Another affordability question for youngsters discussion?

I have a few friends in hospitality, ranging from 20 to 50,

I hear the oh property prices are way too high argument and comment all the time from just about everyone, this has been discussed to death.

However, I have friends in their 40s, earning $60k, -$70k still renting and wanting to buy

yes you can argue that some of these people want their castle in the best suburbs and complaining the y cant afford it

not being actively looking for a PPOR at the moment, some of the suburbs they looked in, that I thoguht were pretty crappy, are now hitting 7 figures,

maybe if these people started looking at apartments for $500-$600k for a 2bdr, or even a unit it would be much more realistic,

but geez 7 figures on a $60k income is not going to happen,

I kind of feel sorry for them, I too dont have a PPOR but I dont want one, and im in a different situation to them. I dont think its even a case of having too high expectations.
I suppoed you can get a 3bdr in melton for $350k

but who knows for how long, wont their be an equilirum point which is reached where prices simply cannot go any higher

food for thought, yes im rambling

 

Very few can go from renting straight into their dream home.

Most climb up the ladder in a few steps, starting out with what they can afford.

We did. We were lucky enough to do it in two steps after our first home doubled in four years.
Marg

 

Ha. You'll find that anything over 400 k is going to be nigh on dangerous for people on a small wage.

The affordability problem isn't the abundance of 500- 700k stuff...its the lack of 3-400k properties.

 

Speaking from a Sydney viewpoint the issue is that there are literally no suburbs left anymore where you can purchase a house for <500k. So yes people will be forced to readjust their expectations and adopt apartment/unit living to get a foot in the door.

As for the original poster if you're on a 60k salary (assuming you're single) there is absolutely no way that you would be able to safely afford a 500k-600k apartment as a PPOR. Let's be generous and say that they saved up a 100k deposit and had stamp duty disregarded so they are left with a 400k mortgage on a 60k salary. On current interest rates P+I repayments on a 400k loan would be approximately 2k a month. On a 60k salary their take home pay is approximately 48k a year so literally half their salary is being used on the mortgage. Add in council rates, strata, insurance and it looks bleak and that's with low interest rates. It's certainly doable but you'd be hoping for a pay rise and for interest rates to stay low for the foreseeable future. I know if I was in that position I certainly wouldn't be sleeping well at night.

As for the equilibrium where prices can't go higher the reality is that low income earners in certain cities (Sydney) are locked out of the market and will be forced to become eternal renters- that or relocate elsewhere. Low income earners have always had low home ownership rates, however, recently the biggest change has been people in the 20-40% strata have gone from having reasonable home ownership rates to those comparable to the low income 0-20% strata group.

 

Putting aside the emotional reasons of a PPOR. In capitals where there has been large growth, have yields not moved in opposite direction?Financialy does the case for buying at this stage stack up?

I own my own home in Adelaide, When i purchaded my home the little extra cost of a mortguage i felt was worth it over renting. (Imo here in Adelaide that is still the case today).
If i was forced to move to say Sydney, im not sure i could justify the case for buying over renting at this stage of the cycle. And with all honesty i would be happy to rent.

I work with alot of younger colleagues whom get frustrated by the cost of housing. There frustration usually stems from the amount they need for a deposit. They mostly claim the repayments would not be an issue. I have always asked what did you do with that mortguage equivalent amount from your last pay? I will leave it to everyone's imagination as to the response i get back .

My advice has always been a little education and the magic of compounding can be an effective hedge against housing affordabillity.
ie set aside that mortguage equivalent and DCA into a basket of ETF's. I also highlight the advantage of doing this now and leveraging off there youth, and explain how compounding will magnify their investment.

At such time this investment has reached the equivelent of a home deposit, then weigh up if thats still your objective. When i point out and give examples of high net worth individuals, that do not own there own home, they are usually pretty surprised of the fact.

