Housing Affordability in Australia

[tk79]

Hi,

Recently a survey was released (Demographia international housing affordability survey) which listed the sunshine coast as the most unaffordable (in terms of ratio of house prices:income) in the world. There were many other australian cities in that survey and Aus is definetely one of the worst places when it comes to housing affordability.

I have been doing a bit of reading and there seems to be a lot of speculation that the Australian housing market is due for a correction. Now i know a lot of people will say house prices wont drop that much or find it hard to believe but im living in the UK at the moment and i have seen London house prices drop by as much as 30%.

I currently have two IP's in canberra and was hoping to buy a third one in Aus before the end of 2009. However the cautionary part of me tells me that house prices are due for a correction, esp seeing that a lot of people will lose jobs and the economy will slow down in the near future.

I respect the level of knowldege in this forum so i would love to hear your opinion on whether there will be a correction in house prices in Australia or not?

 

[BoatBoy]

Tell us all about it tk79

I'm sure you have an opinion and story to tell.

Dave

 

[keithj]

Recently a survey was released (Demographia international housing affordability survey) which listed the sunshine coast as the most unaffordable (in terms of ratio of house prices:income) in the world. There were many other australian cities in that survey and Aus is definetely one of the worst places when it comes to housing affordability.

I'd suggest you do some research on the publishers of the survey, and their business interests & biases.

 

[RumpledElf]

I'm currently following someone I know in Sydney. who was sacked a few months ago. She's been furiously applying for senior IT jobs ever since and is getting increasingly frustrated that it was so easy to get her last few jobs and now she can't find one. Interesting times.

If she stays unemployed for much longer she's going to add to the rental vacancy in Sydney as she's currently in one of those horrifically expensive apartments near the CBD.

 

[Francesco]

Hi,

Recently a survey was released (Demographia international housing affordability survey) which listed the sunshine coast as the most unaffordable (in terms of ratio of house prices:income) in the world. There were many other australian cities in that survey and Aus is definetely one of the worst places when it comes to housing affordability.

I have been doing a bit of reading and there seems to be a lot of speculation that the Australian housing market is due for a correction. Now i know a lot of people will say house prices wont drop that much or find it hard to believe but im living in the UK at the moment and i have seen London house prices drop by as much as 30%.

I currently have two IP's in canberra and was hoping to buy a third one in Aus before the end of 2009. However the cautionary part of me tells me that house prices are due for a correction, esp seeing that a lot of people will lose jobs and the economy will slow down in the near future.

I respect the level of knowldege in this forum so i would love to hear your opinion on whether there will be a correction in house prices in Australia or not?

Hi

If you do a search on Demographia in this forum you will find lots of discussions about its analyses. Cheers

F

 

[HandyAndy888]

Yep, doom and gloom here...do not buy!!! I repeat, do not buy!!! Leave all the bargains and discounted stock to us!!! *whink* *whink*...

Correction in some parts of the market (ie. the expensive silly end) will happen, actually, already has happened, but down at the bottom, steady growth is ongoing...

 

[steveadl]

I think their professional looking homepage speaks volumes

http://www.demographia.com

That and the fact that their survey includes a whole 5 countries: Aust, Canada, Ireland, NZ, UK, US. I know I define "the world" as those 5 countries, I mean really is there anywhere else? Double

 

[sash]

TK79.....the correction will be primarily in the upper end of the market. In fact in Sydney, the prices are moving well in the low end as people realise for the sometime (18 years)....it is cheaper to buy in the low end than rent even accounting for rates.

I currently have two IP's in canberra and was hoping to buy a third one in Aus before the end of 2009. However the cautionary part of me tells me that house prices are due for a correction, esp seeing that a lot of people will lose jobs and the economy will slow down in the near future.

I respect the level of knowldege in this forum so i would love to hear your opinion on whether there will be a correction in house prices in Australia or not?

Agree the $120k plus salaries will take a hit and demand will level off as companies hold off hiring. If she is more flexible in salary, location, and will consider contracts she will land on her feet. But be prepared to approach employers directly and work for 30-50k less.

