Why Houses Being Unaffordable is a Myth...

[jezza]

Let me clear it up I am not on that income. I was using those figures from sash's op that seems to mention that 2 figures do not have any correlation. My final figure of $224 per week is what you would have to survive on if you used those 2 figures, which I know I could not live on and afford for the wifeee to stay at home. People want to buy there dream home from day 1 which is impossible, people need to accept that either a smaller place or a couple of suburbs further out is acceptable and then you move further in over time

Jezza

 

[jaycee]

birds dont have babys untill they establish a nest. Smarter than most humans id say

We are what we are.... that includes you & I too !

 

[Aaron Sice]

it just doesn't sit well with me. for the extra person working we may have an extra bedroom and bathroom, but otherwise we have traded that for our social and family structure. When I grew up, Dad could afford the mortgage, now it takes a Mum and a Dad and the kids get farmed out and at the end of the day we all still live in... just a house. to make it worse, the debt is largely held by foreigners, so all the fruits of labour are transferred overseas

this is what i am specifically trying to avoid, and have done so successfully now for 6 years.

i work, wife raises kids.

 

[bene313]

it just doesn't sit well with me. for the extra person working we may have an extra bedroom and bathroom, but otherwise we have traded that for our social and family structure. When I grew up, Dad could afford the mortgage, now it takes a Mum and a Dad and the kids get farmed out and at the end of the day we all still live in... just a house. to make it worse, the debt is largely held by foreigners, so all the fruits of labour are transferred overseas

Both parents working instead of one staying home can often be a false economy.

Consider this:

- Wife goes to work instead of staying home. Earns 60kpa.

- Hair, make-up, clothing etc to appear professional. $Xpa.

- Cost of child care. $Xpa.

- Cost of house cleaner or similar due to time constraints. $Xpa.

- Additional transport costs for Wife's commute. $Xpa.

- LOSS of Family Tax Benefit Part B. $Xpa.

And the above does not take into consideration the non-financial costs.

 

[tom32]

It has probably all been said before but just summarising the effect of high house prices on the economy at large and the positives it brings v some of the longer term negatives and how affordability is not as important on an individual level as it is on the economy more generally.

There are two distinct stages in a nation with growing house prices and there effects on GDP are different. The first stage is overwhelmingly positive for a nations GDP and average prosperity in the community. Along with this prosperity, standards of living for most also improve as house prices rise. The second stage which we are possibly gradually transitioning to at the moment to a period of high prices that have hit a plateu is not positive.

Stage 1: Asset price appreciation and the wealth effect; As house prices rise people in the community overwhelmingly feel more wealthy. Even people who only own a PPOR still view the equity in it as savings. Suddenly a new car at 70k does not seem like an expensive proposition against 300k of home equity. People become stronger consumers and the effect to GDP is positive. Even those who only rent see employment prospects improve as the economy runs at near full capacity due to building activity and retail trade powering away.

The turnover of homes is a very slow process so during stage one very few people actually buy a home at the appreciated new high prices, but these same high prices make a large swathe of the community feel very comfortable to spend, those who already owned. During this first stage you have a very small group of highly indebted families / individuals becoming virtual non consumers but the effect of this small group on the economy is tiny compared to the larger effect of the group of consumers just made wealthy.

Above I see people saying $600.00 a fortnight is enough for a family to live on. If they can I guess good luck to them, I wish I could. I don't know I could even run my car for that?

How does this relate to affordability? Individually houses are still affordable for many entering the housing market. If they were not prices would not be sustained where they are now. The issue is over time as more people buy in at the current prices we will enter a new stage or I guess if you were an optimist you would say stage 1 goes on forever with ever increasing against inflation house prices which then always keeps the group of post plateu prices small.

Stage 2; At some point house prices peg back to inflation or flatten out. If at this point prices are high and at the limits of affordability the growing group of people who are buying in and joining the ranks of the virtual non consumers grow in relation to those who bought before the last bout of increases. This starts to weigh on GDP as interest repayments become a larger swathe of peoples expenses.

