If I ready one more Baby Boomer whinging about how all young people these days are too picky about where they live, and back in their day their first house was a fibro shack in the outer suburbs so “stop whinging” I think I’ll just stop and scream. Too picky, my arse!
The point of this post is, of course, going to be about the “housing crisis” in Australia. It’s about how the Baby Boomer’s have the nerve to insult us for bringing up this point, to tell us that they remember paying 17% interest under Labor and how it was all so very bad back then, so quit your bitching and buy some tiny place in Ipswich that you can afford.
Let’s look at some facts, shall we. One of the best resources on the housing situation is Demographia, which surveys house prices across the US, UK, Australia, Canada and New Zealand. Demographia reports have been referenced in articles such as this one from the ABC.
Take Austin, Texas and Perth, WA. Both cities are rapidly growing, and both have populations of 1.5 million. Perth’s homebuyers have gone from paying 3.7 times their average annual earnings to around eight over five years. Meanwhile in Austin prices have actually fallen from 3.3 to 3.1 of average earnings.
The median house price in Perth has gone from three times to eight times median wage in the last 5 years. EIGHT TIMES!
It is this comparison of housing prices to wages that is the measure of housing affordability. It is the only metric worth considering, not interest rates, or any measure of how many plasma TV’s we are buying (a particular favourite of the Baby Boomers).
Demographia places the blame for this disparity in housing prices soley on those responsible for the release of land. It is not a demand problem, they say, but a supply problem. The difference between Perth and Austin is the way land is released for development. Perth strictly controls and monitors the release of land, whereas Austin tends to let people develop on the fringes as they see fit. Australia has other unique demand-side issues that contribute to the problem, but I agree that supply side is the driving factor in housing prices in this country.
Perth isn’t the only Australian city with housing affordability problems, of course. Four Australian cities (Perth, Sydney, Melbourne and Hobart) are in the top 25 most unaffordable housing markets in Demographia’s study. Sydney is more unaffordable than London; both Sydney and Perth are more unaffordable then Miami and the entire New York / New Jersey area!
Now, back to the whole “buy something you can afford in the sticks” argument. This might be a valid argument if you are a tradesman, or run a corner store, or do any of a range of jobs that are relatively mobile. But what if you’re a lawyer, a doctor, an engineer, or any professional in general? Do you really think that there’s any real career development opportunities in Ipswich? Bottom line is, if you want a career you have to live close enough to an urban centre such as Brisbane, Sydney or Melbourne. Given a median wage of about $50,000 per year (*), tell me where in these cities you can buy anything more than a studio apartment for $150,000?
The final thing I’d like to touch on is the interest rates argument that I mentioned earlier. It goes something like this: “Back in my day, we were paying 17% interest on our home loan and that was bad. Interest rates are much lower now, so things must be good. Stop whinging!” I’m sorry, but things aren’t better now. The bottom line is that even with stupidly high interest rates the housing prices were still at the affordable level of three times median wage.
Lets do a quick comparison, shall we? This comparison will be between a mortage of $150,000 at an interest rate of 17%, and a mortgage of $400,000 and 8%. That’s three times today’s median wage versus eight times today’s median wage. For the high-interest loan of $150,000 the monthly repayments given a 30-year term will be $2,138.51; for the low-interest loan of $400,000 the monthly repayments will be $2,935.06. That’s a difference of $796.55 more for the low-interest loan per month, every month. (**)
Also, the interest rate only peaked at 17% for a short period time, certainly a lot less than the 30-year mortgage term. When it came back down, mortgage repayments dropped substantially with it. A large loan on low interest rates doesn’t have the same opportunity in the long term.
So can all you Baby Boomers please stop trying to tell me that I’m “too picky” for wanting to buy a place for an affordable amount? You’ve reaped the benefit from the housing boom at the expense of everyone else, so stop rubbing salt in the wound. Let’s hope you live to see your grandchildren pay half their income in mortgage repayments.
