Affordability for Gen Y has never been better

The RBA released SOME OBSERVATIONS ON THE COST OF HOUSING IN AUSTRALIA in March 2008.

The attached graph & following quote were interesting.

• It assumes buying a house in the 30th percentile, with 10% deposit & 30yr P&I loan.
• It uses real incomes (using 2006/7 as a baseline), so inflation & wage growth can be ignored.
• It covers a 25 year period, so IMO it's statistically significant.

An alternative way of looking at affordability for younger households is to consider trends in the real income that this group would have had after servicing a mortgage of a given size (see attachment). The data indicate that real residual income of this group would have fallen between the early 1980s and early 1990s, but then would have increased through to 2006/07. For the 25-year period from 1982/83, expenditure on servicing a mortgage would have grown faster than income. But the real residual income available for other goods and services would nevertheless have grown, by around 0.5 per cent per annum. So the increase in housing prices has not in aggregate terms resulted in a fall in real spending on other goods.

Click to expand...

In simple terms the real income of FHBers after servicing PPOR debt has increased in real terms for the last 10 years.



A few other selected quotes....

Renters will be worse off when housing prices rise whereas those who own rental property will be better off. Owner-occupiers may be largely unaffected, since they can be thought of as being ‘hedged’ against increases in the cost of housing.

Click to expand...

... the existing measures of housing accessibility have a few shortcomings. Most importantly, they tend to focus on the average income level for all households rather than focusing on households in the age groups that are typically looking to purchase homes.

Click to expand...

The estimates suggest that in four of the major capitals, around 30–35 per cent of transacted dwellings (houses and apartments) would have been accessible to the median household in the homebuying age groups (25-39yrs) in 2006/07 (Graph 5). Perth was the exception, where only around 10 per cent of dwellings would have been accessible.

Click to expand...

...the data suggest that Australia’s median house price to income ratio is quite high by international standards

Click to expand...

and this has always been the case according the graph 7.

...the experience of the past couple of decades suggests that, for a significant part of the population, housing may have been something of a ‘superior good’, that is the type of good to which consumers devote an increasing share of their income as incomes rise. To some extent, the recent experience might also suggest that in the earlier era of high interest rates and a regulated financial ystem, households were unable to spend as much on housing as they might otherwise have chosen.

Click to expand...

In four of the five major capitals, average annual growth in house prices within five kilometres of city centres has been about 2 percentage points higher than for houses close to the edge of the cities......... The greater run-up in closer-in and waterfront suburbs suggests that as the income and borrowing power of households has risen, there has been greater competition for housing that is viewed as more desirable.

Click to expand...

It is no doubt the case that housing will never be as ‘affordable’ as we might like, and indeed the cost of housing has been the subject of periodic concern for at least several decades. ....... ‘the apparent decline in affordability over the long term may partly result from the collective decisions of households to spend a greater share of their incomes on housing’.

Click to expand...

The whole report is worth reading .

Renters will be worse off when housing prices rise whereas those who own rental property will be better off. Owner-occupiers may be largely unaffected, since they can be thought of as being ‘hedged’ against increases in the cost of housing.

Tis such a comforting thought to be in both the IP and the PPOR group. It means I'll always have a roof over my head...and a roof of my choosing, at a price I can afford.

Tis a pity that more renters don't take the plunge and save up for their PPOR. They have so many many reasons for NOT buying, and the media do not help with their D&G attitude.

Imagine if....journalists were encouraging, and gave helpful information for those wanting to get into their PPOR? Gosh!

I read that data as indicating that entering the market is now at its LEAST affordable.

Have a look at graph #4 again, and which ways the arrows on the sides of the graph are pointing. Even graph #5, which takes age groups into account, afforability hasn't been this bad for 20 years.

The graph you are using to make the point, #6, I think is distorted, personal incomes have not risen 50% higher than CPI, but it says 'household' incomes have, perhaps because more income earners live in the same house now than 15 years ago.

The scariest graph of all is #7, Australia hovering in the biggest bubble while all those beneath it have already popped and are deflating.

It's not very responsible to encourage younger people to buy in the current environment, enslaving them to much higher payments that they would otherwise be paying in rent, on an overpriced asset going nowhere or downwards for many years to come, so I agree with the media doom and gloom rather than the usual beat up that helped create the bubble in the first place.
I'm not saying renters shouldn't buy, they just shouldn't buy now.

Besides...how can I save for a deposit when there is a new iPhone, iMac, iPod, iNeed, iWant coming out next week?




Now I have the humour out of the way. Thanks Keith for the article. I thought the article was very interesting and showed some good insights into the demand and supply issues. I thought I might offer some observations.

