Is Australia’s housing market ‘unaffordable?’

The debate over the supply of affordable housing and the policies surrounding the framework is a topic that rightly inspires heated emotions – particularly in respect of the lead up we had to Saturday’s Federal election and the  thundering silence from either major political party, outside of a commitment to ‘keep rates low’ and ‘job security’ high.

However, 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 an ingrained cultural mindset looking to profit from rising values in the established sector, hoping to outpace inflation and enable retirement on a pot of ‘property gold,’ to consumer organisations struggling to address the growing need of citizens requiring public housing or rental assistance.

Obviously vested interests across the real estate and finance industry as a whole, mitigates the commentary somewhat, concluding – based on a narrow contextual view of low interest rates alone – that affordability has in no way worsened, but rather improved – whilst at the same time applauding the recent ‘recovery’ in prices.

Sydney, in particular is outperforming other states, and whilst there are differences to the macro back drop compared to 2007, it’s bounded into Spring as the ‘best (and consequently most expensive) performing capital city in Australia,’ – with clearance rates (the curve of which prices typically follow) mirroring ‘boom’ peaks, and AFG (Australia’s largest mortgage broker) reporting an 49.5 per cent unprecedented level of home loans written for investors coupled with the comment;

“This is the highest level of investor activity the company has ever recorded for any state.”

RP-data have Sydney prices up +5.4 per cent for the quarter, and although the information is subject to revision, it leads the annual growth rate to its fastest pace since 2010.

So where do we stand on issues of affordability?

I’ve written previously on the various ‘war’ stories witnessed on the ground, as auction results exceed reserves by some 10/15 per cent – and on occasion, reach a level, which defies all rationality.

In this respect, any benefit derived from lower interest rates is somewhat offset by the inflationary pressure placed on prices.

Indeed – you’d be hard pushed to find a first homebuyer shopping in our largest capital cities, who has not been outbid by an investor through the course of this year. Investors understandably have a stronger financial arm.

Albeit – at least for existing owners – the relative cost of servicing a mortgage has reduced considerably.

This influence is evident in the latest “Housing Occupancy and Costs” survey from the Australian Bureau of Statistics, which calculates affordability to be at the same level it was some 17/18 years ago from the date of which the survey relates.

According to the findings, in 2011-2012 owners with a mortgage and private renters spent roughly the same proportion of income servicing the repayments, as they did back in 1994-1995, despite the fact that the capital price of housing has more than tripled over the corresponding period and the subsequent duration of mortgages lengthened.

Those paying down a home loan were assessed to spend 18 per cent of their income servicing the payments, with private renters just a fraction above this figure, at 20 per cent of income.

It is this, and other indexes such as the Adelaide Bank/REIA housing affordability report, released last week, claiming affordability is at its “best level since 2003,” that encourages commentators to ‘stamp and seal’ further discussion of the issue, with a dismissive waft of the hand to ‘would be buyers,’ accusing them of being both ‘spoilt and picky’ in their expectations, if complaints about the cost of accommodation are voiced, or any suggest that first home buyers are ‘locked out.’

Neither is there any comment on the inevitable future consequence of rate rises.

However, any release of statistical data, always needs to be assessed in context.  A little like median prices, which bear scant relation to individual house prices, and often require an additional understanding of distortions such as ‘stock on market,’ the shadow effect of buyer grants and incentives, and a full appreciation of how the data is stratified prior to making a surface assumption of the material at hand.

As ABC’s Online Business Reporter Michael Janda points out in his own balanced assessment of the ABS release, there are some distinctive trends worthy of appreciation prior to drawing a conclusion that ‘housing has never been more affordable.’

Firstly, home ownership is falling.  In 1994-1995, 71 per cent of Australian’s owned – or were servicing a mortgage – and the proportion of households renting – 18 per cent.

By 2011-2012 the ownership rate had dropped to 67 per cent with a relatively steep rise in the number renting at 25 per cent.

Families with children (one of our biggest demographic of buyers) in particular seem to be suffering.  The decrease of ownership for this demographic has fallen over the latest census period from 79.5 per cent in 2006 to 77.2 per cent in 2011.

There are a number of factors that have played into the percentile changes. Firstly on issues of supply – restrictive growth boundaries, hefty development overlays in new estates, along with a woeful lack of planning for population growth and the consequential reluctance of home buyers to move ‘outwards,’ has produced a downward slide in the number of new dwellings completed per annum, and further inflated the capital price of the stock marketed.

