Australian Housing Affordability Discussion

[drron]

Though it should read "most" of the previous generation think they have paid for all their benefits with the quite small amount of pension they have paid.I hit 70 in 2 months and in 2015/16 paid enough tax to support 3 pensioners.

 

[RAM]

So I will take that as an apology?

NO, merely pointing out that whatever facet I chose as a means of 'judging relative contribution' - I am sure you would have found fault with it. The latest generation (if that's what you mean) have contributed a fraction in comparison to previous generations involved in WW1, WW2, Korea and Vietnam.

Playing the man not the ball is not a good look. Whatever means of measurement other than 'longest running war' for the smallest number of Australian military personnel involved - the latest generation has got off lightly compared with the wars mentioned above.

You seem to have a chip on your shoulder over your experience in the military and it appears that anyone is fair game if they do not agree with your view.

Not really. I busted my biscuit over a stereotype laced rant from someone sledging millennials as being the core of the affordability problem. The reality is that older generations dominate the political spectrum at the moment (due mostly to numbers). The problem with that is a lack of empathy between generations and cold realities of economic self-interest. Boomers honestly don't seem to understand the situation contemporary young professionals (which is why they generally can't identify pensions as the largest outflow of welfare).

Claiming something repeatedly does not make it true. It must be some other peoples' post you are referring to?

Where exactly in my post are the alleged parts that match your rhetoric? Ie: "stereotype laced rant from someone sledging millennials as being the core of the affordability problem"? The only ranting would appear to originate from yourself, similarly the (incorrect) stereo-typing as I am not a baby boomer. I did not detect an apology did I?

Where have I once used the term 'millennials'? Not in any post of mine. You on the other hand have used it repeatedly.

I would agree with this statement but dispute the driver. The problem is not people over leveraging its a market that essentially forces those who want to enter to do so. I personally refuse to do this. I can afford to buy property in the city of Sydney but won't because a) I think the properties are over valued b) have zero interest in transferring more of my wealth to the older generation through a windfall they didn't earn and c) it honestly isn't worth tying up the capital into this market as the amount required outweighs the risk. The result isn't me being irrationally over leveraged, its me staying out of the market and placing my capital into others.

Yet again you twist what I wrote. I did not refer to your personal circumstances - you appear to have made that connection, not I.

My reply was a general one pointing out that what you asserted about:

• contribution to fighting a war for the current generation is a fraction on any metric in comparison to numerous previous wars over various generations.
• housing was less affordable in 1989/90 on financing cost per dwelling vs per household income than it is today.

Nothing personal but your claims are baseless.

 

[Moody]

.... housing was less affordable in 1989/90 on financing cost per dwelling vs per household income than it is today ....

I was there RAM ... I remember interest rates hitting 17% and the eye-watering interest bill. But a few extra facts to spoil your Trumpisms.

- the 17% only lasted 6 months
- whilst it was a shocker, our total mortgage (@80%) was 96K ... of which I owed half ... so my personal interest burden was <$700/month. I chose to pay $750
- when interest rates started easing we were smashing the mortgage, and I bought him out only a few years later

Now families in Sydney are facing $1M+ mortgages in many suburbs. Whilst they may be able to pay the interest rate now, they will be absolutely screwed when rates ratchet up. Plus they still have to pay off the $1M+ loan. So unless wages have kept up with property prices, the theory that housing was more unaffordable in 89/90 is laughable.

 

[TomVexille]

Now families in Sydney are facing $1M+ mortgages in many suburbs. Whilst they may be able to pay the interest rate now, they will be absolutely screwed when rates ratchet up. Plus they still have to pay off the $1M+ loan.

This is what I'm afraid of. It would be incredibly irresponsible for me to leverage myself up to the eyeballs since rates are low (which is what Mr Entitlement himself Joe Hockey wanted people to do). We would be fine until the rates inevitably rise again, and then we would be screwed.

 

[DaveB]

Supply of housing stock really drying up in Sydney. Catch 22 situation now with those able to either sitting on their hands or helping out the kids with well into six figure amounts now the norm.