The most interesting comment I thought, was the one from the Productivity Commission where "the apparent decline in affordability over the long term may partly result from the collective decisions of households to spend a greater share of their incomes on housing."

Anyone remember the "coccooning" phenomenon where they said that people would become more insular and seek refuge in their own homes? This effect is marked since the mid to late 1990's and became pop culture in the early naughties. Increased quality of housing occurred as a result with an associated increase in price. I have houses renovated in the eighties (and maintained), also ones renovated in the nineties and maintained and there is a big difference in the standard and size of the housing from one decade to the next.

Other interesting data is the real house prices wages and rents holding fairly flat during the last commodity boom/inflationary cycle of the 1970's. I feel that this means that even though house prices/wages/rents were stable in real terms, that those with debt over property, especially in fixed loan environment, would have had smaller housing debt in %nominal terms at the end of the trend as inflation worked its way through the economy.

On housing affordability,Graph 5 shows a nice correlation between affordability and interest rates with affordability moving down in the late eighties and recently, correlating with rising rates. This is also reflected in Graph6 with real incomes pre and post loan repayments rising as interest rates fell. Interestingly these have not fallen with recent rises in interest rates suggesting that real wages are being maintained probably due to the strength of the underlying (albeit two speed) economy.

There is interesting information in Graph 9 and 10 which suggests to me that developers are finding it hard to make profits in the outer areas and this leads to redevelopment and continued/increasing prices for the inner areas.

Interested in others thoughts.

Cheers

Shane

Are you implying there is something wrong with renting? In lots of countries (especially Europe) its common that people never buy their own home and rent for their lifetime.

Not a problem.

The fact is you have to pay to live somewhere and renting is a hell of a lot cheaper then owning.

When you take out a mortgage you are renting the money to buy a house, rather then renting the house outright.

sailor said:

Renters will be worse off when housing prices rise whereas those who own rental property will be better off. Owner-occupiers may be largely unaffected, since they can be thought of as being ‘hedged’ against increases in the cost of housing.

Tis such a comforting thought to be in both the IP and the PPOR group. It means I'll always have a roof over my head...and a roof of my choosing, at a price I can afford.

Tis a pity that more renters don't take the plunge and save up for their PPOR. They have so many many reasons for NOT buying, and the media do not help with their D&G attitude.

Imagine if....journalists were encouraging, and gave helpful information for those wanting to get into their PPOR? Gosh!

Click to expand...

Encouraging young people to ruin their life for the next 25 years so they can claim the social status of "ownership" is irresponsible. They should walk away (and rent) if the price is too high - it's the only way to get the price signals back in check. I'll be encouraging everybody I know to do this.

My family has a life twice as good as my peers who have taken on copius amounts of debt to live in a house half as good as the one I live in.

As for the article - it is a good read. People take what they want from it. I like this bit ....

When housing is thought of purely as a consumption item, it would seem that in aggregate we would be better off if its price were lower. Because we all need to consume some level of housing services, either rented or purchased, a higher level of housing prices and rents allows less spending on other items.

Click to expand...

yieldmatters said:

Encouraging young people to ruin their life for the next 25 years so they can claim the social status of "ownership" is irresponsible. They should walk away (and rent) if the price is too high - it's the only way to get the price signals back in check. I'll be encouraging everybody I know to do this.

My family has a life twice as good as my peers who have taken on copius amounts of debt to live in a house half as good as the one I live in.

As for the article - it is a good read. People take what they want from it. I like this bit ....

Click to expand...

And where will you live and how much will the rent be when you are no longer in the workforce?

sailor said:

And where will you live and how much will the rent be when you are no longer in the workforce?

Click to expand...

After saving and investing the difference for so long I'll have such a big pile of cash sitting there I'll pay my rent with the interest.

In actual fact once my savings from renting build up to a certain level ($200K plus) then swapping over and buying a place starts to get more attractive as you don't get taxed on the money in your own PPOR. But between now and then it is very attractive to stay out of the game.

I have no fear of being "priced out forever" as somebody has to buy these houses. In fact renting for 10 years, pocketing a whole lot of cash, then going shopping when the baby boomers are downsizing would be a good strategy.

I feel physically sick when I hear of another young man or woman putting on the shackles of enormous debt just to meet society's expectations of "success".

The whole reason I think this is I have a fundamentally different view about future capital gain. If I thought the past would repeat itself then I would think like most people here and encourage everybody to buy.

On 612 ABC yesterday morning a chap (don't remember his name) spoke about renting instead of owning. The numbers he quoted were impressive and certainly showed that at first, renting was the best way to go. He suggested young people could buy an IP, rent it our while they rent elsewhere... something we all know is one way to get "on the ladder".

