contextually ‘useful’ to find some kind of affordability barometer on an international scale, I fail to see why it should result in the ‘swept under the carpet’ conclusion that this makes our own levels of inner suburban ‘un-affordability’ somehow ‘OK?’ – A conclusion based in part on the principle that consistent demand from a dominant buyer demographic, and a relatively stable job terrain, foreshadow the implication that we’re not in line for a ‘crash’ any time soon.

Or – to put it another way – if the sky’s not falling in, forget sustainability, we can throw a few home buyer grants at the bottom end of the market as a temporary ‘bandaid,’ waft a dismissive hand in the direction of some outer suburban nether land, and carry on ad infinitum with our ‘it’s all right Jack’ ‘prop up the market’ housing policies.

Furthermore, it’s hardly 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.  They may look similar – but shamefully so!

As readers will be all too aware – one of the major problems with which Australia has to grapple, is our need to be centrally located in and around the major capital cities.  For this reason, we’ve effectively, sentenced large swathes of home buyers into the equivalently priced markets of London and Paris and the comparison isn’t pretty.

In UK for example, despite the relative ‘crash’ in ‘country wide’ prices, prime real estate in London has continued to outperform fuelled in large on the attraction it holds for foreign investors.  There are no restrictions on foreign ownership in the UK which has of course helped fuel an investor induced ‘rush to market’ into what many perceive to be a ‘safe haven’ to buffer against other more volatile assets.  

Over 50 per cent of property acquisitions around the ‘average’ London house price are sold to overseas buyers – and whilst foreign investment is freely permissible, I have no doubt this will remain the case.

A similar occurrence has happened in New York.  It too is deemed a relative ‘safe haven’ for investors – hence why we’re now seeing 35sqm apartments for sale to combat the ‘housing crisis’ in a country renowned for its love of big houses.

Singapore, Hong Kong, China, Canada are all suffering inflated property prices in urban centres, once again fuelled by the investment sector. Singapore for instance, has imposed temporary limitations on the number of properties investors are permitted to acquire and moved to increase taxes on ‘speculative’ sales. However, the measures are deemed temporary and therefore hardly sustainable over the long term.

New Zealand faces similar issues – it’s now been suggested that by 2040, only approximately 30 per cent of NZ households will be able to afford a house over $400,000. A worrying statistic.

All in all, few will counter that first home buyers in the all the above markets are living on Struggle Street with the ‘outcry’ from this sector coming in loud and clear through various media outlets and social forums.  However, for an industry focused on profits, the first home buyer sector isn’t all that important. 

Oh yes, you’ll hear the arguments about the need for first home buyers to provide a ‘leg up’ for the second home buyer market – in other words, activity at the bottom of the ‘property tree’ aids the off shoots at the top.

However growth isn’t waning at the bottom of our real estate tree – it’s by all respects flourishing! This is because established ‘affordable’ property in the most desired urban capital city estates is a ‘hotbed’ of investor demand.

Investors make up roughly 35 per cent of the active buying market in Australia however they are not doing much to aid the supply of affordable accommodation – 92 per cent of them purchase into the established market and is it any wonder?  They’ve been buoyed on by a ‘boom’ decade of ‘nominal’ median price growth, indicating 10 per cent ‘plus’ per annum capital gains for this type of accommodation. 

Neither are they soaking up ‘luxury’ properties – an investment trend in some of our ‘comparable country’ markets.  Most local investors have their focus primarily on property most suited to the first home buyer demographic – the low maintenance, easy to rent ‘affordable’ inner suburban apartment market with prices ranging from $300,000 upwards. 

Australia-wide, 58 per cent of apartments are owned by investors. Break this down to a state-by-state capital city level and the investor-owned percentage of inner-city apartments is closer to 70 per cent and in some areas exceeds even this.

Back in 2003 the RBA recognised the problem and advocated a moderation of demand in the property market amongst investors, by way of (prepare to take cover) tightening current negative gearing rules.

Figures from the ATO and RBA highlight the scale of demand – around 2 million Australians claim deductions for net rent, and around one-quarter of all household credit is there for the purpose of holding an investment property. Over 1.1 million investors are negatively geared, and growing numbers are taking advantage of changes in policy that allow investment property to be purchased as part of a self-managed super fund.  There is a whole sales industry built to cater solely for demand resulting from this sector.

Investors play an important role in all housing markets, they are needed and should be valued – however, at present; our models of investment – whether it is negative gearing, land banking, or borrowing to purchase in a self-managed super fund – are solely reliant on capital growth and therefore demand is overwhelmingly concentrated on a reducing pool of established property. Hence why vacancy rates remain at historical lows.