What do you do though if you were a policy maker? The problem is unwinding of high prices is even worse in the short term than allowing them to flat line. There is also an opposite to the wealth effect when people see their equity evaporate. They too become non consumers look at US consumer data from 2007 - 08!

You might say, I don't care what my PPOR is worth and my spend habits do not change irrespective of what my house is worth but this is not how it plays out on an economy at large I am afraid.

This is why the government loading taxes on new developments or stopping them all together while at the same time encouraging demand in homes through first home buyers grants and the like are always going to be politically digestible for the public in the short term and positive for GDP. The short term effects are nearly all positive. At some point though collectively we will find we have an overcapacity in retail and other consumption sides to our economy as consumption levels fall due to the growing group of people who have bought post high prices.

I look at Sydney in the period 2003 to 2008 for a taste of what might be to come for Australia more generally in this area as Sydney commenced urban consolidation policies in the mid 90s and had their action as a result earlier than elsewhere. Perth has massive amounts of investment from the state government in infrastructure etc and yet we are told retail trade is struggling in this two speed economy. Could this be the start of a Sydney like malaise even in the capital of the mining state?

I don't know what the answer is but around whether houses are affordable, it is not such a question of whether they are affordable to some individual but whether high prices are sustainable for the economy as a whole and for that you have to look at a transition over a period of time, i.e. project forward 10 years at current prices, estimate the debt servicing level in aggregate and ask whether this level of debt is sustainable?

 

[bene313]

I'm glad I took the time to read that Tom. Very good post.

 

[Aaron Sice]

in every capitalist society there are those that must miss out for others to profit.

this also creates a middle class of aspirers - they drive the price equation.

i know which side i'd rather be alinged with.

 

[Aaron Sice]

I look at Sydney in the period 2003 to 2008 for a taste of what might be to come for Australia more generally in this area as Sydney commenced urban consolidation policies in the mid 90s and had their action as a result earlier than elsewhere. Perth has massive amounts of investment from the state government in infrastructure etc and yet we are told retail trade is struggling in this two speed economy. Could this be the start of a Sydney like malaise even in the capital of the mining state?

hammer + nail + head.

this is my prediction as well.

"malaise" is the perfect word for it.

*must spread kudos around, apparently*

 

[charlieandkath]

Or you could live in a gutter. That's free! And eat at those caravans where social service people go to hand out yucky soup. Or cheat Centrelink and apply for commission housing (I know lots of Australians who do).

But still, that's not the point. You guys are talking about what people SHOULD do. What's more important is whether the status quo living practises supports status quo prices.

We get plenty of people coming out of Sydney to live out here and most of them recognise that they actually increase their standard of living so Delta berry you are way out of line.

What people like Deltaberry fail to recognise is that you just can't compare median incomes with median prices between different countries because there are still too many variables. These variables include stability of govt., closeness to water, lifestyle factors, etc etc etc could go on.

 

[listoffallacies]

I might cop a caning for this...but here goes.....
The article indicates that houses in Australia are now 7.2 times the median wage of 66k...or aobut 475k.

I feel the story is biased and does not consider that due to the level of participation of women most people use two incomes to purchase a house. So it might be more like the median household income of 110k.

-Making wrong assumptions (household earnings = 2 x full time Adult earnings)
-Making up your own figures when they are already available (ABS measures household income, it was 66k in 2008)

 

[sash]

So I am using wrong assumptions??

Can you please enlighten me what they are?

66k for household income? Maybe....but a lot of households in Sydney, Melbourne, Brisbane, and Adelaide...have incomes higher than this.....this cities account for 80% of Australia's population.

-Making wrong assumptions (household earnings = 2 x full time Adult earnings)
-Making up your own figures when they are already available (ABS measures household income, it was 66k in 2008)

 

[mrsdawnrazor]

Both parents working instead of one staying home can often be a false economy.

