You’d be hard pushed to find a first home buyer shopping in our largest capital cities, who had not been ‘outbid’ by an investor over recent times.
The ABC has been running an interesting and somewhat anecdotal study on the cost of living pressures for a range of ‘typical’ household types across Australia, assessing how they perceive and experience the current headwinds facing our population, in what’s broadly considered to be one of the most expensive countries to live in the world.
According to the IMF, we sit within the top ten of per capita GDP data and PPP (purchasing power parity) data making us officially ‘very well off’ – and whilst both are pretty poor in appraising what’s ‘really’ happening compared to the perceived ‘on paper’ analysis which dictates what we ‘should’ be feeling, ask any economist and they’ll relate a similar story.
Ben Phillips from the ‘National Centre for Social and Economic Modelling (NATSEM);’ has been studying cost of living pressures over the last decade and concluded Australian households are doing “exceptionally well,” and any poll boosting political speak suggesting ‘we’ve never had it tougher’ is a furphy.
His analysis is based on our golden years of growth during which strong and growing incomes have outpaced the official inflation data which has stayed within the RBAs preferred range of 2 to 3 per cent over the past ’10 or 20 years,’ leaving Australian’s ‘a long way ahead of their cost of living’ – which is a lot different from the ‘rhetoric’ we commonly hear expressed he concludes.
According to the study, we just ‘think’ the cost of living has increased. And here’s the graph to prove it. (Roy Morgan)
No doubt, for a proportion of Australians this is a reality. However, it’s more likely to be the proportion of our population that entered the property market early and have subsequently offloaded much of their housing costs whilst still earning and investing – or higher wage family units living within their means. Because, not surprisingly, by far the largest complaint from the ABC study and other such reports assessing similar concerns, is the escalating cost of accommodation and the lack of suitable well located options for those who have a view to entering the property market should they be able to achieve the relatively mammoth task of saving a deposit on the median disposable household income which is around $43,000 for a single person.
(For those wanting a deeper analysis of typical household incomes, I highly recommend Mat Cowgill’s blog “What is the typical Australian’s income in 2013?” or Grog’s Gamut which follows a similar line and sheds light on the broadening gap between the different income percentiles.)
One mistake made when assessing affordability, is to concentrate only on the principle cost of the home – calculating the percentage of income needed to service the repayments – which is usually appraised next the widely considered 30 per cent of disposable income ‘manageable’ bench mark.
However I sometimes think a better assessment would be to take into account what’s left over “post” housing costs, and whether it’s enough to afford the ‘actual’ non Consumer Price Index ‘cost of living’ which all would agree has escalated considerably.
It’s not only commodity prices that have spiked such as gas and electricity but an overload of other essentials such as insurance premiums, housing maintenance costs or owner corporation fees, school fees and child care for working mothers, medical and dental expenses and so forth – transport costs are substantial for those commuting daily as are the ‘needs’ of a modern generation who enter commission/performance based jobs which expect them to have 24 hour access to mobile phones and email.
Obviously, for a lower income individual, there’s far less in the pot once the 30 per cent has been extracted than would be the case for higher income workers. But once the bank has taken their share of principle and/or interest repayments, or tenants have paid their rent, which the ABS assess to be a similar percentile income proportion to accommodation costs serviced by mortgage holders, it’s the remainder that’s needed to service the other ‘not so cheap’ requirements of modern day living that’s an increasing area of concern, as cited by organisations such as ‘Shelter.’
For duel income households, the expenses can be shared, however single buyers would need at least $350,000/$360,000 to purchase within commutable distance of our major capitals – the ‘job hubs’ of Australia, and even in our current low interest rate environment with variable rates around 5.5 per cent, on a median income of around $40,000, buyers are ‘priced out’ unless they have additional assistance from friends or family.
From the participants surveyed as part of the ABC report, a range of comments reflected these concerns, yet one prominent cry which I hear expressed from many first home buyers, is resentment towards investors – or as the ABC case study put it, “people” that;
“have three or four homes who are going into that market because they’re earning money and getting a lot more profit on it..” leaving a “lot of my friends say(ing) that they think ‘I’ll never own a house, I’ll never be a home owner, it’s too expensive”
If you ask any non home owner if they would like own a property, 9 out of 10 would say ‘yes’ – yet most accept they will need a period of renting prior to purchasing, so you could ask – ‘Why the resentment against the investor, the majority of which, only own one or two investment properties, not the 3 or 4 cited above?’
To answer the question, we need to assess whether investment into the property market has aided the first home buyer, or hampered their journey into ownership – the latter of which is this demographics’ majority view.
To date, house price increases have been primarily fuelled by households taking on an increasing proportion of mortgage debt – debt which outpaced both wage rises and inflation for the same period.
