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.
I’ve gone on record in the past about how the median house price is unaffordable for the median income earner in Australia. In the same breath I also explained how rare that this kind of situation was due to the number of assumptions made when you just equate median income with median house price. Still it seems to be a sticking point for many people of my generation that housing prices are just too damn high for them to be able to afford something, even if their incomes are above the median. While I’ll admit that it is harder in some areas rather than others (like Canberra for instance, which I explain below) the generalization the property is straight up unaffordable for our generation just simply doesn’t hold water and the reasons are far more likely to be ones of desire than affordability.
The Canberra Times ran an article yesterday that showed Canberra’s cheapest house prices were $100,000 more than the cheapest places in other capital cities. The cheapest suburb Charnwood (where I just so happen to live) had a median price of $382,000. In comparison to the other 2 suburbs listed in the article this seems kind of ludicrous but there are some pretty good reasons for this discrepancy. Firstly the suburbs that Canberra was compared to aren’t exactly identical with Charnwood being only 20 minutes to the CBD of Canberra and the other suburbs being around double or triple that distance. In that respect it’s more apt to compare property in Queanbeyan and the surrounding region which has several areas with a substantially lower median. There’s also the fact that Canberra is disproportionately affluent thanks to the high concentration of public service jobs and low population which skews the median further. That doesn’t change the fact that property in Canberra is more expensive than it would be elsewhere but it does show that straight up comparisons like the one in the Canberra Times aren’t exactly apples to apples.
Whilst the zeitgeist around the property market for my generation might be “it’s too expensive” a recent survey showed that a large majority of my generation are considering buying property within two years. Unfortunately only 30% think of it as a good investment (although what investment vehicles they consider good doesn’t seem to be included) which makes me then wonder why so many are intending to buy. The biggest challenge according to the survey is saving the required deposit for the house, not financing the loan as you’d expect. The article then references the high median price in Sydney as a source of this barrier which, in my mind, isn’t a barrier at all.
The first folly here is to assume that a first time home buyer should be buying at the median. For starters a good 50% of the housing market will be below that price range, especially if you consider some of those cheap suburbs that the Canberra Times article alluded to. This reduces the “required” (more on that in a sec) deposit from $110,000 to something more like $60,000~75,000 still an non-insignificant amount but a lot less than what the article insinuates. There’s also the assumption here that you need to get a 20% before considering buying which I can tell you is misnomer.
For starters the 20% threshold is usually just to avoid paying Lender’s Mortgage Insurance (LMI). Now this isn’t insurance for you, it’s for the bank in case you default on the loan. What a lot of people seem to think is that this is either some astronomical one off cost or a recurring charge that’s tacked onto the loan. For both of the home loans we currently have we had little more than a 5% deposit and the LMI charge was a couple thousand dollars, much less than the amount of cash required to get the 20% deposit. Of course your choice of loans might shrink a little as well but we never struggled in finding a suitable loan at a decent rate, even when we had such a small deposit. Put this all together and cracking into the property market doesn’t seem as bad for my Generation Y cohorts but you wouldn’t read that in the papers.
Realistically it all comes down to a lack of information and understanding which is unfortunately fuelled by articles like the ones I’ve linked to. Whilst I know that many won’t do the research and then continue to lament their position I’m hoping that at least a few will see articles like mine and start doing some investigation for themselves. Knowledge, as they say, is power and the Australian property market is no exception to this.
One thing that always gets me riled up is when people bitch to me about the housing prices in Australia. I’ve said in the past that yes, for an average single income earner, the median is unaffordable but I’ve long been of the stance that that situation is far from typical. What I feel is that Australians looking at the property market today are suffering more from a crisis of desire more than anything else, wanting to stay in the same level of housing that their parents had without the decades of living in the mortgage belt that preceded it. For the whiners out there however there might be a saving grace that’ll let them get into the house that they want, so long as they can keep their jobs through it.
So the reserve bank decided to drop rates by 25 basis points on Tuesday, confusing a lot of people as inflation was hovering around the Reserve Banks target rate of around 3%. It was the first time that the rates had dropped since April 2009 back when the fallout from the GFC was still causing problems. The decision seemed t0 be based around the fact that despite good economic figures Australian families were still struggling with mortgage payments and as such a drop in rates was seen as being more beneficial than keeping them on hold again. Taking a step back however I believe that they’re attempting to soften the blow of a potential upcoming crisis.
I am, of course, talking about Greece and the potential for a repeat of the events we saw with the GFC.
Rewind back a month or so and everything was starting to look better for Europe with Germany approving the rescue package albeit with some rather harsh provisions in order to make sure Greece didn’t do the same thing again. However just recently Greece has decided to put the rescue package measures to a referendum putting the future of the financial situation in Europe in the hands of the Greek people. Since there’s been rather hot and heavy opposition to the austerity measures that they’ve tried to implement in the past it’s understandable why everyone in the Eurozone is concerned about what might happen. Indeed with the way the markets reacted it’s seems like everyone thinks it’ll fall flat on its face.