I'm currently following someone I know in Sydney. who was sacked a few months ago. She's been furiously applying for senior IT jobs ever since and is getting increasingly frustrated that it was so easy to get her last few jobs and now she can't find one. Interesting times.

If she stays unemployed for much longer she's going to add to the rental vacancy in Sydney as she's currently in one of those horrifically expensive apartments near the CBD.

 

[yorke]

Hi,

I have been doing a bit of reading and there seems to be a lot of speculation that the Australian housing market is due for a correction. Now i know a lot of people will say house prices wont drop that much or find it hard to believe but im living in the UK at the moment and i have seen London house prices drop by as much as 30%.

Is that across the board or just the odd fire sale ? If I remember correctly the median price falls in UK were in the order of 10%-11% and have actually gone up since the beginning of the year ? Then again, you'd know better seeing how you are living there.

I currently have two IP's in canberra and was hoping to buy a third one in Aus before the end of 2009. However the cautionary part of me tells me that house prices are due for a correction, esp seeing that a lot of people will lose jobs and the economy will slow down in the near future.

If you feel that D&G is imminent then maybe you should act on it and forget about buying another IP In fact look at selling the ones you have now before the correction arrives.
Just list them below market value and you shouldn't have any problem selling them before your expected 30% crash arrives. Perhaps if you post a link to your properties someone here may be willing to take them of your hand at 10% -15% below market value.

I'm currently following someone I know in Sydney. who was sacked a few months ago. She's been furiously applying for senior IT jobs ever since and is getting increasingly frustrated that it was so easy to get her last few jobs and now she can't find one. Interesting times.

Do you know why did she left the last few jobs, is she a job hopper or did she gets the sack from the other jobs as well ?
Besides, a slowing economy has only accelerated the IT jobs decline that we've seen over the past few years. Why pay someone $120K+ a year to spend his/her time cyberloafing when you can outsource the job to the Subcontinent or Eastern Europe and pay someone a fraction of that.

 

[tk79]

Is that across the board or just the odd fire sale ? If I remember correctly the median price falls in UK were in the order of 10%-11% and have actually gone up since the beginning of the year ? Then again, you'd know better seeing how you are living there.

In London prices have gone down more than the rest of the UK, i know a lot of ppl who are on negative equity

Perhaps if you post a link to your properties someone here may be willing to take them of your hand at 10% -15% below market value.

3 bedroom ex govie in canberra.........ill sell it to you for 500k, its a bargain really

Thanks for all the comments so far, the part about steady growth in the lower end makes sense. While i previously commented on affordability, at the end of the day australia also has one of the fastest growing populations in the world and therefore there will always be a growing demand on housing.

As for me i bought my IP's as a long term investment so i will most defintely be sticking with them (unless i lose my job and cant find another one ).
I will just do a lot more research and ask a lot more questions before i take the plunge on a third IP.

Thanks for all your helpful comments again.

 

[BoatBoy]

In London prices have gone down more than the rest of the UK, i know a lot of ppl who are on negative equity
.

House prices rise in prime London locations

• Jill Insley
• guardian.co.uk, Wednesday 11 February 2009 09.56 GMT
• Article history

Asking prices for properties in London's best-heeled areas increased by an average of 1.3% (£16,106) in January, according to Primelocation.com – the second index to report a rise in house prices last month.
The survey, which focuses on the most expensive neighbourhoods in London, showed prices had increased to an average of £1.3m over the month, with the biggest increase in west and south-west London where asking prices rose by 2.29% or £21,418. The market was particularly buoyant in Hammersmith and Chiswick where sellers increased prices by 14.3% month-on-month.
Primelocation.com's head of research, Andrew Smith, said: "Last month we noted that the recent upturn in asking prices in prime areas after six months of falling values provided tentative evidence that the market was stabilising. This third month of rising prices adds further weight to that conclusion."
Last week, Halifax reported a 1.9% increase in house prices nationwide during January, while agents across the country said they had enjoyed a big increase in buyer inquiries.
The Royal Institute of Chartered Surveyors said yesterday that interest in the market was continuing to pick up, with 16% more surveyors reporting a rise rather than a fall in new buyer enquiries, with the strongest interest in Wales.
Although the average number of transactions per agency over the past three months is 9.9 – the lowest since the survey began in 1978 – more surveyors, particularly in London and the south of England, are optimistic sales will pick up in the next few months.
David Smith of Dreweatt Neate, an agency in Hampshire, Berkshire and Wiltshire, said: "Our activity rate was up 40% on this time last year. Vendors are being more realistic and buyers are realising that there are some good opportunities out there."
London estate agency Kinleigh Folkard & Hayward reported buyer registrations had reached their highest level since last spring, with more than 35% of new registrations made by first-time buyers.
It said Highgate performed particularly strongly with a 100% increase in activity and one property sold every day in the first two weeks of the year. However, the agency said that prices were still being pushed downwards.
Agents have also reported considerable interest from overseas buyers in the central London market in the past three months, attracted by lower prices and a weak pound. Some agents were even claiming that buyers were entering into bidding wars over properties and there were even cases of gazumping.

