I’ve long been of the opinion that many of my fellow Generation Ys are suffering from a crisis of desire in regards to the Australian property market. It’s an understandable phenomenon as most of us grew up in what are now quite nice suburbs, central to a lot of services and now considered to be an extremely desirable place to live. It then comes as no surprise that our generation would want to replicate this with their first home purchase and regrettably this leads many to believe that the property market is unaffordable, which at that level it most certainly is. Buying out in the mortgage belt, like most of their parents did back when the time came for them to do so, has been my solution to the issue for quite some time now but some recent reading has pointed me towards http://fhareversemortgagecalculator.com/ which in turn pointed me in another direction, one that I hadn’t considered previously.
To give you some background on where this thought came from I’ll point you in the direction of a really solid article from The Atlantic on the drastic change in spending habits between Gen Y’s and their predecessors. In it Thompson lays out the idea that perhaps Generation Y has replaced the home and car as the most desirable objects with modern technology like smart phones. This is coupled with an increasing tendency towards sharing those same goods (called collaborative consumption) that have such a high capital cost which means total ownership plummets whilst use sky rockets. It’s an interesting idea and I was wondering if the trend translated across to Australia.
Turns out part of it does.
Whilst I couldn’t find any good information around car ownership with Australia being a country that’s heavily focused on property ownership there was a lot to dig through in regards to Gen Ys attitude towards property. Shockingly, at least for me, the vast majority of Generation Ys do intend to buy, somewhere on the order of 77% which is actually above previously generations. Faced with the decision of not being able to get the home they own many will consider a cheaper investment property initially in order to be able to leverage it later into the property they actually want. That’s not the interesting part though, what I found out is that 72% of Australian Gen Ys would buy a house with a friend or family member. Whilst I’ve known people who’ve done this I had no idea that it would be so common and that’s an intriguing insight.
I’ve long held the position that the median house price on a single income is unaffordable in Australia and it appears that Gen Y is aware of that, at least on some level. Collaborative consumption of the housing resource then is our way of reacting to this, in effect shrinking the affordability gap by spreading the pain around a bit. Indeed I did something very similar to this when we bought our first house in Canberra by renting out two of the rooms to friends for the first year. The experiences from others are similar as well with the sharing arrangement usually only being temporary (on the order of years, not decades) before they’re able to part ways into a home of their own.
This means my hammering away at the point that Gen Y is suffering under a crisis of desire (they still are, at least in my opinion) probably isn’t going to help them change their minds. What I should probably be focusing on instead is the ways in which to structure these kinds of sharing arrangements in order to make the desired property more affordable or what strategies they can use in order to get themselves into a position to make it affordable. As you can probably tell I’m still wrestling with the best way to approach this and the ultimate idea will have to be a post for another day.
Before I get into what could be a slightly ranty post about the Australian property market I feel it’s prudent to mention that I’m an owner-occupier, investor and would be regarded as being particularly well off when compared to the average Australian. Thus my views may be somewhat skewed by the fact that I have a vested interest in the property market. However I believe that there’s a lot of disinformation out there about housing prices and what constitutes “affordable” property, especially when the entire market is boiled down to single figures. What I intend to show you is that whilst Australian property is more than likely above fair value this does not preclude the average Australian family from owning their own home, nor are first home buyers priced completely out of the market.
There’s been a report circulating recently from NATSEM that says we’ll need a decade of flat housing prices in order for them to come back to affordable levels. This sparked quite the reaction in the media, strangely lacking any direct finger pointing that usually accompanies issues like this. There’s no question that the last decade has seen some extremely wild growth in the Australian property market and for years people have been predicting the ultimate downfall of the Australian housing market. The Global Financial Crisis was supposed to be the trigger that sent property prices tumbling but it had the opposite effect, with extremely low interest rates pulling many into the market and increasing demand significantly. Now that the pressure is back on with interest rates at their pre-GFC levels the question of affordable housing is a hot topic, but it’s not all bad news for those chasing the Australian dream.
For starters let’s dive into the (thankfully unbiased) figures from the NATSEM report. On the surface it looks bad for Australia with the median¹ house price being a whopping 7.3 times that of the median income, 50% higher than what it was back in 2001. However whilst I believe using the median as the measure is by far more intellectually honest than other measures it does hide some important information from the reader. Although the median Australian house price might be $417,000 that also means that 50% of all Australian houses are valued somewhere below that particular line. For first home buyers this means that they shouldn’t be shooting to buy a house at the median price since there is an ample amount of stock available at a much cheaper price bracket. The houses above the median then are usually more suited to those looking to upgrade and not those trying to break into the market.
For interest’s sake I’ve done some calculations based on some typical scenarios. The first is a median income earner attempting to buy a median house with a typical interest rate:
Since the media hasn’t played the blame game yet I thought I’d throw my hat into the ring on this one. Investors who are negative gearing would be an easy target with this one and they’re usually the first to get blame for high housing prices. However in Australia the vast majority of property, to the tune of 68.90%, is owner-occupied (I.E. people who own it live in it). The remaining 31.10% is investors but the vast majority of investors only own 2 properties, their home and another investment. It then seems infeasible for investors to be solely responsible for housing price gains when the vast majority of property is in the hands of owner-occupiers or one time investors. The price rises logically then come from the majority, but how are they doing so?
Simply put it’s people leveraging the equity in their own homes in order to upgrade to a bigger, better home whilst keeping the loan repayments at a similar level. The initial 2001 – 2004 boom meant that many had enough equity to upgrade and many did so over the years. Of course being rational actors they attempted to maximize their sale price in order to reduce the loan on the next property and this put an upward pressure on housing prices, both on the low (the one they were selling) and high (the one they were buying) end of the market. The interest rate scare of 2007-2008 put enough pressure on people to curtail this behaviour for a while, but the GFC dashed those high rates and the upgrades began again in earnest.
I’ve long been of the opinion that there will never be a house price crash, instead I foresee a long time of stagnant or small negative growth whilst wages catch up to bridge the affordability gap. The simple fact is that prices can only drop significantly if people are forced to sell and although many first home buyers who bought in during the lowest interest rates are feeling the pressure now they form only a small part of the market, not enough to trigger a price collapse and most will simply delay selling until conditions improve.
It is unfortunate that the Australian dream is out of reach for a median single income earner, but many factors point towards housing becoming more affordable for them in future. The government could do a much better job of incentivizing the construction of low cost housing as current market conditions favour bigger, higher cost houses. Additional land releases and incentives for desirable, low cost housing would also go a long way to putting a downward pressure on house prices. It’s not a problem that can be fixed overnight either and we’ll need long lasting reforms in order to keep housing affordable, lest the prices rise and the cycle start all over again.
¹The median in statistics refers to the value in which 50% of the total data set is above that value and 50% is below it. It’s much more resilient to use this figure when you have outliers on either side of the equation which in the case of Australian property and wage figures there are many. Using the average would then be less representative of the real world.