An observation on housing affordability

[Barracuda]

I was pondering the onslaught of literature justifying the argument that the property market (particularly Sydney) is overvalued based upon the affordability figures. I don't have the figures at hand, but the argument goes something like "property is still 15% overvalued because it took 30% of household income in 198x and now takes 50%".

My conjecture is that with decreasing costs for luxury goods and other items, there may well be comparable amount that you can do with the remaining 50% that used to take 70% back then - meaning that there may well be parity when a comparison of living standards, discretionary spending etc is made. For example, you might have bought a Commodore 64 way back in the early 80's for significantly more (comparibly) than an Xbox (or even xBox 36) costs you today.

I am happy to accept that this is conjecture and not a study of Cost of Living indexes etc, but may be a reasonable observation and another thing to consider when forming an opinion on how far away from the bottom you think we actually are.

Cheers, Barracuda

 

[duncan_m]

My conjecture is that with decreasing costs for luxury goods and other items, there may well be comparable amount that you can do with the remaining 50% that used to take 70% back then - meaning that there may well be parity when a comparison of living standards, discretionary spending etc is made. For example, you might have bought a Commodore 64 way back in the early 80's for significantly more (comparibly) than an Xbox (or even xBox 36) costs you today.

But we seem to have soooo much more to spend money on now.. mobile phones, Internet connectivity, Pay-TV, IPOD's, PDA's, second car, third car, Airconditioning, huge petrol bills, larger electricity bills, PC's.. So not only is it taking MORE of our income to service our housing needs the remaining income is being put to work purchasing more and more goods and services than ever before.

 

[Barracuda]

Mmmm consumerism. "I can't afford that - how will I pay my personal pilates instructor?"

 

[duncan_m]

My point being a rise in percentage of income being used to service housing needs is more significant now than ever before.. wasnt mean to be, yet another, anti-consumerism rant.

 

[Barracuda]

Thanks for the clarification - misread the meaning there. Yep, so much more to "life" nowadays!

Not having been independant (ie, out of home) in the 80's, it's hard for me to judge from experience - but I think that alot of these things are purely discretionary and would not invalidate the argument that you can do *at least* as much with 50% nowadays that you could do with 70% (please recall that I don't know the official figures being quoted in literature - left API at home, but you get the idea) years ago. I think that I read some agreement to this in your response. A certain amount of the after-mortgage income is necessities, shopping, fuel and the like, which leaves the rest for discretionary spending. Having more discretionary spending items such as those you mention might actually support my observation that we're *at least* no worse off. I guess we might even suggest that as prices continue to drop for luxury items, our discretionary spending power will increase further - meaning that having a higher mortgage percentage is able to be supported. Why would I think this? How many people (apart from the forumites of course) keep money left over rather than spend it?

Now, not wanting to ignore other big influences I will agree that things are alot different - perhaps more household incomes were single incomes then as opposed to more dual income families nowadays - so not quite comparing apples with apples, but that may also be due to choice as well as necessity (or choice driving the changes in society, driving the necessity - another topic for discussion).

It's all interesting food for thought.

Cheers Barracuda

 

[WillG]

recurring costs like mobile phones, broadband fees, ISP fees, parking, road tolls ,foxtel, gym membership, etc are the silent killers

land tax seems to be the silent killer for property investors.

the huge increase in land values has also increased rates !

 

[see_change]

I seem to be more people than ever complaining about their mortgages payments and know one person who is going to be loosing their house.

Mortages are a topic of conversation on the north shore with many people complaining about them , and the one thing willG didn't mention which is applicable in affluent areas with lots of little people , the seeming ongoing rate at which Private school fees continually increase above inflation and wages rises. The private schools tend to bite the dust before the family home, though not always , it depends on what will impact more on the families social scene....

See Change

 

[Barracuda]

Yep - I guess the private school tuition is now much more prevalent - or at least mainstream than 20 years ago.

Losing their house during this period of reasonably stable rates is a concern...

Another thing I was considering this afternoon was the increased impact of rate increases when somebody has 50% vs say 25% of their income going into mortgage repayments - double the impact in terms of the additonal outgoings from the income I guess.

Still - the question remains, is housing affordability really going to come down to historic levels, or has our modern society just settled on a new benchmark? It's a different world....

 

[GIDDO]

I don't think it will get back to the traditional 30% level because people won't disconnect Foxtel and take their kids out of private school.
It's a bit like asking people 40 years ago to go without the sewerage which they had connected just a few years before, and go back to the dunny.
Human nature plays such a big part in investment.

 

[Jacque]

I seem to be more people than ever complaining about their mortgages payments and know one person who is going to be loosing their house.