At the same time investment into property was broadly encouraged through various government incentives, such as negative gearing and reductions in capital gains tax – and most recently, the ability to borrow and buy real estate as part of a SMSF.
Currently, investors make up a little over 40 per cent of Australia’s buying market with scant information on the percentage of foreign acquisitions.
The number of landlords lodging a tax return in 1991 was 750,000 – compared to the latest data of 1.8 Million in 2011.
The increase in outstanding investor mortgage credit since May 1993 is 1970 percent compared to 837 percent for owner occupied housing (Macro Business.)
Yet with all our initiatives to boost the share of private investment into the property market under the misleading concept that it would somehow lower demands for social housing and provide a greater array of options for renters, the shameful fact remains that it has done little – if anything – to increase supply.
Loans to investors for the purchase of new property come in at less than 5 per cent – which essentially means, the vast majority of Australia’s buying market – over 90 per cent – competes for a reducing pool of second hand dwellings.
Apartments are generally considered the ‘foot through the door’ property type that attracts a younger ‘first home buyer’ demographic. However, the bulk of inner city established unit and apartment stock is investor owned, (close to 70 per cent in some localities.) Therefore, both typically compete for the same property types within a similar price bracket.
Most investors are speculating on capital gains and employing a negative gearing strategy which promotes speculation into established terrains and a ‘hold for the long term’ mentality. As a consequence, unit holding periods over the past decade have increased 39 per cent (RP Data) which further promotes a ‘bottle neck’ of demand.
And we’re not alone, a recent study in the UK by the Strategic Society Centre notes similar figures – with the number of private landlords as a proportion of the population more than doubling between 1991 and 2008.
The study has caused an outcry due to the large disparity between owners and renters, which they cite as an ‘enormous financial gulf’ with calls for a massive increase in additional supply to attract new owners.
Unfortunately, the only option considered has been an injection of easy credit by way of the UK’s ‘Help to Buy’ scheme which will produce inflationary elements into the market and further hamper affordability.
First home buyers in the USA are also struggling, with reports of ‘cash only’ investors soaking up large swathes of affordable family homes in city locations.
As just one example, close to a third of all homes purchased in LA during the first quarter of 2013 went to ‘cash only’ buyers, compared to just 7 per cent in 2007. First home buyers and families simply can’t compete.
In Sydney, investors make up roughly 50 per cent of the buying market – and with the level of residential property listings falling to 2009 lows which accounts for a -23.1 per cent yearly decrease in stock (SQM), it’s no wonder that the proportion of first home buyers in NSW sits below 5 per cent – a shameful statistic.
I still regularly hear industry professionals talking up property investment to their clients, speculating on an 8-10 per cent annual return as was the case for those that purchased prior to the spending spree which spurred accommodation costs to an all time 2010 peak.
However to continue on such a trajectory would take the average nominal apartment price in our two major capitals close to, and over a million. If you think getting a foot into the housing market is tough now – it will be nigh on impossible if the wishes of those benefitting from swelling property prices get their way. In all honesty – if anyone spruiks this mantra to you – walk the other way.
Of course it’s not just investment into property that has played a part in prices being as high as they currently remain – a comprehensive study would bring many other issues to light, with significance given to reducing the inflationary elements around the limited supply of established accommodation whilst at the same time, exploring new ideas to massively boost infrastructure investment into regional and fringe locations which would aid an increase of demand in the construction sector.
Yet it remains, that the capital cost of property for initial owners in areas where they are feasibly able to live whilst servicing a combination of other essential necessities is out of bounds for a significant proportion and as far as perceptions go, you’d be hard pushed to find a first home buyer shopping in our largest capital cities, who had not been ‘outbid’ by an investor over recent times.
Despite the higher interest rates, for those who purchased in the late 90s or start of the 2000s, a cheaper capital cost although not easier to service, allowed the principle to be paid down at a faster rate than the longer mortgage terms required for the higher nominal capital prices which sit at peaks in today’s market and over the course of the loan, require the borrower to pay back substantially more.
The risks of taking on a higher proportion of private debt despite our low interest rate environment should not be discounted simply because the serviceability of those expenses is assessed to be ‘affordable’ – yet to get into the market, this is precisely what we are asking first home buyers to do.
Investors are an important sector of any residential property market – and should not be blamed for making efforts to secure their financial future. Instead, we need to look towards our Governing powers that have the political clout to level the playing field.
As those who have their heads out the sand are aware – Australia faces some significant headwinds over the next decade and even with modest improvement of first home buyer figures in the latest ABS finance data – no doubt buoyed by the rush to enter prior to grant withdrawals – it remains to be seen whether we can start producing any long term sustainable solutions for this sector.