Who's to Blame for Australia's Expensive Property?

Discussion in 'Property Market Economics' started by Guest, 27th Jul, 2015.

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  1. sanj

    sanj Well-Known Member Premium Member

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    Michael the issue is that in some cases it's becoming affordable to a select few only and we don't want that to become the norm.

    Going by your logic ferraris are eminently affordable because there are buyers out there form them.
     
  2. Aaron Sice

    Aaron Sice Well-Known Member

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    I also find it's best to start with a market close to home - there is plenty of opportunity in Adelaide, just have to be close to the ground to find it. I simply worry about the longer-term prospects.

    A market that creates a short term price correction in one area or locality or typology - either up or down - does not trigger the need for govt intervention, or we end up with the Marxist East Berlin concept of maintaining the decrepit state of neighbourhoods by not allowing property owners to improve property in a way that will increase the value which may make rents unaffordable.....and yes, that's a real policy based in the "affordability" camp.

    The govt should not step into a capitalist market because they are socialist in nature. The great thing about capitalism is that generally, stupid decisions and the money that follows are soon parted, with that wealth transferring to the smarter decisions that can use it better.

    Small term fluctuations in this model are normal and par for the course.
     
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  3. Aaron Sice

    Aaron Sice Well-Known Member

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    not really - we would have to say that CARS are unaffordable, not Ferraris - because that would refer back to a specific sector or typology in the market.
     
  4. Shadow

    Shadow Well-Known Member

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    If that were true then transactions would be falling, as less people overall would be able to buy. But transactions are at normal levels. Roughly half a million homes were bought in Australia over the past year, which is pretty normal.

    Sydney is having a boom now, but that's after Sydney prices had been falling relative to incomes for a decade, from 2003 to 2012. And outside of Sydney house prices are barely moving in real terms.

    There is no evidence that property is only becoming affordable to a select few. Sydney property is actually pretty cheap compared to other global cities like London, New York, Vancouver, Hong Kong, Singapore etc.

    The median freestanding house price in London is AUD $2.1M, and in Vancouver it's AUD $1.5M. And good luck even finding a freestanding home in Hong Kong or Singapore.

    In Sydney the average freestanding home only costs $1M.
     
  5. Guest

    Guest Guest

    If you consider government providing the policy environment for prices to boom 'lack of action'? They were implicit in it. I take it you didn't read the 1000+ words in the first post of this thread? :)

    I disagree with your definition of affordability. It's a subjective term. But the bottom line is, house prices in Australia are expensive from both a historical and global perspective. I'm going to ignore the affordable/not affordable debate, it's as silly and pointless as the bubble/not a bubble debate.

    Do you agree that prices are far more expensive relative to any real measure compared with the past (pre-2000)?
     
  6. Sackie

    Sackie Well-Known Member

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    "I used to say, ‘Things cost too much.’ Then my teacher straightened me out on that by saying, ‘The problem isn't that things cost too much. The problem is that you can't afford it.’ That's when I finally understood that the problem wasn't ‘it’ - the problem was ‘me.’" -- Jim Rohn
     
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  7. S.T

    S.T Well-Known Member

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    You can buy some old Ferrari's relatively cheaply these days, 80's and 90's ones. Could perm your hair @sanj and Magnum it up - especially with that mo!
     
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  8. sanj

    sanj Well-Known Member Premium Member

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    we do not want to become like the cities you mentioned where the gap between the haves and have nots is so significant. this is not something id like to see in australia, even though i'd likely end up on the right side of that equation.

    ive long felt that australian house prices were expensive but sustainable. i still feel that way about most places, sydney i dont.

    i think it sucks what people have to pay to live anywhere decent and looking at it holistically it is unproductive for the country/city for so much capital to be tied up in something as unproductive as a rental property.

    add to that the effort involved in getting deposits etc together now in sydney for people starting from scratch, sure it can be done but imagine the opportunities that some people are foregoing in the meantime? could there be more businesses started up? could people be doing more for their communities or spending more time with their families?

    I do genuinely feel that it has now reached the stage where the house prices in sydney are unhealthy. maybe they will drop a bit, maybe they wont, im not trying to predict them. im merely stating that i feel it isnt a great thing from a big picture POV and not everything should be based on a monetary result.

    of course it's a great result for anyone invested in it, no denying that and im genuinely happy for those people
     
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  9. sanj

    sanj Well-Known Member Premium Member

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    the only problem is that i can only fit 1 lady in the ferrari at a time but the gold shirt, moustache and perm combo means id be fighting them off with a stick
     
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  10. willair

    willair Well-Known Member Premium Member

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  11. Bayview

    Bayview Well-Known Member

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    The problem is that folks will still line up in Sydney to buy dog-boxes and crappy barns.