Whilst we could downsize now with our kids living OS, the Sydney housing choice is pathetic with pretty much all medium density for OS consumption and/or entry unit standard.

When signing some bank loan docs last week, our account manager advised they were now stress testing mortgage applications to handle 7.25%. Found hard to believe as would pretty much rule out one of the big 4 lending further in Sydney.

 

[JohnK]

Now families in Sydney are facing $1M+ mortgages in many suburbs. Whilst they may be able to pay the interest rate now, they will be absolutely screwed when rates ratchet up. Plus they still have to pay off the $1M+ loan. So unless wages have kept up with property prices, the theory that housing was more unaffordable in 89/90 is laughable.

Dream home? Dream location? May not be such a good idea. Units and townhouses are more affordable or move further out.

 

[RAM]

I was there RAM ... I remember interest rates hitting 17% and the eye-watering interest bill. But a few extra facts to spoil your Trumpisms.

- the 17% only lasted 6 months
- whilst it was a shocker, our total mortgage (@80%) was 96K ... of which I owed half ... so my personal interest burden was <$700/month. I chose to pay $750
- when interest rates started easing we were smashing the mortgage, and I bought him out only a few years later

Now the maths...

The figures you show on a per household basis had you paying interest of 17% on $96,000 = $16,320 (yes some principle would have been paid off, about $50 if first 6 months).

That figure is post-tax income that you have paid with of course and was a stunning 58% of the AWOTE figure.

Converting to the same 58% figure today would yield an interest payment amount of $45,876.36.

Dividing that by the easily available mortgage rate of 4.75% (very conservative can get below 4% easily but for argument's sake) = 45,876.36 / 0.0475 = $965,818.10 Mortgage.

See, on a like for like, you and your partner in purchase were paying the equivalent of servicing a near enough to $1m mortgage in 2016 for you $96,000 mortgage in 1989.

Using the more realistic 4.00% mortgage rate, would see a mortgage of $1,146,909

On the current lowest quoted 'bank' variable mortgage rate of 3.59% gives $1,277,893

That is a like-for-like comparison. Median mortgage not found in 30 seconds so here is the average (which over-states the size) NSW one is around $450,000 - so you were effectively servicing what would service a mortgage 2.1 to nearly 3 times the average NSW mortgage.

Now families in Sydney are facing $1M+ mortgages in many suburbs. Whilst they may be able to pay the interest rate now, they will be absolutely screwed when rates ratchet up. Plus they still have to pay off the $1M+ loan. So unless wages have kept up with property prices, the theory that housing was more unaffordable in 89/90 is laughable.

So do you remember how the 'experts' were predicting the possibility of even higher rates and encouraging people to lock in fixed rate debt? It was luckily before I was involved in the mortgage-go-round.

Do you remember Bob Carr encouraging people subsequently to default on their fixed rate mortgages that the State Govt of NSW had offered for people fearful of the variable rate mortgages going higher? Ending up causing many super funds to lose (in total) north of $100m. I never did buy those NSW Govt securities for the funds I ran...

Even worse than the 17% rates were the bridging loans at 22%+. Those were interesting times indeed. One of the few times that real people could participate in the high rates (if saving) through buying Treasury Notes at the weekly RBA T-Note auction (min $5,000 and awarded at lowest rate awarded in the tender). No rapacious spread taken out so you could end up with over 17% for 13 weeks (never game to go for the 26 week ones).

About the more affordable in 80s - the RBA (and I and others who have run the figures) disagree. The cost of servicing a typical mortgage (even down to 1989 Sydney median house price vs 2016 Sydney median house price level) was a greater % of median disposable household income than it is today at today's interest rate levels. See graphs posted earlier - although those are comparison of Australian median house prices vs median household disposable income.

Totally agree - if (and when) interest rates rise 2 or 3% then the 2016 ratio will rapidly approach (and potentially by-pass) the 1989/90s figure. Until then, it is currently more affordable.

