Affordability article

[Mike]

Hi,

Found an interesting article from AFR at http://afr.com/smartmoney/2003/02/01/FFXJO61ZKBD.html

Cheap houses just a memory
Feb 1, 2003
Morgan Mellish

For me the most significant sentence is:

"Over the past 20-odd years, house prices in Sydney and Melbourne have risen much more quickly than average wages."

This means bridging the deposit gap would have been a real struggle if nigh on impossible. My experience living in Sydney since the late 70's supports this. Even buying with a low deposit via a lease option would have been difficult because few sellers would sell this way and forgo capital gains. Even developers only resort to selling with lease options when there is an oversupply of properties and they are desparate to sell.

Mike

 

[Mr. Fabulous]

Yes, Mike house prices have gone up in Sydney and Melbourne, but less affordable? Depends where you look. The article was refering mostly to young people. Let's remember here that most young people these days don't think about tomorrow, only today. They want everything now, which means spending and spending big.
I wonder how many people between 20 and 35 have enormous (and rising) credit card/personal debt? Fewer young people today are prepared to make the sacrifice to save for a deposit, it creeps too far into their party time.
I reckon a more accurate assessment would be 'Is housing less affordable, or are less young people prepared to do what their parents did - save money for a deposit?'
Methinks the latter, what do others think?

Mark
'no hat, some cattle'

 

[geoffw]

Mark, your point is well made.

But I suspect that saving for a deposit is out of reach for many in Sydney.

I don't know what the average unit price is there- mayge $400K+ ? What young person, say on a $50K pa salary starting out, could save a $40K deposit- while renting. And even that deposit would leave them liable for mortgage insurance.

Why would they even want to buy- if the rental yield was 4% (and I understand there is lower still), why would they want to pay 75% more than that to own?

 

[Mr. Fabulous]

Geoff,
I agree with you on the renting bit. Where I live, it actually is cheaper for me rent there than it is to buy, well... anywhere, actually. I have friends who live in the outer suburbs (owners, not renters) who pay a lot more in related costs (travel, etc.) than I do.
Working in the city, it's actually much cheaper for me to rent 15 mins tram ride away than to rent further out and travel longer distances. This has a lot to do with not paying for tickets, but even buying tickets would make it cheaper (I tend to take travel time as an additional expense, ie: how much does it 'cost' me in time to travel to/from work?).
Looking at it this way, I have been seriously thinking about putting off purchasing a PPOR for quite a while - at least another ten years and channel that money into investments.
But let's go back to considering a purchase. I think it's a real cop out for people to claim they can't afford to save, even if renting. My partner and I live fairly centrally, but our rent is very cheap for the area we live in. However, it is still a significant expense. Yet, we still manage to live on my income and save my partners and still live a pretty decent lifestyle (going out, eating out, etc.). It's all a matter of priorities.
Now, okay, I understand that not everyone is in the same position as we are, but many people our age (and the number is growing) are in the same position. It all just comes down to priorities. We cop a lot of falk from friends about being 'tightarses' but we just think 'Well, we're the ones that are going to be living nicely in the next five to ten years while they are still working in crappy jobs they hate. Unfortunately, they don't 'Begin with the end in mind'. Hey the good thing for investors though is, there is going to be a continous (and growing) number of renters out there because the trend for buying houses seems to be waiting until you are older.
30 years ago, people in their mid/late twenties were thinking of buying a home, now it more like in the mid/late thirties.

Mark
'no hat, some cattle'

 

[Sunstone]

Dear guys,

Related to housing affordability was an article recently received from Your Mortgage.

Cheers,

Sunstone.


Housing affordability drops further

Housing affordability fell a further 5.2 per cent in the December quarter of 2002, according to the Commonwealth Bank (CBA)/Housing Industry Association (HIA) Housing Report. But analysts expect affordability to stabilise as the property market cools.

Continuing rises in house prices, up 6 per cent over the quarter, was the key driver in declining affordability. Home mortgage repayments now absorb nearly one quarter of the average household income. Affordability has been declining since September 2001.