    Saw an episode of "Selling Houses Australia" last night; located in Sydney in a fairly inner area, and the house they were selling went for over $700k and it was (to me) a shocker, in a very ordinary standard street of similar shockers..I couldn't believe someone would fork out that much for something that bad....but they do, and it was a feeding frenzy at the auction.

    While there is the demand these idiots will still do it.

    They should be voting with their feet and not buying there, and choose another part of the planet to live.

    But they don't. :confused:
     
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  12. MichaelW

    MichaelW Well-Known Member

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    No, I read your first post, twice actually to see if I was reading it correctly. I welcome this sort of informed dialogue... :D

    I disagree. Under any real measure, affordability is the same as it has ever been. The problem with absolute prices is they fail to consider servicability. The best measure of affordability, IMHO, is the percentage of household disposable income required to service a typical mortgage at current lending rates. Ideally, individual servicibility by matching demographics to their loans being serviced would be considered, but that is harder to establish. Some points in that equation that I think need to be considered:

    1. Household incomes are increasing. And you only have to read Ross Gittins' fantastic article "We did it ourselves" from July 2007 to understand the implication of this...
    2. Disposable household incomes are increasing faster. Due to the reduction in real cost of doodads and other consumables leaving more disposable income left over.
    3. Current lending rates are at all time lows. Meaning the servicability picture is significantly improved. The amount of money from discretionary household incomes required for servicing loans has not really increased. The amount "allocated" to servicing loans has slightly, but this is due to the increased amount of discretionary household incomes available so we bid up prices by allocating this discretionary spend to this specific luxury good; residential property.

    Read the Gittins' article. It sort of says it all far more eloquently than I can.

    I think you're off the mark with your view that we've entered an unaffordable era of property pricing in Australia, far from it. I reiterate that housing is still eminently affordable its just not politically astute to make this observation given the entitlement mentality of the disenfranchised.

    Regards,
    Michael
     
    Last edited by a moderator: 10th Oct, 2021
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  13. Guest

    Guest Guest

    @MichaelW, your entire post here is based on the premise that affordability is the same as serviceability. I don't agree, so we are unlikely to see eye to eye. Here is my view from an article I wrote last year (no real point rewriting):

    Still today I see many commentators using the terms serviceability and affordability interchangeably in relation to Australian property. The most recent occasion I noticed was in a post from David Bassanese a week ago where he wrote:

    "A better measure of house price valuations – which at least allows for the structural change in interest rates over time, though not financial deregulation – is mortgage affordability. As seen in the chart below, there has been no obvious structural worsening in mortgage affordability over recent decades. Assuming a 20% deposit, loan repayments to purchase the median-priced Australian house have averaged just over 30 per cent of average household disposable income since at least the mid-1980s."

    And posted the following chart to support his assertion:

    [​IMG]
    It shows that initial loan repayments on a median-priced house have remained fairly stable over time (as a percentage of household disposable income). The chart and commentary suggests that "affordability" was the same in the early 1990s as it is today (we have higher prices relative to income, but interest rates are lower), let's compare an example using figures between the two periods to see if affordability really is the same.

    Based on Bassanese's house price to income ratio:

    [​IMG]
    The ratio was around 3.5x in 1992 and 5.5x today. Keep in mind that other commentators who calculate these ratios use different methods, so while the ratio might change around a bit, the change between historical ratios and those today should be similar in a single set/series of numbers. Let's do the sums.

    With a household on $100k. They save their deposit at a rate of 20% gross income and repay the loan at a fixed amount of $3,500 per month (using this mortgage calculator & interest rates from here to get my numbers below).

    1992 Numbers: $350,000 purchase price (3.5x income)
    Deposit (20%): $70,000. 3.5 years to save.
    Interest rate: 11%
    Loan amount: $280,000
    Repayment: Loan is repaid in 12 years, 1 months. Total paid, $506,980.

    2014 Numbers: $550,000 purchase price (5.5x income)
    Deposit (20%): $110,000. 5.5 years to save.
    Interest rate: 5.5%
    Loan amount: $440,000
    Repayment: Loan is repaid in 15 years, 8 months. Total paid, $657,061.