Furthermore, don’t be fooled by the idea that any of the above assists in providing our rental sector with ‘affordable’ accommodation.  Taxation benefits or interest rate drops are not passed across and we remain comparable in ‘yield’ terms to our international counterparts who don’t facilitate such generous gearing rules.

If the intention is to increase the provision of affordable opportunities for the first home buying sector, as well as increasing the vacancy rate for renters, we can only do so by increasing the supply of well facilitated ‘quality’ real estate and reducing the ‘heat’ surrounding our city based established real estate market. 

Unfortunately, it can only be done through Government policy and seeing as we’re in an election year, the subject rightfully deserves attention.

In short, it makes no sense to encourage investment if it doesn’t achieve

A)     An improvement in housing affordability and supply

B)      An increase in vacancy rates

C)      A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs – and

D)     Lower rents for the most venerable in our society

Current policy has failed to do this, are any of our politicians prepared to rock the boat and consider major reforms which could do so?

Catherine Cashmore

 

 

So is Australia’s housing market ‘unaffordable’ or not??

So is Australia’s housing market ‘unaffordable’ or not??

What we really lack in Australia is a realistic vision of how our housing market should appear.  There are too many conflicting voices smothering the debate – from a myriad of investors looking to profit from rising prices, hoping they’ll outpace inflation to enable retirement on a pot of ‘property gold,’ to consumer organisations struggling to address the growing mountain of citizens requiring public housing or rental assistance. 

Even with the ‘peak to trough’ fall in house prices over recent years, with the median dropping nationally a little in excess of 6 per cent coupled with an easing of lending rates to a little over their post GFC record low – residential property prices in Australia still remain far too high for a large proportion of first home buyers – the majority of which don’t stand a chance unless they benefit from a ‘deposit cash injection’ gifted by family or friends. 

The  Annual Demographica Housing Affordability index which generates the same media headlines year in year out, has once again highlighted what it claims is the ‘Severely Un-affordable’ nature of our housing.  However, last week its findings were disputed by APM senior economist Andrew Wilson, who suggested because there were buyers ‘buying’ property, housing couldn’t be all that unaffordable could it? After all – suggested Mr Wilson – Prices were rising in Sydney, banks were lending, and there has been ‘activity’ in the market place of late.

As Mr Wilson is well aware, the reason prices continue to rise in Sydney (and other metropolitan areas), can be directly attributed to decades of poor planning for population growth by both state and federal Government who have ensured a majority of buyers remain well and truly ‘hamstrung’ to the inner and middle ring suburbs of our Capital city locations. 

In this respect, Sydney is no different to New York and London – these cities are also on an upward trajectory due to shortages of affordable supply (despite the woeful economic climate both countries face.)

To some extent this places a ‘floor’ underneath the cost of metropolitan housing in the highly sought after areas of our capitals and hence, investors can still be fooled into thinking there’s no ‘ceiling’ to price inflation.  Despite low consumer confidence and our ‘new’ aversion to debt, the crystal ball predictions of annual 10 per cent ‘plus’ rises in house values continue.

However, this does not mean our housing falls under the definition of ‘affordable.’  Household debt to disposable income in Australia stands a little below 150 per cent – high by historical standards and certainly not healthy. We’ve borrowed more in order to pay more.

As for any perceived ‘activity’ in the market place -putting aside the woefully low transaction figures of late, which although stabilizing, are at levels not seen since the late 1990s – and a construction sector which is struggling to recover from an 18 month low – it seems the remaining buyers  ‘active’ in the market arena to which Mr Wilson perhaps refers, are investors and second home buyers – because as far as first home buyers are concerned, the latest home loan data from the ABS which shows a significant fall in the sector nationally (down to 15.8% in November 2012 from the 18.7% high recorded in October) couldn’t paint a clearer picture. 

Outside of the ‘carrot and stick’ approach of grants and incentives, which disproportionally spike housing costs and activity, thereby forgoing any perceived benefit whilst the grants remain in place – first home buyers are not showing any great enthusiasm to buy into the Aussie dream. Notwithstanding, if you took a national survey, the majority would tell you in no uncertain terms and probably not quite so polity as expressed here – Australian real estate is both inflated and ‘unaffordable.’

Exaggerating the problem is the long term trend and overwhelming preference from this demographic when they do ‘step in,’ for established dwellings over new.

This should come as no surprise – new houses are generally located in outer suburbia away from family, friends and any hint of an adequate supply of social amenities.  High rise dwellings are built on the mantra of ‘squeeze as many in as possible’ and better resemble a rabbit hutch than an ‘abode’ to call home. 

