Housing affordability & long term gains

[ColonialBoy]

The table below gives the 2008 housing affordability for various countries. Affordabilit yis defined as median house price divided by median wage.

Source: www.demographia.com/dhi.pdf

Australia has the most unaffordable housing in the world, somewhat more than New Zealand, & Ireland/UK. We know that Australians hate defaulting on mortgages. I believe the average Australian house price fell 3% last year along with worldwide asset price deflation.

I have been thinking of investing in property but these figures give me no comfort at all. Either we continue to have the most expensive housing in the world, or capital appreciation will be negligible over the next 10 years.

I appreciate others input on this.

 

[Belu]

what do the numbers represent? 3 in the 4.1-5 bracket doesnt mean a whole lot to me - 3 million houses maybe?

Anyway its appears to be very similar to NZ eith 1 - 7 being the same ratio as 3 - 24 with the average only being 5% different.

I notice that there are no other Asian countries on there which we may be more aligned to (not sure).

either way - is it really that difficult to save $30k and buy a house? honestly?

 

[weg]

If you look at some of the cities/towns on the USA data you have places like Stockton CA and Detroit. I wonder how many more cities/towns are on that list which might skewe the comparison.

Apart from the capital cities and a few large prospering regionals we have places like the Sunshine Coast and the Gold Coast on the list. Where are our Detroits and newly created ghost towns in the middle of nowhere.

Using select places to represent a whole country is deceptive.

The reality is Australia has one of the highest rates of home ownership in the developed world which says something in itself.

If a person is a FHB on a median income they should be buying outside of those cities mentioned and they should be buying well below the median. Buying would then be quite affordable.

 

[peastman]

Is Australia still in a bubble for real estate? Yes I think it is.
Is this a problem? Maybe.
Will it make me sell my properties and go into something else? No way.

The figures listed in the chart actually make things look not too bad.
Australia 6
UK 5.2
Ireland 5.4
New Zealand 5.7

Does that mean a 10% downward correction in Australia puts us about inline with UK and Ireland? Not really that bad when you consider the growth over the last few years. I dont think it means stagnation for a decade.

But what would I know. Hindsight in 11 years will be a good judge.

 

[ColonialBoy]

If a person is a FHB on a median income they should be buying outside of those cities mentioned and they should be buying well below the median. Buying would then be quite affordable.

I agree that seems to be the case. You probably need to look at undervalued cities & unfashionable suburbs. Maybe houses that need minor refurbishments.

The figures listed in the chart actually make things look not too bad.
Australia 6

The long term trend for australia has been about 3, which means Australian housing is double the price you would expect based on on previous trends.

 

[yorke]

The table below gives the 2008 housing affordability for various countries. Affordabilit yis defined as median house price divided by median wage.

Can you define the median price, median location, median age of the median wage earner and his median savings ? Its only when you can define these that you can really define affordability.

Lets use the the median age worker who is 40 years old and on median wages of $55K. If he wants to buy a median $500K property he'd be using the proceeds from the previous property which he would have paid off by now or his investment savings. Lets say that his previous house is only worth a low $300K, he'd still only have to borrow another $200K from the bank. Don't know about you but that doesn't seem so unaffordable to me.

Now lets look at another median 40 years old worker left penniless after his wife divorced him and took all his assets. He would find it difficult to jump straight into a $500K median price house even if he is on median wages because he is starting from scratch. In fact he'd be in a worst position then a school leaver who after after being employed for a week on median wages believes that he should be able to go and buy a median priced home, at least the school leaver is entitled to a FHOG and can use that as a deposit.
Now I'm sure you don't suggest that a $500K house is unaffordable just because someone who is just starting work finds it difficult to buy it ? Mind you if he had a girlfriend/wife that also works he could still afford it. The repayments on a $500K loan locked for 10 years at 6.19% would only be about $3000/month so its definitely doable even for a school leaver.
Of course if he was smart he'd move back with mum after 6 months and rent it out for the next 5-6 years to let his tenants paid off his loan while he enjoyed the tax benefits.

Another important factor is the location. Assuming that someone in NSW on median wages goes out to look for an affordable home he should be looking for his median priced house in a median priced city like Dubbo, Grafton or Orange where you can still find houses on 3x median income.

 

[topcropper]

Assuming that someone in NSW on median wages goes out to look for an affordable home he should be looking for his median priced house in a median priced city like Dubbo, Grafton or Orange where you can still find houses on 3x median income.

3 times wages eh?

There wouldn't be a hell of a lot of difference between rural and city values these days, going on wages to prices,...

Dubbo,....$235,000
Grafton,..$234,000
Orange,..$270,000

Wages in the bush are less than the city.
Not quite 3 times wages.