For many first home buyers, the choice, price and location of accommodation offered in these areas, where commute times are inflated as infrastructure development fails to keep pace – gives no incentive to ‘buy in’ outside of various government grants – and based on historical data, it’s fair to conclude if they do purchase a house and land package, the growth of the underlying asset base of their investment in the new estates, will unlikely improve much past the rate of inflation – hamstringing the ability to progress or ‘upgrade’ when desired.

When older generations purchased – the outer suburbs were some 10/15 kilometres from established job and commercial hubs, not the 40 plus kilometres we see today, and financial deregulation, the emergence of duel income households, and the very real realities of our ‘golden decades’ of growth, assisted their steps up the ‘property tree’ to the current environment in which ‘baby boomers’ hold roughly half of Australia’s housing stock – a mix of owner-occupied dwellings and investments – many relying on the value of their properties to fund retirement.

Another direct consequence of our now inflated values, buoyed further by restrictive supply, and policies such as negative gearing – which encourage investors to speculate in the established arena, thereby inflating the value of second hand stock – is a national rise of 49.2 per cent in yields over the five year census period (not accounting subsequent increases) – which outpaced growth in home loan repayments for the same duration.

Other trends indicating affordability pressures – (although agreed cultural tendencies also play a hand) – is between the 2006 census and the 2011 census, the single-person household was no longer the fastest rising demographic.

In the 2011 results, lone-person households dropped from 24.4 per cent to 24.3 per cent – this was the first decrease in this statistic since the census was initially conducted in 1911 – over 100 years – and therefore requires attention.

Against this group households (those sharing accommodation) jumped from 3.9 per cent to 4.1 per cent.

‘Crowded houses’ – with three or more families sharing accommodation, also rose nationally by 64 per cent to 48,499, and other data from the ABS shows that over 40 per cent of renter households receive some form of housing assistance – once again emphasising the growing crisis in this sector of our community.

With the decreasing proportion of first home buyers as a share of the active buying market, commitments of which are down 10.6 per cent year on year, along with reports that significant numbers are now initially entering into their first purchase at the age of post 40 years, you have to question the stubborn refusal from market commentators to recognise ‘we have a problem’ worthy of attention. 

The AFG data I cited above also notes the drop in the proportion of first time buyers, and is no doubt mirrored by other lenders.

According to their figures, the share is down to 11.3 per cent nationally from 15.9 per cent at the same time last year – and although various state grants and incentives play into the peaks and troughs, the percentage drop in New South Wales is appalling – down from 13.1 per cent in August 2012, to 4.3 per cent as recorded last month.

Another mistake made when assessing affordability, is to concentrate only on the principle cost of the home and the percentage of income needed to service the repayments.

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.’

It’s not only commodity prices that have spiked, for example 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.

A privilege I have in my job, is meeting, assisting and talking to current first home buyers (usually couples – singles are all but priced out) looking to get a foot hold. It’s a pleasurable aspect of my work due to the excitement expressed when a successful purchase is achieved.

Albeit, the conversations I have with both first home buyers and renters, keep my feet firmly on the ground in relation to the difficulties achieving the oft quoted ‘dream’ of ownership – it is also what inflames my anger when I read reports such as that offered by Terry Ryder last week – questioning so called ‘false’ perceptions that Australia’s housing is ‘unaffordable.’

I suspect we see things from a different frame of reference.

For this reason, and others, I attended the 122nd Annual Henry George Commemorative Dinner at The Royal Society of Victoria, Melbourne – to listen to respected economist Saul Eslake give a excellently orated speech, entitled “50 Years of Housing Policy Failure.”

As well as his role as chief economist for Bank of America – Merrill Lynch Australia, Eslake is also Deputy Chair for the National Housing Supply Council – set up by the Australian Government to “improve housing supply and affordability” for both home buyers and renters.

He is therefore suitably qualified to provide a detailed assessment the data which is all but ignored by those mentioned above.

As Eslake comments

“..the decline in home ownership has been even more pronounced when one ‘looks through’ the effects of the ageing of the population, which (among other things) means that an increasing proportion of the population is within age groups where home ownership rates are always (and for obvious reasons) higher than in younger age cohorts.”

The transcript and slides of Eslake’s speech can be found here – an absolute must read.

Our affordability issues cannot be solved over night.  The distortions in the market need to be slowly unpicked and the various suggestions by Eslake regarding supply and tax reform, implemented.