Consider this:

- Wife goes to work instead of staying home. Earns 60kpa.

- Hair, make-up, clothing etc to appear professional. $Xpa.

- Cost of child care. $Xpa.

- Cost of house cleaner or similar due to time constraints. $Xpa.

- Additional transport costs for Wife's commute. $Xpa.

- LOSS of Family Tax Benefit Part B. $Xpa.

And the above does not take into consideration the non-financial costs.

Why are we assuming the wife earns less than the husband or cannot get a job that pays a good wage or god forbid, she likes working

 

[Deltaberry]

So I am using wrong assumptions??

Can you please enlighten me what they are?

66k for household income? Maybe....but a lot of households in Sydney, Melbourne, Brisbane, and Adelaide...have incomes higher than this.....this cities account for 80% of Australia's population.

The median figure means that 50% of the households have less than that.... maybe it's just the households you know that have high numbers.

I'll give you another example. When I did VCE, I never understood how people got an ENTER less than 90. Getting 90 was only for what we called pretty dumb people at my school (not saying there's any truth to this, just saying this was the view at the time). But getting 90 actually means you've beaten 90% of the people who sat the VCE program. So where was this other 90% of the state? I had no idea, but numbers are numbers and numbers don't lie unless you think the govt screwed it up.

Sometimes when you 'grow up' or 'live' in a more elite part of this feudal society, you start to think everyone is like the people around you. ABS statistics however will tell you that's not the case...

 

[Dazz]

Why are we assuming the wife earns less than the husband or cannot get a job that pays a good wage or god forbid, she likes working

.....that's easy to answer Dawn.....the average male wage is demonstrably higher than the average female wage.

It would be highly accurate to assume the wife earns less than the husband.

Any other easy ones like that, send 'em on thru.

 

[BayView]

Housing is always unaffordable - when you start looking for the first one and realise that your champaign taste doesn't match the lemonade income.

"Oh my god; I want a new 3x2 apartment in South Yarra with a parking bay, but all I can afford is a 2x1 1960's house out in Moorabbin!"

Difference now is that everyone can get on Facebook, Twitter, forums like this one and all these other terrific media places where you can get yer 15 mins of fame and have a big whine about it in public.

 

[chilliblue]

I believe that it is not the housing that is not affordable but the lifestyle that people want.

If you cannot afford the 4 bedroom house with 3 bathrooms, double garage pool, air conditioning, landscaped gardens in a blue chip suburb make some comprises and buy it in a different area or buy something that fits the price bracket.

Noting that I am a gen X, you do not always need the two new brand cars changed over every 3 years, annual holidays, update your furniture and clothes each year, eating out for lunch each day and restaurants on the week end.

Live within you means and property can be purchased.

We own our home outright and have 3 investment properties and I am constantly being told "how lucky you are".

This is by people that have had the same start or in some instances better start than we did and yet still owe over 50% of their PPOR.

No luck. We simply have always lived on the principle to work hard and save like crazy before the kids came and are now being rewarded for missing out on some of lifes good times.

That my opinion.

 

[mrsdawnrazor]

.....that's easy to answer Dawn.....the average male wage is demonstrably higher than the average female wage.

It would be highly accurate to assume the wife earns less than the husband.

Any other easy ones like that, send 'em on thru.

Isn't that like medians and other averages - indicative but not neccessarily representative. If we all worked on averages and medians, would we be doing what we do?

 

[rugrat]

Problem:
Median wage; takes into account ALL wages, even those who live below the poverty line and wouldn't be able to 'afford' a house if the prices were are record lows.

Median house price; takes into consideration ALL houses, even those whom only high end earners would be able to afford.

Median income v Median Price: National averages are not truely representative. Different states, different regions, different cities and townships all have different median prices and incomes.



