Will I ever be able to afford a house?

Will I ever be able to afford a house?

We get married, start a family and then naturally want to buy and settle into housing to call ours. But with affordability at its worst in history, for some, the great Aussie dream is starting to feel like it may never become a reality.

I think it?s fair to say that the majority of Australian?s belong to one of two camps when it comes to their views on where property is headed at present.

They either believe that property will continue to go up or they believe that Australian property is overvalued and will come down. There are numerous ?experts? championing the argument for both sides. For those on the side-lines, not yet in the market, it is a confusing time. Do you buy, do you wait, keep saving or pack up and go home.

Some have stayed away (despite being able to afford to get in) because they believe prices are overvalued and will fall. Some have simply been unable to save enough to get the necessary deposit together, despite their best efforts to save.

Either way, in recent years, we have watched the dream of owning our own home go from difficult to unobtainable in our major cities; where using Sydney as the example, the average house price now exceeds $900,000 dollars according to the latest figures.

Concerned by the endless creep upwards in prices, you can?t help but be worried whether you?ve missed the boat altogether.

So tired of debating opinions with my neighbours, I decided to do a bit of research into what the experts are saying.

What follows is a summary of the ?experts? opinions and their insights on whether house prices will continue to rise, plateau or fall.

A little bit of background first

It’s easy to get caught up in believing that property always goes up; especially in recent years given the dramatic price increases in major capital cities like Sydney & Melbourne.

In fact, Sydney house prices grew by over 20 % in the last year alone, and have risen a whopping 77% since the end of the GFC.

But this is just recent history. Sure the overall trend has been up but we need to look at the bigger real estate picture to get some perspective on performance over time.

History has shown us that the property market follows cyclical patterns. In short, that means that a boom is almost always followed by a downturn. At times property can be stagnant and show little or no growth; sometimes for years at a time.

The following chart from AMP Capital, demonstrates the boom and bust investment cycles of Australian house prices from 1926.

Source: ABS, AMP Capital

It might be difficult for some to even recall a time when house price growth struggled or declined given since 1996 we have seen the biggest run up in property prices in Australian history.

So, for most of us, we have only seen price go up for our entire adult lives.

The table below is a summary of major house price movements according to the Stapleton house price index.

This index only provides data up to 2010, however; research from CoreLogic RP Data reports 48% growth across the 8 capital cities combined since 2009 to date evidencing the continued growth in prices beyond the Stapleton index.

Source: Phillip Soo?s Bubbling Over

According to the index, every period of price growth has been followed by a downturn (except for price increases in the early 1960?s).? But we are yet to see a downturn from the growth in prices that began back in the late 1990?s.

Given this exponential growth in prices, some 20 years later, we now find ourselves amidst a housing affordability crisis in our biggest metropolitan areas.

Anyone trying to get a foothold in the property market can attest to affordability being a barrier, nowhere more so than in our major cities and Sydney in particular.

We hear stories of parents going guarantor or investing with their children to help them into a family house. Friends & siblings forming buying groups as the only way to get into the market.

Why is it so difficult? Are we all just lazy savers or are we truly plagued with an affordability crisis?

According to the 2015 Demographia International Housing Affordability Survey, for the 11th year in a row, all of Australia’s five major metropolitan areas have been measured as severely unaffordable.

Unaffordability is measured based by a multiple which is calculated as median house price divided by median household income. The graph below shows the trend of housing affordability in Australia since the early 1980’s. You can see clearly that affordability has diminished significantly since the late 1990’s.

A recent study by Mortgage Choice of 1,000 first home buyers found that 23 per cent saved for more than five years and that a large portion of those buyers are getting help from their parents and other family to get a foothold on the property market.

So why is property so unaffordable for us then?

A recent article in Business Insider, reported that since the GFC, the median house price in Sydney has grown more than five times the rate of inflation, and four times the rate of household incomes.

Why is this relevant? Property price growth that significantly outstrips income growth makes getting into the market extremely difficult for households given it is household’s incomes they are saved to purchase property.

Let’s use an example to illustrate.

The average house price in Sydney roughly $900,000.

With a minimum 10% deposit you require $90,000 to buy your average house. In the year to June 2015, Sydney prices grew 18.9% but let’s use a 3 year average of 13.5% (which factors in more modest growth of 2012 – 2013 of 6.1% per annum.)

With house prices growing at 13.5% per annum, this is subsequently pushing up the size of the required deposit up by a compounded 13.5% per annum (let’s not get started about the savings deposit rates).

Even if you are able to save a healthy 20% of your income towards a home deposit, you aren’t able to catch up with the current rate of increase in house prices. Hence worsening affordability.

The table below illustrates this point further. You can see that even after 5 years it isn’t possible to have saved enough to purchase the same home whilst rates are growing at 13.5%. In fact, it?s not even possible after 10 years.

 

Year Property Value price increase @ 13.5% Deposit Required @ 10% Average inflation adjusted Sydney income Savings @ 20% of income Cumulative savings
1 900,000 90,000 83,000 16,600 16,600
2 1,021,500 102,150 85,490 17,098 33,698
3 1,159,403 115,940 88,055 17,611 51,309
4 1,315,922 131,592 90,696 18,139 69,448
5 1,493,571 149,357 93,417 18,683 88,131

Is it fair to say that first home buyers simply need to adjust their expectations?? The average house price in Sydney is somewhere between $900,000 to a $1,000,000 dollars.

That’s a lot of money for the average person wanting to buy the average house isn’t it?