(*) Yes, I realise that the median wage for professionals will be higher than the Australian average.
(**) This comparison only takes into account nominal interest rates, which don’t take into account inflation. See this article for a more about this.
20 comments ↓
I see that it’s not just limited to the Baby Boomers but to anybody who bought their “house in the sticks” or “fibro shack” before the housing boom; and to those who built their new homes before there were even such things as Covenants that dictate the style and size of your house depending on which “estate” you bought your land in or the size of your block. It’s not that people WANT to spend half their take home pay, or even one entire pay packet if in a dual income situation, on their so called McMansions. In today’s land estates, you can’t just add to your house as you can afford it when you are bound by rules such as 30 days to landscape and fence within moving in.
Side Effect: What I see in the not too distant future (if not already) are childless working couples living in houses designed for families simply because they can afford it on two incomes. What I see are couples starting their family by living in too small units and apartments because that’s all they can afford on one income. You can’t have both in today’s current situation anymore. It’s either a house or it’s a family. But that’s a whole other kettle of fish… Two incomes vs single income, childcare costs vs one parent staying home ==> mortgage vs children.
Good read mate, like the supply side argument especially. Have never really been aware of the underlying factors of the housing market, but it makes perfect sense that land availability would be a good starting point. Wasn’t aware that things were like that in the US - perhaps a few Australian cities can take a leaf from that. I know Sydney has an issue in that it can’t expand outwards any further on one side (or so I’ve heard), but I don’t see why other cities couldn’t employ this approach. If more land releases are made available, that would increase the aggregate supply of land which would trickle down to those more expensive, inner city locations. Not saying that this would resolve the housing crisis, but it would begin to address the problem in the least.
One point for your comparison of interest repayments - you’d need to convert the $400K @ 8% into 1988 dollars for this to be a true comparison. $150K is worth a lot more in todays dollars, accounting for inflation mainly, opportunity cost and other factors. I think you’ll find that $700 gap erodes away almost completely when you account for this.
>> One point for your comparison of interest repayments -
>> you’d need to convert the $400K @ 8% into 1988 dollars
>> for this to be a true comparison.
I didn’t think I’d have to do this? My thought process is that by keeping things in today’s dollars and looking only at multiples of wage and interest rates, I could avoid having to compare the effects of inflation and other factors.
I updated the post to reflect the fact that the house values are in multiples of today’s median wage.
I don’t think its that simple. My quant skills aren’t great, but to get a true comparison between the income effects of mortgage repayments then and now i would have thought that you’d have to do some discounting to take account of changes in the value of money over time. We’re richer now than we were in the past (in absolute $ terms), and that needs to be acocunted for. Put simply 150K in 1988 in todays terms is alot more. E.g. average loaf of bread is now $3 whereas it was about $1.20 in 1988. Extrapolate this basic analysis and the value of 150K in todays bucks is 375K, and the house repayment is 5350K per month. If you wanted to get really exact you could go to the RBA site and find a GDP deflator or some measure of CPI that would work it exactly.
Also - what was the median wage back in 1988?? If you check the proportions of income spent on mortage repayments in 1988 versus today, I would have thought you were spending more of your income on your house repayments in 88 than now.
I agree with your analysis, but I’m not trying to compare the mortgage load between 1988 and 2007 directly. What I’m trying to do is show that all things being equal, the relative value of housing to median wage has much more impact than the current interest rate.
While comparing mortgage loads in relative terms between the two eras has definite merit, it’s not what I’m trying to accomplish here.
From what I’ve read (and this is from memory, so take it with a grain of salt) the multiplier of median housing values to median wage was still around 3 in the late 80’s in Australia.
Ok. So what your saying is house prices have grown faster than median income, which means the mortagae-to-median income burden has worsened over time. Correct???
I agree with you that the proportionate level of income spent on paying off a house is a (if not) the key indicator, but I’m not sure, based on this measure, if things are worse now than they were in 1988.