 

It depends where you are. You can pick up a property half an hour from the CBD for about $150,000 in Queensland. I believe the situation is similar in/around other capital cities and regional areas. The "affordability crisis" should really be focused on Sydney and Melbourne as far as I understand, where there is a legitimate argument for being able to afford any type of property within a wide area of choice.

 

Being a first home buyer, the main issue for me is fear. I understand the concept of "start with something simple". But when ppl see double digit growth, starting with something simple isn't really helping.
It seems like the market consists of two groups of ppl now, those who has bought in the beginning of the boom and those who is entering now.
Who has bought at the start and started with something simple have gained some CG and can trade if for something better.
I've bought a 2 Bedroom apartment in Melbourne, Oakleigh a week ago. Having two kids, I will need something bigger later on. However, if the market continue to grow, 3 bedroom apartments or townhouses will be out of reach for me in 2-3 years. 1-2 years ago I was able to buy 2-3 bedroom townhouse, but now they jumped from 550 to 750k.
I would prefer to have the market being flat. Then I can see some prospect for ppl like me. Saving more money and buying something better. But with the price jump like 100k a year.....
I can see a huge amount of shoeboxes off the plan and very little interest from buyers in this area. I think developers really struggles to sell those. One developer in my area offers Mazda 3 if someone buy his shoebox. But the good quality units/townhouses are growing like crazy.
I'm a realistic person and understand that there always will be someone poor and someone rich. But it seems a bit strange for me when two adults with diplomas working full time earning above average can't afford a simple spacious place to live with two kids.
PS: we have been looking at properties farther away, but commuting just does not work when both are working and someone need to drop off kids at school.

 

Great discussion @TMNT !

without significant capital growth, upcycling wont work. without the rate falls of the last 10 years it will also be a tonne harder to leverage any higher debt in the near future. in fact probably harder when rate increases start.

i was just talking with someone about this today. If i knew 60k was all i would ever earn, i would be leaving Melbourne yesterday. with even Lalor now cracking 600k, your only options for a backyard is Dallas or 60km out of the city. Even for an apartment with any space you're looking at an easy 600k. Probably a small 2-3 bed townhouse is about all you could hope for, and given its unlikely to build significant equity in the near future, you're practically waiting a full property cycle for it to go up.

I grew up in Perth and have mates there earning less than me living considerably more comfortable lives. in fact i would say despite my pay going up, my quality of life has only gone downhill since moving east (apart from my career, but that's a conscious choice for a particular industry). Melbourne and Sydney are getting like London - you need some real cash flow to enjoy the city.

Fully fully agree with the sentiment that rental yields are a joke. the only argument I've heard is that chinese keep buying because yields in shanghai are 1-2%. but the counter is that rural china has an average wage a fraction of the capitals, so there are really no options outside major centres. Australia has flat wages, so apart from temporary supply constraint, i don't see any reason for some capitals to be soaring so far above others. especially when yields between cities are so out of tune.

 

Congratulations on the purchase. I wouldnt stress too much about needing to upgrading in the future. You've made the hardest step and the next step will be easier. Once you build some equity it will unlock alot of opportunity.

 

Of course.
But expectations. To stay in your own city personally isn't a "omg, you're expectations are so high" view.

Let's take melboure for example. For the above average person I feel the choices are limited for a freestanding home . Unless you go to the dumps. And I wouldnt consider living in a Relatively safe area as too excessive

 

True, but its also fair to say that @10 Million people, or 40% of Australia's @25 Million people - live in those two cities. All of Brisbane's population, all of Perth's population and a good portion of Adelaide's population would only fill one of either Sydney or Melbourne. And soon enough both cities will be at @6 million -7 million while other cities just arent growing as fast...

So while it may only be 2 of Australia's cities that are suffering from affordability problems, its also going to be 50% of the population before too many more years pass....