But how, pray tell, does this affect property prices in Australia?
Well for the past year or so prices for Australian property have been declining slowly, on the order of single figure percentage points. Primarily this is because of many people coming out of the honeymoon period they had when they secured a massive mortgage during the GFC at spectacularly low rates, many below 5%. Once the pressure was back on with more sane interest rates many chose to sell up and this has lead to a downward pressure on the Australian housing market. It’s still not enough on its own to make property affordable though, for that we also need cheaper mortgages.
Markets are fun little beasts and are, for the most part, driven by irrational thought processes and fear. You’ll notice that during the GFC Australia remained relatively unscathed yet we still had as much panic as if we were going to go down with the rest of them. Indeed there was supposed to be a tightening of credit during this as well but many banks aggressively dropped their rates in order to draw people in. The fallout from the Greece’s financial problems is a very similar trigger to that of the GFC, enough so that if those measures don’t pass you can almost guarantee that interest rates will fall through the floor again as everyone tries to withdraw from the markets and the desire for credit dries up. Of course this will also mean that companies will use this as an excuse (both legitimately and illegitimately) to start downsizing again, pushing the unemployment rate back up.
For a financial sociopath like myself it’s like being a kind in a candy store as I’ll have my pick of the loans and properties available. However it’s not a situation that everyone can take advantage of, indeed only a select few (although not just the 1%) will be able to. However if you’ve got a decent deposit up and have been waiting for “just the right time” to get into the market then holding off for another couple months or so whilst this disaster unfolds could prove beneficial for you, especially if you take the banks current fixed term mortgage rates as any indication of where the market is heading.
Despite my tag-line explicitly mentioning finance I haven’t really been harping on the subject much recently. I’ve always managed to find something else far more interesting than boring everyone to death with dollar figures or the latest news on how the Global Financial Crisis is unravelling itself. More importantly however the big ticket financial issues haven’t really caused any waves and as such I really haven’t had anything to say on the matter. Yesterday however a juicy little nugget in the form of recent GDP growth has given me a little something to talk about:
The economy grew 2.7 percent from a year earlier, the report showed. Economists forecast a 2.4 percent expansion.
Signs that Australia’s economy outperformed other nations made its dollar the best performer among the most-traded currencies in the past year. The currency has climbed 42 percent versus its U.S. counterpart since March 2009 and this week hit a 25-year high against Britain’s pound.
Faster-than-anticipated growth was a key reason policy makers increased the overnight cash rate target to 4 percent yesterday from 3.75 percent and prompted Governor Stevens to say rates should be closer to “average,” which he last week signaled may be 75 basis points higher than they are now.
It was just under a year ago when I did my first analysis of how Australia was reacting to the GFC and I did a followup a few months later. Back then I made the point that Australia was well placed to whether the fallout from the USA’s failings and we would for the most part be unaffected. Here we are many months along the track and my predictions have come true, despite the air of skepticism that abounded in the media and amongst my peers. I can’t say that I blame them though as the media was pushing the story that everyone wanted to hear and the everyman would have to actively seek out the opposing viewpoints, something which most of them don’t have the time or resources to do.
The follow on effect of economic growth is of course higher interest rates. Whilst I appreciated them at the time (and managed to lock in a home loan at an absolutely ridiculous rate for the next 2 years) I feel there might be a mini housing crisis on the horizon when the interest rates ramp up and flood of first time home owners start to feel the pinch. The First Home Owner’s Grant boost definitely kept the low to mid range of the property market from feeling any effects of the GFC however it may have come at the cost of long term price stability in the future. I’m really just speculating here as if interest rates stay away from their 2008~2009 highs then most of them will be fine. However I know many who took advantage of the boost to crack into the property market without thinking about the long term consequences, especially when concerning higher interest rates. Time will tell if this mini-disaster comes to pass (it will be short, as the glut of cheap homes will be snapped up by investors) but I’ll be watching the low to mid range market carefully over the next few years.
Another factor to take into consideration is the current unemployment rate, which has shown an interesting turn recently:
I made the observation back in September that the unemployment rate was steady to that month, which was a good sign. However in the same breath I also cautioned about another metric, underemployment, that showed there was still some work to be done. Recent figures show that in fact things are improving with the underemployment rate dropping 0.4% to 13.5% a small but marked improvement. The article I just linked echoes the feelings I was trying to get across many months ago but also fails to recognise that underemployment and unemployment will track each other quite closely, with minimal lag between changes. The stability of the previous 2 quarters plus the trend down in the quarter just past shows that not only are we creating more jobs but we’re also able to ramp people back up that had to cut back their hours for economic reasons. Both these metrics are trending in the direction that you’d expect when the economy is on the way up, which for all intents and purposes it is.