Also as I posted earlier, when you look at the pre-tax case it is substantially easier in 2016 and then you should add in the near tripling of 'middle class welfare' that has happened since then such as baby bonus, family part A and B etc etc etc.

The tax free threshold has more than trebled from what it was in 1989.


This from the RBA..

and updating it for rising income, rising house prices (used 50% but that is more than Aust-wide figure is) and falling mortgage rate - has it BELOW the average for the ratio since 1980.

Sticker shock and shock-jocks/newspaper fillers and lobbyists are almost NEVER reliable sources of information. A blank sheet of paper and a calculator would save millions of Australians from poor financial decisions.

Unfortunately most implicitly (sub-consciously) have the hold-over from school days - what you see in print is correct and you believe it accordingly.

 

[alieninperth]

That is an astounding piece of research. Well done.

 

[CaptJCool]

Would the figures be impacted as to if it's an Interest only loan ?

Its my impression with those loans, it's a 30 year rent via your financial institution with "bracket creep" delivering a capital gain.... but on that basis, you still don't own the home after the time.

If Australia had greater than one year rentals and more socially conscious property owners (eg like pension funds in Germany) perhaps rents would be lower? When state housing was downscaled (costs State govt too much to build and rent) - and then negative gearing introduced, the "ponzi scheme" carousel of house prices spiralled out of control.
But that said, the stock exchange is a perfect example of what happens with a price crash - if you bought in for $5 and over time the price goes upto $50 and you get franked dividends (tax paid by someone else) and then crashes to $25, you still make a profit if you're "forced" to sell. And if it's conducted in foreign currency you could make a double profit if the exchange rate has "worked in your favour". Often when retention periods lapse you see a price dip because directors or employees who 'earnt shares via options or $0 cost base, are more than happy to crystallise the profit. After all, selling a million $0 shares at $15 or $10 is neither here nor there... you still become a multi-millionaire.

Just St think of tenants rent as franked dividends and depreciation allowances as exchange gains and voila ! Magic !!

 

[RAM]

Would the figures be impacted as to if it's an Interest only loan ?

Its my impression with those loans, it's a 30 year rent via your financial institution with "bracket creep" delivering a capital gain.... but on that basis, you still don't own the home after the time.

If Australia had greater than one year rentals and more socially conscious property owners (eg like pension funds in Germany) perhaps rents would be lower? When state housing was downscaled (costs State govt too much to build and rent) - and then negative gearing introduced, the "ponzi scheme" carousel of house prices spiralled out of control.
But that said, the stock exchange is a perfect example of what happens with a price crash - if you bought in for $5 and over time the price goes upto $50 and you get franked dividends (tax paid by someone else) and then crashes to $25, you still make a profit if you're "forced" to sell. And if it's conducted in foreign currency you could make a double profit if the exchange rate has "worked in your favour". Often when retention periods lapse you see a price dip because directors or employees who 'earnt shares via options or $0 cost base, are more than happy to crystallise the profit. After all, selling a million $0 shares at $15 or $10 is neither here nor there... you still become a multi-millionaire.

Just St think of tenants rent as franked dividends and depreciation allowances as exchange gains and voila ! Magic !!

Short answer yes.

More helpful answer - not much in the first 2 to 3 years for a P&I vs I only loan.

The loan repayments are higher for a P&I loan but for a typical 25 or 30 yr term (even though most loans are paid out as house sold for new one or loan refinanced well under 7 years after establishment). In the first Year the P component of a repayment is tiny and less than 5% of total fortnightly repayment - but that is around 5% more than an interest only repayment.

Historically the bulk of loans were P&I. Some biased groups (un-named), who receive commissions on basis of Face Value of mortgage sold, can earn a bigger commission by selling a larger I-only mortgage vs a P&I one as the I-only will always be a larger mortgage amount for any given repayment size vs P&I.

ASIDE - one possible explanation for so many more people taking higher % repayments as % of household disposable income may be due to lack of a recession in several generations adult-lifetime.