Sydney experienced the biggest decline in affordability over the December quarter, followed by Adelaide, Brisbane, Hobart and Perth. Melbourne affordability was relatively stable. In the twelve months since December 2001, Brisbane experienced the greatest decline in affordability.

One of the leading indicators on the relative price of housing, the affordability index uses CBA lending data to measure the ratio of average-household disposable income to the qualifying income required to meet payments on a typical dwelling. Home loan repayments on a typical first-home mortgage increased by 1.4 per cent.

HIA Chief Economist, Simon Tennent said strong house price rises reduced affordability over the December quarter. “As we head into 2003, it is unlikely that housing affordability will improve in the short term. With the current stable interest rate environment, house prices are expected to continue to creep up.”

Tennent said a significant driver of house prices has been the current restrictions on the availability of land in many capital cities. “The HIA calls on the various state governments to carefully assess their land release programs to ensure that there is adequate supply and to avoid unnecessary bottlenecks.”

According to the CBA’s Hugh Harley, Group Executive, Retail Banking Services, the continuing decline in affordability comes when the property boom is cooling.

“It appears the housing cycle has reached maturity. With a relatively stable interest rate outlook and some steam coming out of the market, we are unlikely to see the same deterioration in affordability over the coming year compared to the last year.”

The Housing Report highlights that Hobart is Australia’s most affordable city, followed by Perth, Adelaide, Brisbane, Canberra, Melbourne and Sydney.

 

[Lissy]

I think another problem with "my" generation (this is from observation of many friends!) is that they want it all NOW. They want the house with everything that opens and shuts, carpets, landscaping, all mod cons, every electrical appliance... and all brand new.
I have photos of the house I grew up in, which was built around the time my eldest sister arrived. There were no carpets, second hand curtains and hand me down furniture. Over time my mum and dad replaced things when they could afford it, and eventually put in carpet. Even hubby and I, when we built our first home, bought land further out that we could afford, built a modest home, and used a combination of second hand carpet and painted concrete for years. The dishwasher cavity was a great place to store my bin. And we paid it off in two years. Our friends who aimed for the stars either lost their homes when interest rates hit the mid teens, or are still pretty much stuck at square one.
I'm not trying to pass judgement here, just making some observations!

 

[Jamie]

Hi all,

I personally think this is a great thread...

I can see both sides of the argument...

I agree with Mike and geoffw... To buy in Syd with a 10% deposit on a median priced property, while renting, would take years of saving... in the meantime, house prices would have risen considerably so that your 10% would be worth a lot less now.

To a geater degree, I agree with Mark and Lissy...

I have lost count of the number of friends who have asked for advice in the last year. I have sat down with each and every one of them for a minimum of 12-15 hours and explained the ins and outs of property investment, good and bad debt etc. Without fail, each of them had respnded with "Why dont I just give you my money and let you do it for me..."

The last person I had this conversation with just went and paid 25k for a second hand car... he outlays more in car repayments than he does in rent. I went thru his finances for him, and could have easily qualified for a home loan on a lower priced prop. in this area.

But, as Mark and Lissy mentioned, he wanted it now . I told him that the growth in this area meant he could buy the same car in 18 months with the cap. growth in the property, but he couldnt wait.

Regards,

Jamie.

 

[Pele]

Gday

Mark i think your statement of :

'Is housing less affordable, or are less young people prepared to do what their parents did - save money for a deposit?'


is wide of the mark considering that the whole point of the article was to prove that relative affordability has decreased. Even if young people are prepared to save a deposit for a property the figures show that they will need twice as much money(relative to the average wage) that their parents would have needed.

Pele.

 

[Jamie]

Both Pele and Mark,

'Is housing less affordable, or are less young people prepared to do what their parents did - save money for a deposit?'

Do the two have to be mutually exclusive?

I personally can see truisms in both.

By all means, relative to wages, affordability has decreased...

But I also agree that the work ethic of recent generations (myself included) pales in comparison with what my/our parents had to do to earn a living.

Just a thought,

Jamie.