http://www.guardian.co.uk/money/2009/feb/11/house-prices-rise-in-prime-london-locations

London house prices "could explode"
Tue Jan 6, 2009 3:44pm GMT

LONDON (Reuters) - London can expect a future explosion in house prices unless there is an increase in construction during the economic downturn, one of the city's key figures said on Tuesday.

http://uk.reuters.com/article/Internal_ReutersCoUkService_13/idUKLNE50503H20090106


Dave

 

[yorke]

3 bedroom ex govie in canberra.........ill sell it to you for 500k, its a bargain really

For someone expecting D&G and worried about a possible 30% crash you sure are greedy. Then again, the way the sub $500K houses seems to be selling in ACT your $500k ex govie will probably look like bargain of the decade before the end of the year.

As for me i bought my IP's as a long term investment so i will most defintely be sticking with them (unless i lose my job and cant find another one ).
I will just do a lot more research and ask a lot more questions before i take the plunge on a third IP

Try spreading a bit of D&G, stories about Japan and Detroit are always popular with FHBs and may help to give you some extra time to do your research.

 

[tk79]

Try spreading a bit of D&G, stories about Japan and Detroit are always popular with FHBs and may help to give you some extra time to do your research.

Fair enough mate ill just put the blinkers on and tell myself that investing in property is completely risk free and not try to understand all the potential risks involved. My intention for the post wasnt to spread D&G but to ask questions and try and get arguments to both sides of the story.

 

[tk79]

http://www.guardian.co.uk/money/2009/feb/11/house-prices-rise-in-prime-london-locations

http://uk.reuters.com/article/Internal_ReutersCoUkService_13/idUKLNE50503H20090106


Dave

Unfortunately in the media one source tells you one thing and someone else tells you the opposite, sometimes it is difficult who to believe:

Prime London residential prices fell 3.7% in January 2009, the second highest monthly decline on record, according to the Knight Frank Prime Central London Index. Overall prime London prices have fallen 21.4% since the March 2008 peak, the important £1m to £2.5m sector has fallen 25.3% over the same period...

Source: http://firstrung.co.uk/articles.asp?pageid=NEWS&articlekey=10939&cat=44-0-0

I dont claim to know whether they have started going up or are still falling but the general feeling when talking to friends, colleagues over here is that for the vast majority of them their properties have had a substantial fall in value

 

[BoatBoy]

So even that article you linked to says that its the top end of town getting savaged, the million pound plus stuff, which is hardly what I would consider average Joe territory.

From the same source we also get this

House Price Reports
UK house prices in shock rise of 1.9% in January

http://firstrung.co.uk/articles.asp?pageid=NEWS&cat=62

Dave

 

[Ms Jade]

Fair enough mate ill just put the blinkers on and tell myself that investing in property is completely risk free and not try to understand all the potential risks involved. My intention for the post wasnt to spread D&G but to ask questions and try and get arguments to both sides of the story.

If there is another side to the story tk79, it's that we are in incharted waters right now. I'm sure no one in London would have believed that the correction would happen to them either. Though the fundamentals look good, the rise in unemployment is just starting in Oz (had a positive blip last mth for full time jobs but I'm sure that is not a trend!). If there is more of a correction to come (i think the general decline is 10% already) it will be due to higher unemployment and the credit crisis. Banks are already calling in loans to business and commentators here are saying that business is hit before consumers. If access to credit continues to contract, it does not matter what you would like to pay for the property. Even if you get funding it's likely to be at much lower LVRs. As I see it this is the biggest risk factor. Hopefully it won't pan out but the potential downside risk is huge, IMHO.