The old joke during normal business cycles was:
Q: What is the difference between a Recession and a Depression?
A: A Recession is when a close friend or relation is made redundant, A Depression is when you are made redundant.

The period from 1989-1992 was the first time since the Great Depression in Australia that several professions/groups suffered wide-spread layoffs. The groups? Lawyers, accountants and tax agents.

As we have not had the newspapers with front pages (as we saw in 1990) showing a Capital city street where every house had one or more occupants who had been laid off - the perception that you cannot lose money in property has gained widespread traction.

Just like it had in the US until 2007/8...

 

[whatmeworry]

Now the maths...

The figures you show on a per household basis had you paying interest of 17% on $96,000 = $16,320 (yes some principle would have been paid off, about $50 if first 6 months).

That figure is post-tax income that you have paid with of course and was a stunning 58% of the AWOTE figure.

Converting to the same 58% figure today would yield an interest payment amount of $45,876.36.

Dividing that by the easily available mortgage rate of 4.75% (very conservative can get below 4% easily but for argument's sake) = 45,876.36 / 0.0475 = $965,818.10 Mortgage.

See, on a like for like, you and your partner in purchase were paying the equivalent of servicing a near enough to $1m mortgage in 2016 for you $96,000 mortgage in 1989.

Using the more realistic 4.00% mortgage rate, would see a mortgage of $1,146,909

On the current lowest quoted 'bank' variable mortgage rate of 3.59% gives $1,277,893

That is a like-for-like comparison. Median mortgage not found in 30 seconds so here is the average (which over-states the size) NSW one is around $450,000 - so you were effectively servicing what would service a mortgage 2.1 to nearly 3 times the average NSW mortgage.

View attachment 83098



So do you remember how the 'experts' were predicting the possibility of even higher rates and encouraging people to lock in fixed rate debt? It was luckily before I was involved in the mortgage-go-round.

Do you remember Bob Carr encouraging people subsequently to default on their fixed rate mortgages that the State Govt of NSW had offered for people fearful of the variable rate mortgages going higher? Ending up causing many super funds to lose (in total) north of $100m. I never did buy those NSW Govt securities for the funds I ran...

Even worse than the 17% rates were the bridging loans at 22%+. Those were interesting times indeed. One of the few times that real people could participate in the high rates (if saving) through buying Treasury Notes at the weekly RBA T-Note auction (min $5,000 and awarded at lowest rate awarded in the tender). No rapacious spread taken out so you could end up with over 17% for 13 weeks (never game to go for the 26 week ones).

About the more affordable in 80s - the RBA (and I and others who have run the figures) disagree. The cost of servicing a typical mortgage (even down to 1989 Sydney median house price vs 2016 Sydney median house price level) was a greater % of median disposable household income than it is today at today's interest rate levels. See graphs posted earlier - although those are comparison of Australian median house prices vs median household disposable income.

Totally agree - if (and when) interest rates rise 2 or 3% then the 2016 ratio will rapidly approach (and potentially by-pass) the 1989/90s figure. Until then, it is currently more affordable.

Also as I posted earlier, when you look at the pre-tax case it is substantially easier in 2016 and then you should add in the near tripling of 'middle class welfare' that has happened since then such as baby bonus, family part A and B etc etc etc.

The tax free threshold has more than trebled from what it was in 1989.

View attachment 83095
This from the RBA..
View attachment 83096
and updating it for rising income, rising house prices (used 50% but that is more than Aust-wide figure is) and falling mortgage rate - has it BELOW the average for the ratio since 1980.

Sticker shock and shock-jocks/newspaper fillers and lobbyists are almost NEVER reliable sources of information. A blank sheet of paper and a calculator would save millions of Australians from poor financial decisions.

Unfortunately most implicitly (sub-consciously) have the hold-over from school days - what you see in print is correct and you believe it accordingly.

Lots of cherry picked figures. Not a mention of wages/salary compared to home price ratios of then to now.

HOUSING
Property is where the really scary figures come out.
In Sydney, the average house cost $28,000 in 1975. Today, it costs $850,194. That’s 30 times as much as it used to be. Your 10-times as much annual earnings isn’t looking too great right now, huh?