    So even if interest rates had remained elevated the entire period of the loan, it still ends up more affordable over the long run to have double the interest rate, but lower price to income ratio. Not only that but it would be faster to save the deposit given that it's a lower amount (relative to income) and I haven't taken into account the higher interest rate on saving for the deposit which would have benefited the 1992 scenario. Costs such as stamp duty which are tied to the price paid would be lower too. Finally, higher interest rates tend to come with a higher rate of inflation, so the real value of the debt would be reduced faster as wages increased, meaning the buyer in 1992 would have found it easier to ramp up the level of repayment.

    As I have mentioned in the past on housing affordability, I prefer the following basis as a definition for affordability:

    "Afford: To manage or bear without disadvantage or risk to oneself."

    It's clear that although initial loan serviceability might be similar with lower rates and higher prices, the buyer is also at a clear disadvantage over the term of the loan.

    When considering affordability we need to take a holistic approach and not use a simple snapshot of a single repayment as the basis to make judgement calls on whether house prices or a mortgage used to purchase them is affordable.
     
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  14. MichaelW

    MichaelW Well-Known Member

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    Hi BB,

    Again, I beg to differ. I know I see the equation through a different lens to yourself as I definitely believe affordability is directly correlated with servicability given that's how most homes are purchased.

    And I disagree with your calculations. You've assumed P&I and tried to calculate how long it would take to pay off a home. Paying it off isn't affording it. Affording it is being able to purchase and service it. It is the alternative to renting it.

    Correcting your numbers with the only pertinent information required I get:

    1992
    Interest Rate: 11%
    Loan amount: $280,000
    Annual Interest Payments: $30,800
    % of Disposable Income, assuming $100K: 30.8%

    2014
    Interest Rate: 5.5%
    Loan amount: $440,000
    Annual Interest Payments: $24,200
    % of Disposable Income, assuming $100K: 24.2%

    Yep, easier in 2014 to afford a house than it was in 1992. Affordability, even in general media parlance, is the hurdle to achieving ownership not the time taken to pay off. Servicability = Affordability. The only hurdle difference is the percent deposit which you've called out, which is why a lot of parents are utilising their accumulated equity to assist their children into ownership. Servicability isn't the problem, only the deposit is. And at the moment, APRA via the banks is only focussing on servicability and not LVR. If they were to focus on LVR and limit lending to say 70% for IO loans then they would make a bigger dent on new purchase uptake than trying to influence rates and thereby servicability IMHO. But I also agree they should at a minimum, mandate stress testing all new loans to 8% if they ever intend lifting rates to previous levels again. But that's a big IF...

    Regards,
    Michael
     
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  15. Guest

    Guest Guest

    Again disagree & doubt if you took this question to the street that many would agree with your view that affording a house is simply paying the interest on the loan. In fact I have my doubts you would get majority support for such a comment here.

    Most homes are purchased with a P&I loan.
     
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  16. 2FAST4U

    2FAST4U Well-Known Member

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    It comes back to demographics. In order for house prices to increase the Australian population needs to continue to expand, hence our positive immigration policy and push for an increase in the birth rate.

    Successive Australian governments, strongly supported by property development and construction lobby groups, have actively encouraged immigration since 1945 from all points of the globe. The result is a supply side of its real property market driven by a demand side bolstered by continuous population growth. Springing from this philosophy, then, is continuous growth in property values, fuelled in part by demands imposed by population increases. Values rarely, if ever, return to previous levels (as they generally tend to do in a Malthusian society – where growth is stabilised and borders controlled), and a culture of expectation of capital growth has developed across all sectors of the real property spectrum. Interlinked with this is a market structure that is transparent, strongly supported by government and statute, and available to both national and international investors.
     
  17. See Change

    See Change Well-Known Member

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    So inflation has nothing to do with price increases , neither changing demographics of an area ??

    Cliff
     
  18. Aaron Sice

    Aaron Sice Well-Known Member

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    BB_ that second graph looks a lot like a "toppy" stock chart.
     
  19. 2FAST4U

    2FAST4U Well-Known Member

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    The changing demographics of an area are usually directly related to population growth...
     
  20. MichaelW

    MichaelW Well-Known Member

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    Fair enough, still cheaper in 2014 though mate: $2,744.32pm in 1992 and $2,701.98pm in 2014...

    [​IMG]

    [​IMG]

    Cheers,
    Michael
     
    Last edited by a moderator: 10th Oct, 2021