Why Baby Boomers just don't "get" the housing crisis
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 (1), 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. (2)
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.
(1) Yes, I realise that the median wage for professionals will be higher than the Australian average.
(2) This comparison only takes into account nominal interest rates, which don't take into account inflation. See this article for a more about this.
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