Buyers who do move outwards tend to be families upsizing to larger 4 and 5 bedroom properties and therefore make the choice to compensate distance (and the cost of a commute) for an increase in accommodation. First home buyers on the other hand would rather take a smaller property to purchase closer to the hub and bub of city amenities – thereby favouring apartments.

Herein lays a further problem.  Banks don’t like lending first home buyers finance for high rise dwellings – so any suggestion to build as ‘many as possible’ to ease supply, is of little benefit to this sector.  Furthermore, construction (as I point out here) has often proven to be overwhelmingly poor, owners corporation fees high, and purchase prices that simply do not represent value for money.

On the other hand, established dwellings hint of an era when property was built with the home buyer in mind.  Unlike ‘new’ dwellings which come with a “wow” premium on the initial price, older properties offer the potential to buy in at a lower cost and renovate.  The floor plans in apartments are generally more specious and the low rise facade is in keeping with the predominant street aspect.

Living in a smaller block with an owner’s corporation of 12 occupiers, is highly preferable to a high rise monstrosity which contains 150 off shore investors who won’t be so actively motivated to pay future levies for long term building improvements and general upkeep. It’s no wonder first home buyers preference the option.  

Of course, local investors under our current system of negative gearing also prefer established over ‘new’ and therefore, considering our current terrain low fixed interest rates, and rising yields, it should come as no surprise that when a first home buyer does come across an attractive property seemingly priced within their allocated budget, when faced with competition from an investor, the first home buyer won’t be the one leaving the property with a signed contract in hand.

Research from RateCity suggests it takes an average single income wage earner on $70,000 per annum, five years to save a deposit– with more than half of buyers in their 20’s receiving help from family and friends.

Other analysis based on ABS borrowing figures, places a single income first home buyer’s budget round and about the $300,000 mark.  To purchase something larger than a one bedroom apartment at that price in Victoria, you need to head some $25km outside the city to areas such as Melton and Werribee – is it any wonder our ‘new’ buyer market is diminishing?

 

As for the Demographica Study, Comparing property markets across the world is difficult due to the way statistics are collated, with some markets substantially less transparent than others and each having their own unique demographic and structural requirements. 

Australia and Hong Kong are both classed as ‘severely unaffordable’ – however I’d posture that you’ll find far more attractive living options in Australia for $350,000 than Hong Kong where most are confined to an apartment in the sky.

The survey rates each selected country by dividing the median house price by the annual median pretax wage.  This places Sydney’s ‘median multiple’ at 8.3 and Melbourne’s ‘median multiple’ at 7.5

I’m not a fan of the methodology – comparative ‘medians’ are a poor way to analyse effective cost.  However the result of the survey speaks volumes for a growing demographic of first home buyers wanting more than a dead duck of a property in outer suburbia, or a boxed sized room in the clouds.  As far as this demographic is concerned, Australia’s real estate – at least the options worth buying – is ‘severely unaffordable.’

It doesn’t have to be this way – there are many things both government and planning authorities can do to increase the supply of both affordable and quality accommodation.  For example, if you dig down deeper into one of the previous International Housing Affordability surveys, there is an interesting picture painted comparing Sydney and Melbourne in their twilight years of growth with Dallas Fort Worth and Atlanta in America.

In 1981 both cities in the USA were a similar size to our biggest capitals with similar rates of projected population growth, however, unlike Melbourne and Sydney, authorities in Dallas and Atlanta ensured cheap land was made available on the outskirts of their cities and more importantly, unlike Australia – (who believed it was too hard to nurture such growth due to the expense of providing infrastructure) – Dallas and Atlanta expanded their train lines into the new suburbs as part of the plan.

Consequently, neither city suffered the same level of price inflation we’ve experienced in Melbourne and Sydney, – and Dallas now boasts the largest light rail system in the United States with further plans to expand into the outer suburban locations as part of its 2030 plan.  

But let’s face it.  The property market in its current capacity has little interest in the ethics of providing shelter or affordable accommodation – it’s a money making vehicle and as long as someone out there is willing to pay in excess of a $500,000 for a modest one bedroom apartment with the mind set that it will be worth a lot more when they sell – regardless of their means to fund the purchase – the debate over whether our market is ‘unaffordable’ will fall on deaf ears within both the property industry itself and the political domain.  

As such, the addiction to ‘building wealth the property way’ will continue to the determent of increasing numbers of individuals who will struggle to rent, let alone buy.  Looks like we’ll need to hurl straight into the iceberg ahead in order to learn a ‘better way.’

Catherine Cashmore