 

[Crystal]

Another point to consider...
Housing affordability is lower now than it was back in the 70's but...
It was much more difficult to borrow money back then. (I'm told)
So, although houses cost more now it is much easier to get a loan.
A single female probably would not have been able to get a 95% loan then, but can now! (Lucky for me!)
Cheers,
Crystal

 

[Mike]

The young are growing up poor
By Matt Wade
September 19 2002

Generation X is being left behind in the wealth stakes, as younger Australians find themselves increasingly shut out of the property market - the major source of rising wealth - by spiralling home prices.

A study on the nation's savings by the National Centre for Social and Economic Modelling showed that while average household wealth has jumped over 40 cent in the past nine years to $280,000, the wealth of younger households dropped 39 per cent to $121,000 in the same period.

Surging house prices mean fewer people aged in this 25-34 age group own property, a key driver of the rising level of overall household wealth, according to the researchers.

In contrast, households headed by those in the pre-retirement 55-64 age group, who bought into the property market many years ago, had the highest average wealth of $401,000.

Those in the 35-44 age bracket averaged $253,000 in assets.
The researchers said that, in addition to struggling to break into the booming property market, the younger group seemed to be more willing than ever before to go into debt to fund lifestyle alternatives such as travel, mobile phones and other consumer goods.

"It seems consuming rather than saving is much more attractive for this age group than it was in 1993," the centre's senior research fellow, Simon Kelly, said.

A home? Tell him he's dreaming

The winners and the losers of the property boom often belong to the same family, but are divided by a generation. Patrick Muhlen-Schulte, 25, says house prices in Sydney are beyond his reach for "the next 10 years".

But his parents have ridden the crest of the property wave. They sold the family home in Dangar Island last year "for a healthy profit" and are now living in semi-retirement in Asia. In contrast, Mr Muhlen-Schulte is without assets and caught in a debt cycle. Like many gen-Xers, his money is spent on "intangibles" such as overseas travel and education.

On a wage of $37,000, he sets aside $300 a week to pay off a $10,000 credit card debt, accumulated during a year-long working holiday in Europe. Next year he must fund a Masters degree, which requires up-front fees. "Owning my own home is not something I could even contemplate for the next decade," he said.

Sydney prices make me think that I should live in another city - they are beyond my reach," he said.
But he is hoping that money spent on further education will be a smart investment that will result in shifting him into a higher income bracket.

"On a higher income it may be easier to save for a deposit. That is my long-term strategy," he said.

Brigid Delaney

[Source: http://www.smh.com.au/articles/2002/09/19/1032054869397.html ]

 

[Mike]

On a wage of $37,000, he sets aside $300 a week to pay off a $10,000 credit card debt

What percentage of Patrick's net pay is he paying down the credit card debt with?

Net Yearly Pay: $28,940
Yearly payments: $15,600
Percentage of Net Pay: 53.9%

According to the REINSW, "median house prices have grown at around 9% per annum over the last eight years."

Could someone beginning their savings program eight years ago have saved a deposit to buy a Sydney unit today?

Current Sydney median unit prices:

North: $385,000
South: $320,000
City and East: $410,750
Inner West: $361,000
West: $233,000

We'll compare two examples: the cheapest - West: $233,000; and the dearest - City and East: $410,750.

20% deposit for $233,000 is $46,600
20% deposit for $410,750 is $82,150

Patrick's gross wage today is $37,000. The same wage 8 years ago factoring a discount inflation rate of 4% would be $27,000. Based on tax rates pre GST, the net pay would be approx. $18,860.

To purchase a unit in the West, a person on Patrick's relative wage 8 years ago would have needed to save $5,376 per year at a savings interest rate of 2% after tax. That represents 28.5% of the net pay.

By comparison, to purchase a unit in the City and East, a person would have needed to save $9,480 p.a. at the same interest rate. That represents 50.3% of the net pay.

Question is could anyone be disciplined enough to save such a large percentage of their take-home pay over 8 long years?

At $300 per week, Patrick will pay off his credit card debt in under a year. But could he keep saving at that rate for another 8 years? Makes you wonder what sort of lifestyle you would have to achieve that goal? How far would he need to commute to work to keep the rent low enough to save?