However, as I’ve written previously – the reason we have asset ‘bubbles’ is a direct consequence of our current debt-based monetary system,  and in this respect, I hold the opinion that you cannot tackle the health of the housing market without also addressing the disease that funds it.

Catherine Cashmore


8 thoughts on “Is Australia’s housing market ‘unaffordable?’

  1. aussie spruiker says:

    What would stop the government from limiting negative gearing to new builds? Could that not be implemented without overhauling how all the money works all over the world?
    I agree that the debt based monetary system is flawed and may yet prove to be unsustainable, but to suggest that the housing problem can’t be fixed until the world moves back to the gold standard or something like it is alot like saying ‘Yeah, we have a problem, but what are ya gonna do?’
    If you fall victim to an untreatable cancer then you wake up one day and find that it has also made your leg go gangrene, do you not still treat the leg? Would you not cut it off, even if it meant that it may only extend you life for awhile?

    • There are flaws limiting negative gearing to new builds – significantly, it is not an attractive policy without speculation of capital growth – hence why investors stick to the established market. It should be abolished.

      Modern Monetary Theory has nothing to do with returning to a gold standard – it is concentrated on removing the ability of private banks to create money out of thin air and lend it into existence with interest attached. I would encourage you to do some research for a fuller understanding, however hopefully I’ll have time to expand on the subject more in the weeks ahead.. However, you cannot fix the housing market without fixing the disease that funds it.

      We need to effect long term changes, and all of the above is possible to implement – it just requires political will. As I said, this is an area I hope to move into further as the year progresses.

  2. aussie spruiker says:

    I have a basic understanding on how fractional reserve banking works which is I don’t see how it can be truly reformed without without reverting to a gold standard or something similar. (And I’m not suggesting thats even possible) But even if you forced all of our private banks to adopt reserve requirements as other countries do, the central banks are still free to create as much money as they want (like they’re doing now)
    Anyway, I don’t want to unnecessarily chew up your time, so if answers are gonna be coming anyway I’ll wait and watch what happens.
    Thanks for your patience with me.

    • It’s possible to reform the current system in a way that would benefit everyone – not just the 1 percenters at the ‘top’ of the tree as under the current system. I’ll try and get some information together for you and email directly. I really appreciate your comments – I am limited on the words I write for property observer each week, hence why I probably don’t go into enough detail. Following our conversation, I’ll see if I can rectify that in future weeks – until then, would appreciate if you bear with me with the articles I do write.. They are not empty words.

  3. aussie spruiker says:

    My fears are not that your words are empty, my fears are based on the fact that you currently work in the industry. You are at the coal-face.
    To explain my fear, please allow me to overstretch the metaphore.
    As you turn away from the coal-face you could be saying one of two things –
    “I’m not sure if we should even be mining coal, but I am sure if we do keep digging here, the tunnel will cave in, let’s stop.”
    “While digging at hard barren rock, the canary died and fell in a deep hole. If we want more coal, that’s where we dig deeper.”
    Still, I wish you the best in your political ambitions. Either way you go will, in all likelihood, galvanize public opinion. I hope you’re on our side, we need you much more than they do. And if you are, I’d seriously consider changing the background logo of this blog.

  4. lol good call Aussiespruiker – a few have said that re the background – I’ll change as suggested

    Yes I work in the industry – as a buyer advocate. Albeit, ask any buyer I’ve purchased for, and they will tell you how careful I am regarding the advice I give. You will never stop people purchasing real estate, what I attempt to do is assist them with as much information as possible to ensure their choices are entered with eyes wide open. It could be argued I spend more time talking people out of property than into it. I am extremely open with my thoughts on Australian real estate and our economy.

    I would have thought by now it’s clear who’s side I’m on with regard to Australia’s long run up in over inflated values – I am extremely unpopular within the industry in regard to my opinion. However, working at the coalface does allow me to see clearly what goes on, which is valuable in so much as it gives me a stronger base to argue for reform and greater regulation within the sector itself. Something that must be addressed.

    Hopefully this helps answer your questions….

    • aussie spruiker says:

      I may not have been following you long enough to clearly understand your position. But If I have misconstrued your angle, the people who you would seek support from may do too. If that’s the case, I hope my questions help your cause. Thanks for taking the time to reply.

  5. You’re welcome – I’ve enjoyed the debate, it’s focused my mind on a number of matters. Albeit, for those who have been following me for a while, I’ve made my position startlingly clear in regard to my views concerning Australian real estate and what needs to be done. Hopefully it will move toward a greater influence in getting real action.

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