Yep, you can find houses at 3 times wages. Absolute dumps, as you can find them anywhere, even the capital cities.

See ya's.

 

[AUSPROP...]

Oz less affordable than the UK? have they ever shopped for a flat in London?

 

[AUSPROP...]

we can all find extreme examples but EOD a decent house can be bought for about $350k. I don't see this as particulalry unaffordable.

example, I found this in 2 secomds...

http://www.realestate.com.au/cgi-bi...ader=&cc=&c=645596&s=wa&snf=rbs&tm=1239527766

 

[BoatBoy]

Australia has the most unaffordable housing in the world,.

Last time I looked the world had more than 6 countries.

I also noticed Bundaberg and Rockhampton are on the list for some of the most unaffordable housing in this very small world of Wendalls.

Well, heres a feast of 10 pages under $200,000 for Bundy
http://www.realestate.com.au/cgi-bi...ETT+HEADS&us=CORAL+COVE&us=INNES+PARK&latest=

And 20 pages for Rocky under $200,000
http://www.realestate.com.au/cgi-bi...GAN&us=NORTH+ROCKHAMPTON&us=ROCKYVIEW&latest=

Dave

 

[yieldmatters]

I have been thinking of investing in property but these figures give me no comfort at all. Either we continue to have the most expensive housing in the world, or capital appreciation will be negligible over the next 10 years.

Where is Shadow and his typical rambling blurb on this?

The question for me is not what the ratio is now as it might be normal to have a higher ratio - our houses might be better, we might value them more - who knows? There could be many things different between the countries.

The important thing to me is how the ratio has has changed over time. This is where Australia gets scary as it has gone up and up and up. Still people justify it by pointing to 2 incomes, looking at disposable incomes only, looking at lower interest rates. In my view it's all desperate clutching at straws to try to avoid using the "bubble" word.

The bottom line is houses have become a lot more expensive and it's far easier to argue that we have fallen into the same delusions as the USA, UK, Ireland, NZ etc than to come up with other reasons for it.

 

[Sunfish]

The question for me is not what the ratio is now as it might be normal to have a higher ratio - our houses might be better, we might value them more - who knows? There could be many things different between the countries.

Good point YM. I'm no property bull (wow) but have made a similar point a number of times. The average Aussie is doing it pretty easy. The discretionary part of our income which dictates how much we can spend on housing is probably higher than any of the other countries. This is because of the high ratio of high paying export based jobs, Sydney financial millionaires, and Melbourne boardroom "old money". And let's not forget our open borders trade policy where we buy Asian products cheaply. Possibly cheaper than they are available in the home countries.

I do not, and never have, used overseas ratios as a dictate of our prices. But if you think any or all of the above groups may be looking towards a leaner period, then there could be change in the wind.

 

[yieldmatters]

Good point YM. I'm no property bull (wow) but have made a similar point a number of times. The average Aussie is doing it pretty easy. The discretionary part of our income which dictates how much we can spend on housing is probably higher than any of the other countries. This is because of the high ratio of high paying export based jobs, Sydney financial millionaires, and Melbourne boardroom "old money". And let's not forget our open borders trade policy where we buy Asian products cheaply. Possibly cheaper than they are available in the home countries.

I do not, and never have, used overseas ratios as a dictate of our prices. But if you think any or all of the above groups may be looking towards a leaner period, then there could be change in the wind.

I think you are right on the high discretionary income boosting purchasing power. I also think easy credit has turbo charged it further. Now both are in retreat which will be interesting to say the least.

Higher purchasing power on existing housing stock though is a zero sum game (i.e. buyer payment less seller receipt less government theft = zero). It is a distributional / equity issue as to how the higher discretionary income is being distributed.

 

[ColonialBoy]

The important thing to me is how the ratio has has changed over time. This is where Australia gets scary as it has gone up and up and up. Still people justify it by pointing to 2 incomes, looking at disposable incomes only, looking at lower interest rates. In my view it's all desperate clutching at straws to try to avoid using the "bubble" word.

Absolutely, you understand the issues well. We may be experiencing a large number of mortgage defaults, I'm not sure if numbers are kept. We could see stagnant or decreasing prices for years.

The average mortgage on a first home is $281K. You need two above average imcomes to support that.

I do not, and never have, used overseas ratios as a dictate of our prices. But if you think any or all of the above groups may be looking towards a leaner period, then there could be change in the wind.

Australian property is the most exponsive in the world, its a fact. Comparativly far more expensive than the US who have million of mortgages in default.

 

[yorke]

3 times wages eh?