He did point out though, that even for those who invest the difference between renting and buying, that after 17 years, the benefits are no longer there. He made the point also that failing to invest the difference makes renting less attractive in the long run (obviously).

He stated that rents will continually increase over a renter's lifetime, whereas housing loans are static (apart from interest rate rises, of course, but then interest rates can fall too). He made the point that after renting for 20 years a renter owned nothing whereas an owner occupier owned a house. Of course, this is ignoring what investments the renter might have been squirreling away.

I would think the majority of renters don't save the difference, and that is the big problem.

He also touched on the fact that housing loans will only stay static if owners don't pull out their equity for consumables.

I thought it was a really well balanced segment.

wylie said:

On 612 ABC yesterday morning a chap (don't remember his name) spoke about renting instead of owning. The numbers he quoted were impressive and certainly showed that at first, renting was the best way to go. He suggested young people could buy an IP, rent it our while they rent elsewhere... something we all know is one way to get "on the ladder".

He did point out though, that even for those who invest the difference between renting and buying, that after 17 years, the benefits are no longer there. He made the point also that failing to invest the difference makes renting less attractive in the long run (obviously).

He stated that rents will continually increase over a renter's lifetime, whereas housing loans are static (apart from interest rate rises, of course, but then interest rates can fall too). He made the point that after renting for 20 years a renter owned nothing whereas an owner occupier owned a house. Of course, this is ignoring what investments the renter might have been squirreling away.

I would think the majority of renters don't save the difference, and that is the big problem.

He also touched on the fact that housing loans will only stay static if owners don't pull out their equity for consumables.

I thought it was a really well balanced segment.

Click to expand...

I heard it as well. I tried to remember his name to look him up as it was a well balanced segment but I've forgotten. He was a financial adviser - first name might have been Scott.

evand said:

Are you implying there is something wrong with renting? In lots of countries (especially Europe) its common that people never buy their own home and rent for their lifetime.

Not a problem.

The fact is you have to pay to live somewhere and renting is a hell of a lot cheaper then owning.

When you take out a mortgage you are renting the money to buy a house, rather then renting the house outright.

Click to expand...

However when paying to rent you are not getting any capital growth. So while you may still be paying a mortgage your property value is increasing (hopefully and therefore you will be better off long term. Capital growth in NSW is around 4% so each year while you are paying a mortgage you are also earning through this growth.

wylie said:

On 612 ABC yesterday morning a chap (don't remember his name) spoke about renting instead of owning. The numbers he quoted were impressive and certainly showed that at first, renting was the best way to go. He suggested young people could buy an IP, rent it our while they rent elsewhere... something we all know is one way to get "on the ladder".

He did point out though, that even for those who invest the difference between renting and buying, that after 17 years, the benefits are no longer there. He made the point also that failing to invest the difference makes renting less attractive in the long run (obviously).

He stated that rents will continually increase over a renter's lifetime, whereas housing loans are static (apart from interest rate rises, of course, but then interest rates can fall too). He made the point that after renting for 20 years a renter owned nothing whereas an owner occupier owned a house. Of course, this is ignoring what investments the renter might have been squirreling away.

I would think the majority of renters don't save the difference, and that is the big problem.

He also touched on the fact that housing loans will only stay static if owners don't pull out their equity for consumables.

I thought it was a really well balanced segment.

Click to expand...

wish i had heard this! it is a point i regularly try to explain to friends who believe they are better off renting. The point about saving the difference is so true! So many people i know just arn't saving! I also find in Sydney so many people in their late 20's still living at home, paying no rent, working full time and have no savings! Where does their money go? to the pub and to overseas trips... it is a worry! They could save for only a year and buy a place!

Alabex said:

However when paying to rent you are not getting any capital growth. So while you may still be paying a mortgage your property value is increasing (hopefully and therefore you will be better off long term. Capital growth in NSW is around 4% so each year while you are paying a mortgage you are also earning through this growth.

Click to expand...

Keep in mind though that if you never sell (or sell and buy back into the same market) then you will never see this money. It's phantom wealth. At best it helps you upgrade.

yieldmatters said:

After saving and investing the difference for so long I'll have such a big pile of cash sitting there I'll pay my rent with the interest.

In actual fact once my savings from renting build up to a certain level ($200K plus) then swapping over and buying a place starts to get more attractive as you don't get taxed on the money in your own PPOR. But between now and then it is very attractive to stay out of the game.

I have no fear of being "priced out forever" as somebody has to buy these houses. In fact renting for 10 years, pocketing a whole lot of cash, then going shopping when the baby boomers are downsizing would be a good strategy.