In Perth - things are obviously worse, but Perth is an outlier, and *8 median income won’t be the case everywhere.
Apologies mate if I’m screwing up the argument again, although I definitely enjoy the banter more than work
That’s correct… the multiple of media income has worsened significantly over time. I also don’t know if things today are worse than in ‘88, but remember that interest rates spiked and went back down. If you buy a property at $400,000 the mortgage load isn’t going to drop over time… in fact you’re seriously exposed to the effects of any interest rate changes, as we’ve seen reported ad nauseum recently.
As for Perth being an outlier, the Demographia report I linked to in the post has the multiples for USA, UK, New Zealand and Australia. Sydney is actually worse than Perth at 8.6 times median; however Los Angeles and San Francisco are still much worse at 11.4 and 10.1 times median.
The Demographia report also considers a median multiple of over 5.1 as “seriously unaffordable” with 3.0 or less being “affordable”.
What was Bris at??
Brisbane clocked in at 6.1 times median, which 30th overall on their list.
It’s the 6th most unaffordable in Australia, behind Sydney, Perth, Hobart, Melbourne and Adelaide. Adelaide? I don’t know whether to be happy or insulted!
Check out the PDF here (http://demographia.com/dhi-ix2005q3.pdf)… it’s really quite interesting.
Nice read Craig! My Quant skills are even less than you both, however the fact that housing affordability is becoming an issue in many booming developed economies is suggestion enough.
Do you both think a housing crash is a potential reality?
I know the situation in the UK is the same…I recently saw a report in The Times showing the increase in property prices realitive to income since 2000…almost the entire country has gone from 3 to about 8 times, with areas in London up to 12 times. Surerly this can’t be sustainable?
We now see the rise of high wealth individuals/ groups and even baby boomers developing extensive real estate portfolios. The days of buying the white picket fence and maybe a holiday house is turning into buy/renovate/sell…rent. All of this being heavily geared in debt.
Surely housing is one of the key responsibilities of government? How do they manage an over inflated housing market, whilst ensuring the bubble doesn’t bust or interest rates cause deafults across the country?
The release of land is defintley a factor, however I think your point Craig about proximity to centre’s of business is the most important. You can release all the land you want out towards Ipswich, however people need to be close to work. No one wants to live in the small towns or regional centres anymore, becasue the dollars that will get me wealth/houses/shares etc are found in cities.
What happens when OZ is at 30 million people? Is there the potential to see regional centres become hubs on new industry? Carins/Townsville etc…
I know I would love to get something moving in the real estate market in the next fews years whilst my earning potential is good…but it just doesn’t look like a great time to enter. Who really wants to be anchored to a mortgage for the next 30 years with the chance of interest rates being lower almost nil??
Renting is not that bad
Thanks for your post Amon… let me answer your question on a possible housing crash in a new post.
You make a good point about regional centres becoming hubs. Personally, I think this is absolutely necessary. The state and federal governments need to really start encouraging high-value jobs to move to these regional centres, whether it be via tax breaks or something else.
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Firstly, I’m not a baby boomer, but lucky enough to get into the housing market early enough to insulate me from the current housing carnage…. I have a large mortgage though, so i am not insulated from problems surrounding housing affordability.
A few comments:
Australian cities have a rare characteristic in that they are close (within an hour drive) to some of the best natural beaches in the world. I think you will find that most cities high on the list have some common feature (and that might be a booming economy at the town centre) that people are drawn to live near.
Unfortunately, this makes all Australian cities attractive for many investors (not just local). We locals have all come to take living near these natural features as a right when choosing land to build upon. Most foreigners would live in a place like Ipswich without blinking an eye at it being down-cast. My opinion is that the comparison of Perth to Austin is not apples-apples. Austin is a city built in the middle of no-where, whereas Perth is one of those cities with the characteristics i have explained above. Comparing Austin to Toowoomba might be a better match.
A couple of other points.