To be a more reasonable indication of housing 'affordability', the low end income earners should be excluded at the very least. Those relying on pensions and centrelink payments, or earning below the poverty line have never had a hope of finding property 'affordable'.

In addition, these medians need to be localised. It is impossible to look at Australia as a whole. Different markets exist for both property prices and income.

Canberra, for example has a very high local median income level - even higher if you disclude those who fall below the poverty line. Our Property prices are also very high, however for the average 'household' income here it isn't actually too bad (and statistically 'most' households here in Canberra are Dual income.)

If you look at a small regional city like Armidale, NSW, on the otherhand. The median income is significantly lower, even without including those who live below the poverty line. The propertion of the population that does live below the property line is HUGE (the university being the main industry, with students making up a large portion of the populations. I am not sure about current median housing prices in Armidale - I am well aware however that despite the median, the prices 'range' greatly. I could buy comparable 3bed houses in different areas; one for $120k the other for $450k - the difference being local. Personally I would buy neither. I would consider the $450k overpriced, and the $120k is in an area I definitely would want to avoid. So it isn't about 'affordability' as much a 'desirability'.

I do think 'affordability' often boils down to what people are 'willing' to afford, not what they actually can afford.

FWIW - I am kinda faced with the issue of affordability myself at them moment. I am expecting my fourth child at the end of the year and as such our 3 bed house is becoming very small. Four bedrooms in Canberra jumps out of our 'affordable' price range, especially with our now decreased servicability.

I am aware however that prices are not about to change, so instead I am looking at ways that I can make it more affordable for myself to upgrade. I can do this by saving a bigger deposit and borrowing less and by increasing income, there is also renting the property out before moving into it (creating cashflow for servicibility, and significant deductibility to reduce initial costs - ie, stamp duty). We can also be looking in cheaper areas even though they may not be our first preference of where to live. So that is what we will do.

 

[listoffallacies]

To be a more reasonable indication of housing 'affordability', the low end income earners should be excluded at the very least. Those relying on pensions and centrelink payments, or earning below the poverty line have never had a hope of finding property 'affordable'.

-Don't change the goalposts, this is not done in other markets. The point of Demographia is to compare cities across the world.

-These people have to live somewhere. They DO live somewhere - probably low end housing that likely correlates with their incomes. The fact that they can afford to rent but not to buy points to a price/rent bubble. The trouble is that has persisted so long and been covered by capital gains many no longer see it as a problem.

 

[Sheryn]

I believe that it is not the housing that is not affordable but the lifestyle that people want.

That my opinion.

Chiliblue

What a great quote and I have to agree that the lifestyle people want impacts on their ability to have their own PPOR when their requirements change unless they plan for the PPOR or IP in advance.

a) Friends 2 x adult children have followed their desired lifestyle (working and snow skiing - now living in Canada) and have not much in savings but plenty of different experiences.

b) Daughter's friends brought PPOR lived in it 6 months and then rented it out and moved to UK for 3 years, worked and travelled extensively, now back home, married and renting in a capital city with PPOR an IP.

c) Son's friends a little smarter, male brought a PPOR and girlfriend's sisters & a male mate boarded with him. Girlfriends parents lent her a deposit after she finished uni to buy her PPOR.

After meeting FHOG requirements boyfriend moved in then they got married, sold both places over time and built new brick PPOR, male mate lived with them as well and this couple repaid loan to girlfriend's parents.

What is the old saying "If you fail to plan you plan to fail"...

Bottom line I think the difference has been parents influence/knowledge as the parents of a) have relocated 8 times in 30 years to try different lifestyles themselves [large city, small city, acerage, large city, small, city, QLD beach, small city, NSW beach].


I know of 2 people who are renting within a short walk to the beach and paying a huge rent so they can have the lifestyle they want, but IMHO they cannot afford so they are setting themselves up to be pensioners with basic employer contributions only in superannuation.



Regards
Sheryn