Mortages are a topic of conversation on the north shore with many people complaining about them , and the one thing willG didn't mention which is applicable in affluent areas with lots of little people , the seeming ongoing rate at which Private school fees continually increase above inflation and wages rises. The private schools tend to bite the dust before the family home, though not always , it depends on what will impact more on the families social scene....

See Change

Know exactly where you're coming from here, Seech. A former work colleague of Steve's lives in Wahroonga, and refinanced a few yrs back to fund an extension on their house. His mortgage is bigger than ever, he has little or no investments (save for super and some money in MF's) and he absolutely HATES his job. He has turned into a miserable old grouch and it has affected his whole family. He's continually whingeing about his lifestyle costs, yet when Steve suggested (in a joking manner) that he consider taking his two children out of the very expensive private school (whose fees went up again this yr) and perhaps cutting back on the annual skiing holidays and private tennis and other tuition lessons, his face was a register of shock and horror. He is also tied to a job he hates as it pays considerably more than others and he really can't afford to quit.

I think he'd rather eat home brand tuna for a yr than suffer the indignation of his peers knowing that he had to take his chn out of one of Sydney's most expensive schools because he was struggling. Mind you, it is amazing what we will do for our children. Removing them from school sounds easy but, in reality, it must be a heart wrenching and difficult decision to have to make. It's not just the school fees, though, and as you suggest in your post, the whole social scene that goes hand in hand with the expectation that you can continually fork out for this function, and that trip, and hand over money because you're "seen" to have bucketloads of it.
Not always true, as I've also seen ppl struggling and holding down three jobs to be able to send their chn to schools of their choice. Don't get me wrong, as I believe that education is vitally important, but, as a former teacher myself, I also have faith that it's within the individual child to want to achieve, no matter what the educational institution. Sure, there are exceptions, but we don't want to start a schools debate here on a property forum

The sad fact is that, with some people, it's so very important to at least look as though you're "keeping up with the Joneses" in certain areas of Sydney If this means quietly suffering and trying to maintain a lifestyle that is bleeding you dry then you really have to reconsider your situation carefully and look at the harder choices that need to be made. After all, there's little point being happy holding your glass of chardonnay at a ski resort if you know that you're not going to be able to afford to pay off your credit card at the end of the month.

Sorry for the diversion of the thread Barra......
When you get me on my soapbox...!!!

 

[Jacque]

recurring costs like mobile phones, broadband fees, ISP fees, parking, road tolls ,foxtel, gym membership, etc are the silent killers

land tax seems to be the silent killer for property investors.

the huge increase in land values has also increased rates !

So very true, Will! Those recurring costs that are quietly debited from our bank accounts on a regular basis are the hardest to let go, as they're not viewed as cash costs. I cancelled my gym membership last yr and, honestly, it was like going through the third inquisition with the cancellations people. Every tactic under the sun to keep me as a member
I did consider asking them to throw a few kilos worth of Cadbury's chocolate in as an incentive, but figured they'd pass on that....

Land tax hurts even more as it's an outmoded tax that isn't necessary and is a killer for us investors. But I won't get started on that again.
I'm having a good day- best not to spoil it by mentioning land tax!!

 

[simonjulie]

Hi Jacque
Is there any more room on that soap box. my turn
When will folks get the message? "It's not how much you earn but rather how much of that you get to keep and what you do with that money is really what will make folks wealthy".
IMH, affordability is down to self education and self discipline. What hope does a young person have no matter how good their formal education is when the parents and other adult influences are bad roll models?
Simon

 

[handyandy]

Land tax hurts even more as it's an outmoded tax that isn't necessary and is a killer for us investors. But I won't get started on that again.
I'm having a good day- best not to spoil it by mentioning land tax!!

Who mentioned land tax

These are word that can no longer be uttered in our house Maybe if I ignore it, it will go away (as a herd of pigs fly past)

Cheers

 

[skater]

Who mentioned land tax

Land Tax! Isn't that a swear word?

 

[simonjulie]

I Have just had to up my holding cost predictions for next year by another 5%. I am now allowing 25%of the rental income for holding costs without including interest on loans for next financial year. These costs include all the extras from Land tax to vehicle and travelling. The cost of doing business next year will be the highest yet for me. But I am still in sound position to keep going for a bit yet before we would have to look at reducing stock. Our portfolio still managed to grow by 22% off last years base. I am hoping for an increase of rents @ around 5% across my portfolio and a natural growth of around 8% and a value add of a few of hundred thousand. Any of the above would help with the drudge of holding the properties but no one can see into the future. Fingers crossed.
Simon