Building has two costs, the land and the house itself. In my experience, typically, the cost of the house is similar to the cost of the land. Currently, the cost of labour is rediculous. Many in Gen-X/Y have been attracted into the university system, only fo find that a professional job (example, software engineer) now pays less than a labourer (and that’s notwithstanding the HECS debt). Off-shoring is also another interesting discussion, but not in this forum. The only way building labour will get cheaper is if the demand for the trades drops (as we don’t have the luxury of illegal immigrants) and this may happen as a result of construction afforability reasons (builders will have to drop the labour portion of the cost).
Land release may help reduce the cost of the land portion as the land is naturally further away from the attractions. But it won’t remove the fact it will cost 300K to build a house. In fact, labour may go up, since demand for housing increases again.
The asset distribution today is also very different to when baby boomers were young. Many wealthy baby-boomers own more than one property, I would be interested to know what that ratio was. In a way, they are hogging the market, and in most cases, we Gen-X and Gen-Y’s will inherit this wealth in time. To resolve this, if your parents own more than a couple of properties, it’s time for them to “show you the money” as they are surely partly to blame for this situation.
>> Currently, the cost of labour is ridiculous.
Thought I’d link off to an extract from the CPDS…
http://cpds.apana.org.au/Teams/Archive/home_ownership.htm#Thoughts
It contains this quote:
“huge increases in infrastructure spending coinciding with a resource investment boom (a factor in Queensland in particular) that has resulted in very large blow-outs in construction costs”
To be honest, I’d never thought of this link before!
Interesting fact from my dad about how life was under the last labour government:
He earned an annual salary of $30,000.
Mortgage repayments were $2,000 per month or $24,000 a year.
Income left for other expenses (not disposable income) - $6,000 per year
Currently he earns a lot more and lives in a house with a bigger mortgage and higher value.
Monthly mortgage repayment - Still $2,000 per month.
Hi,
I don’t quite understand how someone who earns $30k can make replayments of $2000 per month considering the fact that you only get approx $500 per week net on a taxable income of $30000. How on earth did this person eat…were they on a farm? Or did we simply pay less tax under the labour government? Please explain.
Today if this person is paying still $2000 per month they must live in a area where housing is cheap (rural area?). I’ve been looking to buy property in Sydney for the last year. I currently earn $60k if i buy a 2 bedroom unit under $300k my monthly repayments will be around $2000. You certainly wont get a house in Sydney on those sort of monthly repayments.
I am pretty sure (will have to check the facts properly as it was just an off hand remark) he supplemented his income with a second job on weekends. By doing work for companies in the early days of DOS based programming he could earn almost the same amount from two days work and in those days it was easier to pay in cash… but keep that quiet from the ATO please
Whether the payments are $2,000 per month or not does not necessarily indicate they are in a cheap area; the repayments are based on the amount you borrow and the interest rate of the loan.
If you have a loan of $150K for 25 years with interest rate between 12% – 17% you will be paying up to and including $2,100 per month; if the rate is say 8.25% you will only be paying $1,100 per month. You also have to remember that the difference between $2,100 13 years ago and $1,100 is more then $1,000 when you adjust for inflation.
If you take an average inflation rate of 3% per year, a present value of $2,100 and say a difference of 13 years then the current comparative value is:
Future Value = Present Value * (1+r)^t
FV = 2,100 * 1.0313
FV = $3,083
In other words it is almost like paying an extra $2,000 more then today. Mind you, it also means a loan of $150,000 13 years ago is much bigger then a loan of $150,000 today.
If my calculations are wrong please correct me it has been a little while since I have done this. Also, this is not meant to be a swipe at the ALP because interest rates were just as high under previous coalition governments too; I am just trying to point out that it was pretty tough back in those days too.
Either way it is tough today; I am in the process of thinking of buying property and there are a 100 things going through my head, not least of which is the current trend of the interest rate.
Update:
He was on a net wage of around $30K per year not gross sorry.
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