This might not matter to your situation. If you are comfortably holding your current properties, the good news is that it's a buyers' market. You don't need to rush to find something that you believe is really well priced. I personally wouldn't be gearing over 80% max right now, and if you found something to hold long term (7 yrs+) it probably won't matter if it declines a bit in value. Chances are you will end up OK.

 

[Shadow]

A more complete perspective on the affordability equation.

The Demographia survey has been thoroughly debunked. There are massive flaws in that survey. It uses a very basic measure of 'affordability' - i.e. median house price to median income. This is a very blunt tool. Demographia compares house price to income ratios across various countries, however there is no reason why house price to income ratios would be consistent across different countries, because there are substantial differences between each countries housing markets. The survey fails to consider the following factors:

- Disposable/discretionary income
- Employment rate
- General cost of living
- Interest rates
- Rental yield
- Availability of public housing
- Marginal tax rates
- Mortgage default rates (Australian defaults are way below UK and USA default rates)
- Tax incentives such as negative gearing, FHOG, CGT reductions
- Land/Block size
- Dwelling size and quality
- Proximity to transport and infrastructure
- Currency exchange rates
- Economic and political stability
- Home ownership rates
- Urbanisation (much higher in Australia than in US, UK or Japan)
- Population growth: Australia (1.7%), USA (0.9%), UK (0.3%), Japan (negative)
- Demographics (ironic that a survey called Demographia ignores demographics!)

Of course, no survey is perfect and no survey can possibly hope to account for all these factors. The best we can do is try to look at as many different surveys as possible, each of which will address a few of these factors, and this will give an better general impression of comparative affordability in each country, rather than looking at just one survey (I have linked to nine alternative surveys below).

We should note that the historical '3-4 x income' house price affordability ratio that some D&Gers cling to is no longer valid, because interest rates are historically low, and a large number of buyers today have large deposits, dual incomes, and high disposable income. These are the people who drive our property markets.

However, the RBA has also demonstrated that 25-39 year olds today still have more disposable income left over after buying a 30th percentile house than at any time in the past (Keithj has some good posts on this).

Regarding the 'demographic' failings of the Demographia survey, take for example its assertion that a certain 'sea-change' town in Australia is particularly unaffordable. They base this on the median house price to medium income ratio in that town. What they fail to consider is that the median income there is largely irrelevant, because much of the population are cashed-up retirees (no income) who have saved up for their whole lives and purchased a nice big beach house, often with very low borrowings. Sure, these beach houses may be unaffordable for a first home buyer who works in the local supermarket, but that's not the primary demographic driving prices in that town. In reality, the Demographia survey is comparing apples with oranges.

Another key issue with Demographia is that it only compares Australia with five other countries, yet the media proceeds to claim that Australia is the 'most expensive country in the world'. The survey conveniently ignores all the many countries and cities around the world with much higher house prices than in Australia. For example: Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore, Monaco. Here are some alternative studies...

World's Top 10 Priciest Cities To Own A Home
http://www.forbes.com/2009/02/09/cities-top-expensive-lifestyle-real-estate_0209_cities.html
Sydney - not in the top 10

GlobalProperty Most Expensive Cities 2008 (apartment price per sqm):
http://www.globalpropertyguide.com/investm...-cities-in-2008
Sydney - Number 13: US$7,085 per sqm

Mercer Most Expensive Cities (cost of living, including housing)
http://www.mercer.com/costofliving
Sydney - Number 21

CityMayors Expensive Cities
http://www.citymayors.com/economics/expensive_cities2.html
Sydney - Number 24

Knight Frank Survey (prime residential property)
http://www.finfacts.com/irelandbusinessnew..._10010019.shtml
Sydney - Number 8: EU$13,100 per sqm

Overseas Property Mall Survey
http://www.overseaspropertymall.com/proper...tional-markets/
Average home values for select 2,200 square foot single-family dwellings with four bedrooms...
Tokyo - $785,818, Sydney - $683,109

Aneki (most expensive countries to live in)
http://www.aneki.com/expensive.html
Australia - Not shown in the top 20

Most expensive countries in the world
http://www.associatedcontent.com/article/1...the.html?page=2
Australia - Not in the list

Most expensive rental markets
http://www.forbes.com/2008/02/11/properties-world-rent-forbeslife-cx_mw_0212realestate.html
Australia - Not in the list

(Two of the above surveys actually quote data from others, but they do also add their own additional information and commentary, so I have included them anyway).

