Lower income earner’s hopes of owning a home have faded over the past two years due to the high rate of capital gain, so what can be done?
In last week’s Blog I highlighted sales by price point across the capital cities.
The data showed a shortening supply of homes selling at lower price points, in particular within some of our largest capital cities.
In this week’s Blog I want to investigate what this means for those who don’t already own a home and in particular those that are on lower incomes.
The latest quarterly average weekly earnings data from the Australian Bureau of Statistics (ABS) to November 2013 shows that the average Australian earned $1,114.20 a week.
Remember this is the average so plenty of people earn less than this figure which is the equivalent of almost $58,000 a year.
Compared to many other countries, Australia’s average wage is quite high however, so too is the cost of living in Australia and in particular the cost of housing as highlighted last week.
With a combined capital city median house price of $580,000 and median unit price of $482,000 an average income is not going to go a long way.
But why is the capital city median price more relevant than the nationwide median which is $490,000 and $440,000 for houses and units respectively?
Well it comes down to the fact that you generally need to be employed to secure a mortgage and work towards owning a home. The latest labour force data from the ABS shows that Australia had 11.578 million employed persons as at June 2014.
With a 6.0% unemployment rate the total size of the workforce, or to put it another way the number of people with employment or actively looking for employment, is 12.320 million.
For myriad reasons a proportion of the population is not actively working or looking for work at any given time. As at June 2014 the employment participation rate was 64.7% meaning that for whatever reason there are an estimated 4.349 million people over 15 years of age that are not actively working or looking for work.
The 2011 Census reported that at that time there were 21.504 million Australian’s living across the six states and NT and ACT. At that time, 65.6% of Australian’s (or 14.1 million) lived in a capital city.
A slightly higher 67.4% of persons reported as being in the workforce (working or actively looking for work) lived in a capital city. In fact, 58.2% of people in the workforce lived in Sydney, Melbourne, Brisbane or Perth.
If we think how this impacts lower income earners and their prospects of entering into home ownership it’s not simply a case that they can move to another city where housing is more affordable.
Unfortunately in Australia, jobs, particularly well-paying jobs, are largely located in a handful of major capital cities or on mining sites in the middle of nowhere.
The reality of moving to another capital city or to a regional area where housing is cheaper is not a realistic prospect for many low income earners.
As I showed in last week’s blog there are still opportunities to purchase lower priced homes across the capital cities however, these opportunities are becoming fewer.
If you look at where these lower priced sales are occurring, for houses they are typically located on the outskirts of the city.
Houses on the outskirts of cities, particularly the major capital cities, are inherently cheaper because they are often less desirable than those in well-established suburbs closer to the city centre (although not always).
Although housing is cheaper in these areas the cost of doing day-to-day tasks is more expensive. If you work in the city, the cost of public transport is higher and if you choose to drive you lose hours in traffic, not to mention the additional cost of fuel and road tolls.
Local amenities such as shops, schools and health care tend to not be as abundant in outer suburbs as they are closer to the city centre so it will take residents of these areas longer to access these amenities too.
Although housing may be more affordable within the outer suburbs, it won’t necessarily make it easier for some lower income earners to afford a mortgage when they factor in all the additional costs of living in that location.
Lower priced housing stock is also available within the unit market however, this too has its shortcomings. There are becoming fewer lower priced units available in areas closer to city centres.
Unit prices are still generally much lower than that of houses although, most of the newer stock comes with a relatively high price tag these days.
Of course units are also much smaller than a house and you tend to get less (in terms of area) for your money. While a unit may be practical when your single, a couple or have young children, they become less practical if/when the situation changes and the size of the family grows.
Units also don’t offer the same level of freedom as a house with limitations generally in place with regard to what you can and can’t do both within and to your unit.
Although when you own a home you have to pay for upkeep, in a unit complex you have to contribute strata levies each quarter the cost of which can at times be exorbitant.
So what realistic option does the person on a lower income have? Of course housing should be cheaper on the outskirts of the city (and it is) but even still a lot of lower income earners are not in a position to purchase.
This is partly because although housing is cheaper a mortgage is still going to swallow up a sizeable chunk of their income not to mention the other costs associated with living on the outskirts of the city.
The commonly recommended solution is to remove urban growth boundaries and cut fees and charges on new developments which would theoretically increase supply and therefore bring down the cost of housing.
But I wonder by how much would it really reduce the cost and would it be significant enough to allow lower income earners to purchase. I think possibly not and here’s why.
It’s not simply a case that we can fix housing affordability by building more and more homes, if that was the case, lower income earners could just move to a more affordable city.
The issue is more to do with employment and specifically where the jobs are located. Even on the outskirts of the capital cities the cost of public transport and fuel will still eat up a sizeable chunk of lower income earners salaries.
If residents on the outskirts still have to travel to get to their jobs (which often they will) they will often encounter a number of hurdles. Firstly public transport is often woefully insufficient in these areas.
[sam id=37 codes=’true’]Anyone who has travelled overseas will know that public transport in our larger capital cities is not of a particularly high standard.
The other thing with public transport is that it caters much better to those people living closer to the city centre and transport upgrades often benefit inner city dwellers much more than it benefits those on the outskirts of the city, the ones that need it the most.
Secondly, the road network also tends to be insufficient on the outskirts of the cities unable to cope with the growing population.
This is due to the fact that Governments tend to put the onus of building the roads on the developers and will often not provide the major roads to a new housing area until such time as it is absolutely critical.
Developing the roads before the housing would make these areas much more attractive and accessible.
If we can’t provide sufficient public transport and roads to the housing areas on the outskirts of the city, the greatest assistance we can provide when developing these areas is to accompany this residential development with local jobs for these workers.
Travelling to work does not become such an issue for low income earners on the outskirts of a capital city if they can find employment locally. Not to mention it is imperative to bring amenities such as shops, schools and health care closer by.
If this were to occur, public transport and investment in new major roads becomes not as vital as it is currently when there are so few employment opportunities locally.
If lower income earners aren’t lumped with the additional burdens of significant public transport, fuel and road toll costs to get to their employment then the burden of a mortgage whilst still difficult does not become a virtual impossibility.
So yes, affordable housing is becoming harder to find in our capital cities and yes, increasing supply of housing will help to improve the opportunities to purchase homes at a lower price.
However, local employment drivers and amenities I believe are just as important especially seeing as time and time again we have seen insufficient investment in public transport and road infrastructure on the outskirts of the cities.
Not to mention that the cost of utilising public transport is extremely restrictive. Alternatively we should forget pie in the sky proposals such as fast trains between Brisbane and Melbourne and improve the rail network locally.
Each of Sydney, Melbourne and Brisbane could use a more expansive rail networks which includes more stations, better linkages to suburbs on the outskirts and faster connections between nearby cities.
Investing in improving links and train speeds to the Central Coast, Newcastle, Wollongong, the Blue Mountains and Bathurst from Sydney, to Geelong, Ballarat and Bendigo from Melbourne and to the Gold and Sunshine Coasts and Toowoomba from Brisbane would no doubt be a much more worthwhile investment.