I feel physically sick when I hear of another young man or woman putting on the shackles of enormous debt just to meet society's expectations of "success".

The whole reason I think this is I have a fundamentally different view about future capital gain. If I thought the past would repeat itself then I would think like most people here and encourage everybody to buy.

Click to expand...

I already pay my rent with interest, and while I would definitely prefer to own I delay it for both personal and economic reasons - First it is not so bad to rent if you have small kids - you don't care if they scratch the wall or the floor. Buying a ppor might be "safer" when kids are 12 and up from this point of view. But again, main reason is economic - I live for free now (interest) and converting this free-living-generating amount into a deposit plus to start paying interest on loans on top of that to live in a similar property just doesn't sound attractive to me. My punt is that I will buy for cash in 3-4 years

Instead of buying now and owning outright in 10 -20 years. Excellent choice in the current property environment i think.

I have owned my ppor outright for a long time now. I have considered selling it and renting. If i put the proceeds in a cash account paying 8%. Half that amount would pay full rent for a better house than i live in now. And my existing house is pretty good.

Plus not having to worry about all the crap & costs of home ownership.

My first preference would be to buy & sell (not day trade) shares with it where i have been making 25%-30% for the last 4-5 years. Before the recent sub prime fiasco.

My wife wont have a bar of any of it tho.

spark said:

My punt is that I will buy for cash in 3-4 years

Click to expand...

evand said:

I have owned my ppor outright for a long time now. I have considered selling it and renting. If i put the proceeds in a cash account paying 8%. Half that amount would pay full rent for a better house than i live in now. And my existing house is pretty good.

Click to expand...

If you do that, nearly half the interest amount will be taken by government as income tax. And if you spend the other half on rent you will be left with a cash account that doesn't even keep up with inflation.

Well you can't make money without paying tax.

And i don't mind the inflation bit if i think property is going to go backwards or be stagnant for years relative to inflation. And thats not taking into account the costs of home ownership.You have to pay to live regardless.

willfong said:

If you do that, nearly half the interest amount will be taken by government as income tax. And if you spend the other half on rent you will be left with a cash account that doesn't even keep up with inflation.

Click to expand...

yieldmatters said:

I heard it as well. I tried to remember his name to look him up as it was a well balanced segment but I've forgotten. He was a financial adviser - first name might have been Scott.

Click to expand...

I didn't hear the program, however if the financial advisor had the first name of "Scott", it may possibly be Scott Pape, author of 'The Barefoot Investor' and columnist for the Courier Mail and probably other newspapers too.

Cheers
LynnH

evand said:

Well you can't make money without paying tax.

And i don't mind the inflation bit if i think property is going to go backwards or be stagnant for years relative to inflation. And thats not taking into account the costs of home ownership.You have to pay to live regardless.

Click to expand...

May I suggest a scenario for you. Real investment property prices stay stagnant, that is rise with inflation. Inflation is say 5%. So we have 5% capital growth. Wages rise at inflation of 5%. Rents also rise at 5%. So everything is stationary in real terms, but not nominal terms.

In nominal terms if I fix my IRs at say 8% then in fourteen years,

My wages will have almost doubled,
My rent will have almost doubled,
and the price of the property will have almost doubled.

The outcome is my LVR is now 50%, rents have doubled from 5% to 10% yield on my debt (which I fixed) , my wages have doubled and now my property is CF+.

So if I use debt as an inflation hedge through investment property, with everything stagnant, I can still make money. None of this takes into account the obvious tax benefits of negative gearing, depreciation etc etc. What it does take is time and patience though.

Obviously any of these figures can be altered and I would recommend that people look at various outcomes based on their own assumptions and not those of this simplistic model.

Cheers

Shane

yieldmatters said:

Encouraging young people to ruin their life for the next 25 years so they can claim the social status of "ownership" is irresponsible. They should walk away (and rent) if the price is too high - it's the only way to get the price signals back in check. I'll be encouraging everybody I know to do this.

My family has a life twice as good as my peers who have taken on copius amounts of debt to live in a house half as good as the one I live in.

As for the article - it is a good read. People take what they want from it. I like this bit ....

Click to expand...

Good to see your alternative strategy is working for the meantime but what happens when not- if the rental price starts to climb as it will over the next few years are you are forced out of your upmarket rental property that is my only concern for people like you,who sold on the belief that property had tanked and would slide in value,well it's just not happening in the unit market is it,and in my simple opinion it never will in the 10 klm's radius from the CBD,GETTING THE TIMING RIGHT IS NINETY NINE PERCENT OF THE GAME, and from my experience we all know of the events to come,but no-one can see or tell when,next week,next month,
or next year with all the facts that are fed into the market by the media.
willair..