What Australia's two largest east coast cities need is high speed rail linking them... it would allow for several hundred thousand people to live along the route in places like Goulburn or Shepparton for example, and commute to work in less than 60 minutes...which is a standard commute time for many in Sydney these days anyway . If the rail was built, multiple regional centres could easily grow to meet the increased population demands over the next 20-30 years

You simply arent going to get any improvements to affordability in Sydney, in particular...without finding a way to get people outside the Cumberland Basin and still able to commute to work, quickly. Until you have spent your mornings or evenings sitting on one of Sydney's "motorways" during peak hours - which start at 6am and ease off a little bit around 10 am, then start again at 3PM and only start to ease off after 7PM... or trying to get onto one of its trains - built for a city of 1-2 million people not 5 million people.... you just won't "get" why people are willing to pay SO MUCH for property here.... just to save on some commute time.

High speed rail will improve affordability dramatically.

 

Instead of doing this why not make Brisbane the 3rd major player and business hub (which is already is) but lets provide some incentives for business to invest more money and more jobs there.

 

That would have to be cheaper than building a HS railway line, and it would work for me.

 

So now they have to wait for high speed rail?
De-centralisation is the only realistic solution. How many people who live in Sydney work in a shop, a hospital, a supermarket, etc? We have these all over the country, some in very beautiful and affordable (and therefore friendly) towns AND cities.
Doctors and nurses are needed everywhere. So are teachers, police, tradies! Come on people! Are you really so close to your parents and spend every weekend with them? If that's the case, move together! Let's face it, most of them left their families behind to come here. Change the mind-set, or live the life that your migrating forbears escaped.

 

Interestingly I wonder how much the median price is for a standard 2/3 bedder house (attached or detached) on say 250sqm + is in London.

 

London you'll typically get more bedrooms and less land. Something like this would be standard for a family house. The area is nothing great by any means.
Check out this property for sale on Rightmove!

Others feel free to challenge this, but i consider North London kind of like Melbourne's east, and West London more like Toorak/South Yarra/Albert Park. I have a lot of family in Finchley (North), I remember one of them buying a house for around 500k in the mid 2000's. Looking at today's prices, the same house would be 2m+. so call it ~AU$2-3m for a decent family home, not too far from the city.

Rightmove.co.uk

If you really want to see where london gets crazy though, try moving any closer to the city. Places like Belsize Park and Islington. The number of AU$8m+ properties blows me away. Still no Mayfair, where you can easily double that again.

 

As someone who invests in both property and equities, i find it intresting that the key metric of P/E ratio is not more espoused or expressed in property investment.

Here's an intresting quantitative method to calculate the risk/reward of buying over renting. Also as an investor, the price you are paying for the asset. An intresting method to calculate price between suburbs or capital cities, or even property to equities! (some may be surprised how expensive there property investment is compared to equities).

Before buying a home, analyse your 'Price-to-Rent' ratio price.

'When a stock price is high, and its earnings per share relatively low, the P/E is high. A high P/E often indicates that the stock is too expensive, and the share price is headed for a drop' - Therefore in property, if your asset is too expensive and the return is so incredibly low, it may not be a good idea.

A lot of people bank on the idea of capital appreciation to counteract the loss that they incur, and they negatively gear the asset to write off the expense from their taxable income. But when you get dangerously low in your percentage, and it is clearly more economical to rent than buy, it may be better to look at investing your money elsewhere and getting a return from it that way, rather than sinking it in to property.

 

This.

We're got ready made base cities close to Sydney like Newcastle, Balarat and Bendigo not far from Melbourne incentivise people to go to them.

High speed rail is a pie in the sky dream. It wouldn't solve affordability at all. Plenty of places in the world have high speed rail and they still have high property prices. Commuting to work isn't the only factor and as I have said many many times not everyone works or has a need to go into the city everyday anyway.

 

I'm a HUGE fan of decentralization. It perfectly suits our landscape and accustomed style of living. It's being very well implemented here in QLD, where the ShapingSEQ CityPlan 2014 has all growth and development occurring along major lines of transit and in "satellite" cities (Logan, Ipswich, Moreton, etc.) in order to leave the majority of Brisbane as it is.

 

I know they're different but Sydney/Mel still quite a bit cheaper than London it seems, apples with apples.