Discussions about this topic focus too much on the price of the real estate and its daily movement, rather than what should be discussed – household income.
What we earn, particularly in disposable terms (minus tax), is equally important in determining what we can and cannot afford; as is the price of property.
And the income profile of what most Australians earn, paints a sobering picture when it comes to housing affordability.
Before I go much further, wage growth is slowing here and the last time I checked, the average Australian’s wage escalation was below the inflation rate.
For mine, this trend is very likely to continue.
Australian wages and general costs are high by competitor standards and now with the mining capex shift underway, more will earn less Down Under.
We also like to use household incomes, not individual earnings, when we look at housing affordability.
Many families – especially young couple households – need two incomes to make ends meet.
And more oldies these days appear to be following suite.
Before I get into some stats, I have used in the first part of this essay, information from both Macro Business and Urban Economics.
When using household incomes, a third (yes 33%) of all Australian households earn less than $52,000 per year.
That’s gross income folks, not net monies after tax – a measly $1,000 per week, gross; or just over $700 in one’s skyrocket.
Another 15% earn between $52,000 and $78,000 pa, plus a further 12% earn between $78,000 and $104,000 each year.
True, a third earn over $104,000 each year, but just 5% earn more than $200,000 each year.
And let me tell you, $200k per annum doesn’t buy what it once used to; but then again, money never bought happiness.
So in summary, seven out of ten Australian households earn less than $100,000 each year.
And these percentages get worse if you are a young couple trying to buy a house, with 80% earning less than $78,000 per annum.
So what about housing affordability?
This essay outlines in simple terms, when using current household wage estimate, how much it costs to buy or rent a three bedroom detached house, or a two bedroom apartment in each capital city.
First, we need to discuss some benchmarks.
When it comes to buying, we believe that a disposable income to price ratio below 6 is still affordable; between 6 and 8 is starting to do it tough, and above 8 is quite unaffordable.
You might disagree with our multiples here, but you cannot deny that housing is getting increasingly expensive to buy.
For detached dwellings available figures at the end of last year showed our capitals averaging 6.7; with Sydney highest at 8.8 and Canberra lowest at 4.7.
When it comes to renting, few would argue that paying less than 30% of your income on rent isn’t okay; but if paying between 30% and 40%, it can start getting a bit sticky; and having to fork out over 40% of your hard earns in rents, often makes your old bedroom back home look pretty damn inviting.
Australia’s capitals averaged 23% at the end of last year ($540 per week); with Sydney, Melbourne and Darwin highest at 28%, 22% and 22%; and Hobart and Canberra lowest at 19%.
The bottom line is that most Australians cannot even afford a very modest $400,000 home.
It’s true that interest rates are low and that some state governments are offering first timer incentives.
Plus, of course, housing is somewhat more affordable if you have a big deposit or solid equity.
But for mine, it won’t take much to stop Australia’s housing markets – a lift in interest rates is less of a concern these days than rising unemployment; falling wage growth and fewer full-time jobs.
Rents are now starting to get expensive.
Tenants are increasingly sharing accommodation.
Investors will need to be consistently improving their properties in order to get some rental growth; but more likely than not, just so that they can keep rents stable.
Attached product has become an increasingly affordable housing option.
Low affordability is forcing greater numbers to accept more compact housing.
There are three potential solutions here.
The first is a major market correction, potentially on the cards, but I do think unlikely.
The second is a slow deflate as prices and rents soften until wages (and productivity) rise, so things get back to some form of equilibrium.
This might take a decade or so.
This is the most likely scenario, if you ask me.
The third option would take some spunk.
It involves reducing the price of new (not existing) homes.
A reduction of tax, charges plus compliance costs on new digs could potentially reduce new house prices by up to 25%.
Further price falls would be obtained if the artificial land constraints that accompany our urban fringe were removed.
A more relaxed attitude towards what we build would also help.
In simple terms, let the market decide what it wants when it comes to housing form and function, not a government agency or group of elitists.
But someone reading this will already be muttering, “Tell him he is dreaming.”
And in reply, most of these additional costs and constraints are self-inflicted – we allowed policy changes in the early 2000s, which dramatically widened our affordability gap.
It is made-man, it can be fixed.
So how do I segue my way into a conclusion here?
I will leave you with these thoughts:
Confucius apparently once said, “The strength of a nation derives from the integrity of the home.”
Many experienced property owners with whom I speak are very cautious about their next property move or investment purchase.
And so they should be.
The novice is still buying like there is only a fantastic tomorrow.
This affordability update again suggests to me a fully priced market, not an undervalued one.
Buy, please, with both eyes open.