Additionally the mass media has been generally free of any major doom and gloom stories regarding the economy. The last interest rate hike went past without even a second glance from the major news outlets when just under a year ago it would’ve spurred days worth of debate. It seems that we’re far more interested in Rudd’s latest health care plan than whether or not our houses are going to be worthless and our mortgages untenable, which means the consumer sentiment is improving.
After spending the past year telling everyone that it wasn’t going to be as bad as the news made it out to be it’s good to finally get some vindication on the matter. This year will see Australia drive itself forward and will hopefully let the Rudd government start to really get their teeth into some real initiatives, rather than fighting an economic fire. With an election not far off it’s going to be interesting to see not only how the post GFC Rudd handles himself, but also Australia at large.
I see a lot of people these days claim that they’ll never buy a house because it’s a bad idea, usually using the past year of economic turmoil as an excuse for their actions. Similarly with Australia’s housing market in an apparent bubble (that’s been meaning to burst for years if you believe the doom and gloomers) it would seem that it’s impossible for the first home owner to get into the market without ruining themselves financially. As someone who bought his first house 2 years ago when interest rates were rocketing up to 10 year highs and bought the second just this year I know exactly how the market is functioning and what the causes of this so called “affordability” crisis are. Today I want to step through some of the insights I’ve gained into market and why the media reports are, as always, misleading.
Hitting up the ABS for some data on house prices I found that they haven’t updated the price data in almost a year, leaving me with real figures that don’t accurately reflect the current situation. Still I’d hazard a guess that the swing couldn’t be more than 5% either way, otherwise we’d be hearing about it in the news. Taking that all into consideration here’s the median house price for the eight capital cities of Australia (in 1000’s):
You can see there’s a wild amount of swing between the different cities and that’s with good reason. Canberra for instance is filled with public servants who all have steady, above average incomes and this is reflected in the housing prices. Places like Hobart and Adelaide owe their lower prices to the lower population and hence lower average incomes. So what do these figures tell us? Well typically one city or state will be reported on and you can see how that would lead you to believe that all of Australia is unaffordable, especially when you look at say Sydney. Secondly the median figure tells us that 50% of the houses sold in that quarter were below that price, and the other 50% above. So whilst the median price might look rather scary it is in fact far from it and this is why reporting like this which is using the average price can make things look far more scary than they really are. It only takes a few outliers to completely ruin the average price as an indicator of affordability.
I’ve often talked with friends about the house prices in Australia being a crisis of desire and not affordability. Todays generation Y grew up predominately in suburbs with an easy going lifestyle and are seeking the same thing for themselves when they move out. The problem is those closer in suburbs now attract a premium as the urban sprawl has made them far more central than they were when the gen Y’s parents bought into the market. Taking this into consideration the first home buyer should not be looking at median priced homes and should be looking to the mortgage belts if they want to step into the market. It might not be what they want and so they choose to rent seeking to keep their lifestyle. There’s nothing wrong with this, the issue I have is that most of them throw their arms up in the air and call houses unaffordable when really they’re being unreasonable with their demands.
There are also some more financially inclined among us who believe that renting is more financially sound than owning. Now this is a complicated idea and the answer can vary greatly depending on someone’s situation. However there’s a little bit of comparison we can do to get a feel for how right or wrong this idea might be.
Having a quick look through Allhomes I found I could acquire a typical 3 bedroom house for anywhere from $350,000 to $400,000+, but there were quite a few homes available for somewhere in the middle. Checking the rental market for the same area (I’m using Holt as an example) a 3 bedroom place could be expected to rent for $380 per week. Now the one assumption I’m going to use is that property price as a general rule of thumb increases by about 7% annually, or it doubles every 10 years (see here for some data on the matter). So in the buying vs renting argument over 10 years you’d have:
Looking at that it comes out to a difference of around $100,000 over 10 years to own rather than rent which works out at about $200/week. The question is if you are renting, could you use that $100,000 to invest and beat the return gained on the house. If the theory holds true the house you bought is now worth around $750,000 or a capital gain of $375,000. If we knock off the $100,000 of extra money you had to spend since you bought there’s a difference of around $275,000 so the question then becomes, could you do this if you didn’t buy? For most people the answer is no, since Australians aren’t particularly good at saving money. Renting makes fiscal sense if you use the difference in what you spend on a house and what you’d spend on renting to make a return of approximately 7% per annum and don’t spend it. Suddenly the extra $200 per week might not seem so unaffordable.
When you take certain figures being reported by the media it’s always easy to get caught up in the hype. The problem with using a single figure to report on these things is that the real situation is hidden under a layer of equations and interpretations. If you go out there, do your research and curtail your desire you will see that the Australian housing market is no where near as bad as the media makes it out to be. I bought a house at a time of sky rocketing interest rates and everyone screaming that the housing market was about to go bust. Here I am 2 years later and the bubble has yet to burst and they’re all still saying the same thing.
Don’t believe everything you read kids.