Cheers,

Shadow.

 

[yorke]

Fair enough mate ill just put the blinkers on and tell myself that investing in property is completely risk free and not try to understand all the potential risks involved.

Isn't that a bit late for that ?After all you already have 2 IPs.

My intention for the post wasnt to spread D&G but to ask questions and try and get arguments to both sides of the story.

If that wasn't your intention then you have my apologies. For some reason I must have confused you with someone else from the other side looking for a link to add to "your favorite SS threads"

 

[nonrecourse]

Isn't that a bit late for that ?After all you already have 2 IPs.


If that wasn't your intention then you have my apologies. For some reason I must have confused you with someone else from the other side looking for a link to add to "your favorite SS threads"

Yorkie; I think you should put your money and equity where your mouth is.
Since your such a gun investor offer to purchase tk79's two properties after getting a valuation right now. Since your so certain how good things are going to be just use the equity in your existing portfolio so that the properties are geared at 100-110 percent.

The last commercial property we bought in 2005 we used our equity and the actual property had 120% gearing that included legal fees and stamp duty. It had no tenant and for six months we did't blink and stuck to our demand on rental return and directors guarantees.

We go to at least 10 auctions a week and since 2006 our hands have remained in your pockets because values lost touch with reality and in early 2007 we saw the subprime on the horrizen.

Your so sure that nothing bad is going to happen and your quick to advise tk79 to sell, so here's your chance to show us your cahones

 

[yorke]

Yorkie; I think you should put your money and equity where your mouth is.
Since your such a gun investor offer to purchase tk79's two properties after getting a valuation right now. Since your so certain how good things are going to be just use the equity in your existing portfolio so that the properties are geared at 100-110 percent.

What's the matter, did I spoiled your fun ?
Thank you for thinking so highly of me, I never said or believed that I was a gun investor but if you say so it must be true because you'd never make things up.

In case you haven't noticed tk79 has said that he plans to keep them despite believing that "house prices are due for a correction, esp seeing that a lot of people will lose jobs and the economy will slow down in the near future."

Thanks for the advice regarding 110% equity but I'm also not really interested in holding properties in Canberra or Queanbeyan and if I was I'd keep it simple and put down some cash. He is welcome to place the links here but if he was serious about selling he'd have no problems, the under $500k property market in Canberra has been on fire lately. I'm sure you know that and is a similar situation in Sydney and Melbourne or else you wouldn't be so agitated.
Since you are so keen to prove something (or to show off to your buddies) maybe you can give us some details about your Melbourne residential IPs and depending of the location I may be interested in them. You do want to sell them before the correction arrives, don't you ?

The last commercial property we bought in 2005 we used our equity and the actual property had 120% gearing that included legal fees and stamp duty. It had no tenant and for six months we did't blink and stuck to our demand on rental return and directors guarantees.

Wow, commercial property, 120% gearing, no tenants and no blinking for 6 months ? You must be a very astute investor or a very bullish one.

We go to at least 10 auctions a week and since 2006 our hands have remained in your pockets because values lost touch with reality and in early 2007 we saw the subprime on the horrizen.

Unless you work for the rent-a-crowd mob why waste your time and fuel going there ? Or have you also lost touch with reality and hope to grab a no reserve $1 bargain like in Detroit ?

Your so sure that nothing bad is going to happen and your quick to advise tk79 to sell,

If you don't agree with me then you must think that something bad will happen but despite that tk79 should NOT sell , is that it ?

so here's your chance to show us your cahones

Sooo, you play for the other team and like perving at other people's cahones ? No need for you to be embarrassed.