Melbourne is even worse, at 31 times the cost of 1975. Back then, the average house was $19,800. Now, it’s $615,068.
In Brisbane, it’s 27 times higher from $17,500 to $473,924.
In Adelaide, it’s 28 times higher from $16,250 to $459,258.
In Perth, it’s 32 times higher from $18,850 to $604,822.
In Canberra, it’s 21 times higher from $26,850 to $573,326
In Hobart, it’s 21 times higher from $15,200 to $322,274.

House price growth: Wages falling behind

 

[andye]

Lots of cherry picked figures. Not a mention of wages/salary compared to home price ratios of then to now.



House price growth: Wages falling behind

A higher proportion of dual wage earners will be boosting the household incomes though.

You might argue that a sizeable proportion the extra GDP created by widening the workforce has been sunk into house prices.

Another aspect is that having two parents working limits one of them to a 'local' job to facilitate childcare. Difficult if the only place you can afford is long way from the high-paying CBD jobs

 

[kamchatsky]

A higher proportion of dual wage earners will be boosting the household incomes though.

You might argue that a sizeable proportion the extra GDP created by widening the workforce has been sunk into house prices.

Another aspect is that having two parents working limits one of them to a 'local' job to facilitate childcare. Difficult if the only place you can afford is long way from the high-paying CBD jobs

Yes, and with higher and higher cost of childcare, it starts to negate the benefits of having double income. Depending on the salary, sometimes it is better off to go back to single income. Then of course it restricts the loan size you can get. It really is getting to a no win situation.

Both of us are travelling 1 hour + each way to work in Sydney CBD and we bought our house in 2007. Sure the house price gain is great but we still have a sizable loan to pay off still. I cannot imagine people borrowing $1m to buy a property and need to pay it off with average wages.

 

[drron]

Lots of cherry picked figures. Not a mention of wages/salary compared to home price ratios of then to now.



House price growth: Wages falling behind

What do you think the AWOTE figure mentioned if it is not wages.
And using Average prices can also be called cherry picking.
A reasonable article from the RBA-
http://www.rba.gov.au/publications/bulletin/2015/sep/pdf/bu-0915-3.pdf

 

[RAM]

Lots of cherry picked figures. Not a mention of wages/salary compared to home price ratios of then to now.

When the facts do not match your opinion it is cherry picking.

I took the figures that an AFFer proffered on their own experience about why it is less affordable now, used the directly comparable ABS statistics as well as standard variable mortgage rates then and now, used the Australian Tax rates then and now and took the data for the avg mortgage size.

No cherry picking just the true figures that do not match the storyline peddled at the moment.

The RBA graph is not cherry picking - it shows the entire period from 1980 to near current.

I am sorry that the numbers do not match the 'reality' you and many commentators wish. As to the ratio of house prices from 1975 to wages - you need to then look at the mortgage rates and tax rates.

Apples with oranges comparisons do not work. In my original post I referred to the ratio showing the ability to service a mortgage over the 30+ year period.

Servicing a mortgage aka housing affordability is more than a function of price and pretax wages (as shown above). A one-legged stool is not really successful.

 

[RAM]

Yes, and with higher and higher cost of childcare, it starts to negate the benefits of having double income. Depending on the salary, sometimes it is better off to go back to single income. Then of course it restricts the loan size you can get. It really is getting to a no win situation.

Both of us are travelling 1 hour + each way to work in Sydney CBD and we bought our house in 2007. Sure the house price gain is great but we still have a sizable loan to pay off still. I cannot imagine people borrowing $1m to buy a property and need to pay it off with average wages.

What is this fixation with 'having to borrow $1m to buy property'?

NOBODY is forced to buy a $1.1m or more property - nobody.

For decades people aspired to one day owning their 'dream' property - until then (if they ever achieved their dream) they purchased what property they could afford to buy/service. For many that was a smallish unit, maybe even a 2 brm unit at a pinch. Using Sydney as an example - some people traded off distance from the city for being able to own some land - so they went out to Penrith et al or Blacktown, Campbelltown etc when the roads system was single lane each way, single deck trains and maybe, if you were lucky there were 6 trains an hour in peak times with no airconditioning of course.