My conclusion is, if you don't have to work in Sydney, move somewhere more affordable, otherwise you may never get that deposit. Two income couples may be able to manage it but not a single income earner. If you have to work in Sydney my suggestion is to rent and save for deposits to buy IPs in affordable areas. Eventually the equity in the IPs will allow you to buy a PPOR in Sydney.

Regards, Mike

For trivia buffs:

The economic boom of the 1990s has spawned a new and growing group of millionaires. The number of millionaire families in Australia has been doubling every four years since 1986, largely as a result of rising share prices and the housing boom. Today, an estimated 330,000 families have net assets of $1 million or more. About 3.6% of all Australian families are millionaires, up from about 180,000 families in 1998 and about 12,000 in 1983 (families are defined as income units - people living in the same home and sharing costs and income - so the term can cover a sole parent or a couple).

 

[geoffw]

Mike,

My kids are going to face this in ten years.

I'm a horrible example- I did not but my ppor early.

The only solution I can see for young people is to start buying IPs in areas which they can afford.

I'm not going to act as guarantor for my childrens' loans- they have to get that deposit themselves.

But I will certainly be encouraging them to start with buying something small, and something within their limits. And hopefully something which will grow.

I hope that at least one of my properties will be substantially contributing towards their tertiary education in six to ten years (as family trust distributions). So they will see the benefits to be gained. And hopefully will want to follow that way themselves.

But Jude H had some great ideas in educating kids financially. I just can't quite afford to follow her example just yet!

 

[Jas]

I read an article saying those on 70k label themselves as 'aussie battler'. They want more, and can't afford it, so they are 'poor'.

Jas

 

[crusty]

I think the younger genxers would be much better off it they.
A; didnt have mobile phones (monthly cost min$50 it cost that much to service two ip)
B;didnt waste ? money on Grog and Poker machines. (dont get me wrong i love a beer but its a small sacrifice if you want to get ahead and how they can pour money into those machines that just make you brain dead sitting there.)

This is just my opinion from some of the young and not so young people i know who cannot afford to buy ips let alone ppor.



Crusty

 

[bundy1964]

Originally posted by crusty
I think the younger genxers would be much better off it they.
A; didnt have mobile phones (monthly cost min$50 it cost that much to service two ip)
B;didnt waste ? money on Grog and Poker machines. (dont get me wrong i love a beer but its a small sacrifice if you want to get ahead and how they can pour money into those machines that just make you brain dead sitting there.)

This is just my opinion from some of the young and not so young people i know who cannot afford to buy ips let alone ppor.
Crusty

A; My mobile now costs $25 a month and I claim 10% on my BAS and the rest at tax time. It's a lower cost than a secretary.

B; Since I am named after a product of Qld lol. Part of your investment outlook should be to invest in yourself.......if having a drink is relaxing in moderation it is money well spent. I think my pokies money is well in front at the moment.....I have my budget set and know when to walk away....I even have a drink while I play

You forgot c; The evil smokes

If I did live life as a t/a I may have IP no 3 or 4 instead of 2 but I may of gone mad and shot someone in the process

bundy

 

[XBenX]

damn, i think myself and other youngin's in the forum must just have been "lucky" to have been able to afford mutliple properties

i do agree with the HAI is at historical highs but it is measured as the ratio of average household disposable Y to net Y req'd to meet repayments on a typical dwelling.

I wonder how much discretionary spending is taken into account in the disposable Y ?

 

[JumJones]

My last 2 days ..

Wife 'found' a property in Bentleigh, being quoted 420-460K. 3Br, 650sqm block, triple garage, close to shops and zone 1 railway station. This is for us to live in apparently, I thought I had extolled the virtues of renting, and investing the diff.

Hmmmm I say ... Repayments on 400k loan = roughly $650 per week, what do we pay for the same house 2 blocks away (well, only double garage) .... $250pw. yeowsers, theres that affordability gap. Granted, our landlord is a loony, but hey, we're laughing all the way at the moment.

I said "Honey"... seriously, is the fact we're having a baby really mean that we fork out the extra dollars? Would you believe she thought about it for a while?