So, why have prices grown so much faster than households’ pay then?

One contributing factor is that buyers are borrowing more money from the bank encouraged by historically low interest rates.

Source: Property Observer

After spiking in the late 1980s, interest rates have been in a long term downward trend for over two decades and have been well below their longer term averages for several years.

These historically low interest rates have in turn encouraged larger borrowings as the cost of servicing the debt (the interest repayments) is more affordable for buyers.

Larger borrowings means people are able to pay more for property ? and subsequently this increases house prices.

But prices have surged particularly in Sydney and Melbourne when compared with the rest of Australia so interest rate movements alone cannot be the only explanation for house price growth over the last decade.

According to CoreLogic RP data research, employment growth & subsequent jobs creation can explain the skew to higher prices in Sydney and Melbourne over other capital cities.

Across all cities, more than two thirds (66.9%) of employment growth between 2008 (end of GFC) and 2015 has taken place in Sydney and Melbourne, creating further demand for property in these locations.

Also contributing to the continued boom in prices of the last few years in property, has been the frenzied buying of investors who have favoured real estate over shares, bonds and term deposits given how low interest rates.

Foreign investment has also been highlighted as another cause for price growth in recent years. Foreign Investment Review Board figures put China as the largest foreign real estate investor in Australia, followed by the US. Cashed up Chinese buyers have flood the market simultaneously increasing demand and paying a premium for Australian property, subsequently driving property prices even higher.

So where to from here? Is housing set to become even more un-affordable or will there be some price relief?

Here’s a quick bullet point summary of the argument for both sides:

Arguments for Yes?

  • Worsening affordability will eventually trigger a fall in prices as nobody who wants to live in a house can afford to buy one anymore. Steve Keen, economist and author makes his point here.
  • According to the UBS Global Real Estate Bubble Index, Sydney now ranks third among cities at most danger of developing a housing bubble making it by their definition one of the riskiest property markets in the world.
  • Mortgage lenders have clamped down on property investors to comply with new Australian Prudential Regulation Authority [APRA] requirements that investor-loan growth remains below 10%. This has led to both a tightening of lending criteria for investors as well as interest rate increases for both investors and owners alike.
  • New regulatory guidelines from APRA for banks to cover the risks of their mortgage lending has meant bank capital requirements have increased by 50%. This adds to their funding costs which is ultimately passed on to borrowers with higher interest rates.
  • Economic growth is slowing.
  • Population growth is declining, mainly the result of falling immigration. ABS statistics show growth of 4% to the end of March 2015 which is the slowest growth in almost a decade.
  • Auction clearance rates are slowing down as a result of a falling number of investors in the market, the unrealistic expectations of vendors and the threat of rising interest rates. A typical weekend in recent years saw clearance rates of approximately 80%. These numbers are more like 60% now.
  • Supply is increasing. A boom in housing construction may lead to oversupply. There will be 720,000 new homes built across the country by 2019. Half of these will be in Sydney and Melbourne alone. As a result, Goldman Sachs research expects this to translate to an excess of 75,000 dwellings by 2017 rather than a forecasted shortfall of 140,000.
  • A fall in foreign investment demand. Some experts suggest demand for offshore property among Chines buyers could decrease by nearly a third as economic conditions there worsen. Read more here.

Arguments for No

  • Australia is not one property market. Each of our capital cities have their own cycles and segments that perform differently. Factors affecting the performance of one segment may have no effect on another. Uniformity of price movements across all markets is unrealistic (eg. not all markets move in the same direction all at once).
  • Market conditions typically preceding a crash in house prices are not evident in Australia. Factors like rising interest rates, a severe tightening in credit conditions, bank failure, a sharp increase in unemployment or severe overbuilding that creates an oversupply are not threatening our market at present.
  • Employment growth will hold up demand in our largest capital cities reducing the likelihood of mortgage distress that could lead to forced sales and an oversupply.
  • Ongoing undersupply for the near future. HSBC bank published research last month that found the housing market in NSW is likely to remain undersupplied for some time yet despite the recent boom in residential construction.
  • A healthy economy that will continue to perform at a level that is the envied by of much of the Western world and will create jobs for anyone who wants on.
  • A sound banking system with low interest rates for the foreseeable future, tight lending practices and low default rate.
  • Healthy levels of household debt. While household debt is increasing, it is argued that those borrowing more can afford more debt. We are also taking on less credit card debt and paying off mortgage debt faster given lower interest rates. This reduces the risk of falling house prices if interest rates rise.
  • Foreign investment is not driving up prices as determined by the federal government?s parliamentary inquiry.
  • It highlighted that overseas buyers actually help to make housing more affordable because their investment boosts the economy, provides jobs and ? crucially ? encourages new homes to be built, increasing housing supply. Therefore any drop in demand should not negatively impact upon house prices.

It’s interesting to see that most experts agree that our housing market, particularly the markets in Sydney and Melbourne are overvalued. But they disagree over the idea that the fact prices are overvalued alone will mean a fall in housing prices.

Buying a home is one of the biggest purchases most of us will ever make. In fact, for most people, the family home is their biggest asset. Naturally we want to make sure that the decision we make is not going to leave us financially vulnerable and that where possible, it may actually afford us a better financial position over the longer term.

None of us have a magic ball and we all have to continue to live our lives within the economic conditions of the present.

But it always pays to know the background, and hear the argument for both sides, when the stakes are high.

 

2017-07-16T10:28:54+00:00December 7th, 2015|

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