Today you can still buy units. There are even 3 brm houses for under $500,000 in Sydney - but they are far from the beach or CBD etc.

It is not everyone's right by birth to be able to live with ocean views, or within sight of the CBD. It is a choice or something to aspire to.

I agree paying off a $1m mortgage on AWOTE would be hard but that is someone's choice to make - whether it is a wise financial or healthy choice - it is their choice and they make it and have to live with the consequences. Or is it everybody's right to live at Manly or Vaucluse after all?

 

[cove]

In Perth I did buy two homes in the early 1970s around 6 kms from the city for a combined $12,300. Both are still standing with one a 3 bedroom and the other a 5 sleeping unit. Banks in those days wanted short repayment terms and much higher interest rates than on a live in home so they made life as difficult as they could with 9% money and 7 or 10 year loans. Just like today banks charged you fees for every imaginable service because they could.
Today I rarely look at residential real estate because it earns too small a return once you get hit with stamp duty, land tax,shire rates and water rates.

 

[Rigs]

That is an astounding piece of research. Well done.

Only if you think there is value in a whole of country figure. Which, given the current state of the education/employment market, there isn't.

The column on the right shows the dramatic drop from 71.3% to 64.3% between 82-11. The number hasn't gotten better since then. You can see the core of the effect in the 25-44 brackets. There is more to the story than a simple repayment to income flow diagram will show. Price is not the key reason, although it certainly doesn't help. The affordability problem is caused by a range of factors. Given that RAM doesn't engage with the evidence presented, it makes it hard to figure out exactly how the points he is putting forward relate to the claims of people who say that housing is unaffordable.

 

[JohnK]

Housing is not unaffordable.

One can buy a unit around Forest Lake in Brisbane for around $250,000-$300,000. Similar unit around the city is maybe $500,000 or more. I have seen 1-2 bedroom units in the new developments in Toowong advertised from $350,000.

That's quite reasonable. Stay at home with mum and dad until you pay it off. A family of 2 incomes can pay it off even quicker. Just make the sacrifices.

Sydney is the same. Units in the Belmore-Campsie area can be bought for $350,000-$400,000. I am sure someone can give similar figures for Melbourne. Once you have paid that off you can then tackle the next obstacle up the ladder.

I don't quite understand why we keep discussing median house prices and average house prices. Start at the bottom and work your way up. Plenty of affordable housing. Not close to city and not my dream home are poor excuses.

 

[alieninperth]

Only if you think there is value in a whole of country figure. Which, given the current state of the education/employment market, there isn't.

The column on the right shows the dramatic drop from 71.3% to 64.3% between 82-11. The number hasn't gotten better since then. You can see the core of the effect in the 25-44 brackets. There is more to the story than a simple repayment to income flow diagram will show. Price is not the key reason, although it certainly doesn't help. The affordability problem is caused by a range of factors. Given that RAM doesn't engage with the evidence presented, it makes it hard to figure out exactly how the points he is putting forward relate to the claims of people who say that housing is unaffordable.

I honestly dont know what these figures mean. Participation rate in the workforce? Months to save a deposit? Is it for a local area, or is it the national picture.

And of course there is value in a broader national picture, it provides the outline that you operate it, you then look at State/Regional/Local pictures and stats when they are available. You can then assess the impacts of policy settings on each of those pictures. For example, we know that at a national level the last few years have seen a reduction in the participation of first home buyers in the market. This has been replicated to some extent in various states and territories.

So, here in WA the State govt. decided to incentise first home buyers to buy newly properties rather than existing. This then made developments on the urban fringe and inner suburb infill developments more attractive to the (nominally) younger demographic. This in turn supported other govt. policies and agendas, and importantly could be measured.

The only percevied lack of value is when the information is not used, which is why the ABS annonomised data is so useful.