There wouldn't be a hell of a lot of difference between rural and city values these days, going on wages to prices,...

Dubbo,....$235,000
Grafton,..$234,000
Orange,..$270,000

Dubbo...$120,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=42741415&s=nsw&snf=rbs&tm=1239543792
Orange $135,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=42741415&s=nsw&snf=rbs&tm=1239543792

Nothing fancy but with the increased FHOG is even affordable to a couple living on the dole. And they could cut down costs by growing stuff in their backyard.

 

[jingo]

The average mortgage on a first home is $281K. You need two above average imcomes to support that.

I have broken the figures down to see whether this debt could realistically be supported by one income earner on the average wage (57,668). I haven't allowed for Family Tax A or B which would help this person's cash flow.


Aveage Wage: 57,668 p/a
Less Tax p/a : 12,765 (Includes medicare levy, but does not allow for Family Tax A and B)

Take Home p/a :44,903

Monthly Mort payments on 281,000 @ 5.91% over 30 yrs. (Variable Loan, p&i) : 1669

Therefore: 44,903/12= 3,741 less 1,669 leaves 2,072 per month or 518 each week for other expenses.

Is this possible?? Anyone doing this at the moment - how are you going. Are things very tight??

 

[weg]

I have broken the figures down to see whether this debt could realistically be supported by one income earner on the average wage (57,668). I haven't allowed for Family Tax A or B which would help this person's cash flow.


Aveage Wage: 57,668 p/a
Less Tax p/a : 12,765 (Includes medicare levy, but does not allow for Family Tax A and B)

Take Home p/a :44,903

Monthly Mort payments on 281,000 @ 5.91% over 30 yrs. (Variable Loan, p&i) : 1669

Therefore: 44,903/12= 3,741 less 1,669 leaves 2,072 per month or 518 each week for other expenses.

Is this possible?? Anyone doing this at the moment - how are you going. Are things very tight??

Not doing it but been there done that in the good ol' days .

So if you have 2 average wages coming in you would be left with $5813 per month (3741 + 2072 = 5813).

I'd say servicing a mortgage of $281 on 2 incomes would be more than doable.

CB,

If you're looking to buy into the market for the first time the figures can look daunting but the rent you will pay will probably be not too far off what your mortgage repayments would be.

If you're a young single guy you don't really need a 3 bedroom house. Perhaps look at 2 bedroom homettes or villas and get someone to board and share expenses.

 

[keithj]

I have broken the figures down to see whether this debt could realistically be supported by one income earner on the average wage (57,668).

......


Therefore: 44,903/12= 3,741 less 1,669 leaves 2,072 per month or 518 each week for other expenses.

Is this possible?? Anyone doing this at the moment - how are you going. Are things very tight??

Good stuff jingo.....

You've given the figures for first year of purchase. Can you put the numbers together for yr 2 & 5 & 30 (& 31) ? Assume IRs are fixed and wages increase on average at 4% pa.

And maybe compare it with renting (4% initial yield?) to find out if/when discretionary income for OOs exceeds that for renters. Maybe assume rent increases at 1% less than wages ?

 

[BoatBoy]

If you're a young single guy you don't really need a 3 bedroom house. Perhaps look at 2 bedroom homettes or villas and get someone to board and share expenses.

NOOOOOOOOoooooooo

I want my 4 bedroom 2 bathroom DLG, with granite bench tops, European appliances, porcelain tiles, smart wiring, lap pool and ducted air.

NOW, NOW, I shouldn't have to wait.

Dave

 

[keithj]

I think you are right on the high discretionary income boosting purchasing power. I also think easy credit has turbo charged it further. Now both are in retreat which will be interesting to say the least.

I'd say both are reverting to pre-2000 levels. Discretionary income will stop increasing at the rate it has due to the current economic situation - however, I'd expect this to be short term. And relatively easy credit has already stopped - we're reverting to a 'normal' credit environment. So I'd expect flat valuations in the short term while discretionary income is flat, and then increases in values to revert to whatever they were in the 30 years before 2000.

Higher purchasing power on existing housing stock though is a zero sum game (i.e. buyer payment less seller receipt less government theft = zero). It is a distributional / equity issue as to how the higher discretionary income is being distributed.

Firstly, so what if it's a zero sum game ? Would you say that the planet earth has a fixed number of resources & all we're doing is swapping them around, so it's a zero sum game ? Your point makes no sense.

And secondly... I'd disagree. IF inflation was 0% then I'd agree that it's a zero (-ve) sum game - we're just swapping stuff. But the fact that everything increases (rent, wages, IP values), relative to debt, makes it a +ve sum game for those that hold debt.