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Do we really want houses to be more affordable?

Housing in Australia is unaffordable – everyone knows that.

Or at least that’s what you’d be led to believe with all the talk in the media, measures introduced Federal Government in the recent budget and the First Home Owner incentives being introduced by a number of State Governments.

But let me ask you a different question:

Do we really want houses to be more affordable?

In fact that was the topic of my interview on Sky News recently – you can watch my thoughts here:

Before you think I’m a rich property investor who doesn’t understand the plight of first home buyers, let me give a disclaimer:48226298_l1-300x200

In my blended family I have six children, nine grandchildren and another one on the way – so I fully understand how difficult it is for young people to get into the property market.

And I still remember the challenges I had many years ago when I first got into the property market.

I really am sympathetic to the concerns of those who want to get a foot on the property ladder, so let’s look at the topic of housing affordability with a simple Q&A:-

How can we make property more affordable?

In my mind there really are 2 ways: 

  1. Give home buyers more money to spend on property – either by increasing their wages or by handing out grants or incentives. 
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    However, unfortunately this only works in the short term and for a few select buyers, because both these measures encourage people to spend the extra money they have available and this pushes up property prices leaving properties even more unaffordable for the next round of buyers.
  2. Decrease the value of properties – In 2016 there were about 9 million private dwellings in Australia each with, on average, 2.6 occupants. Around two thirds of these were owned by ordinary Australians as their homes and they don’t want the value of their homes to decrease.

Who wants property prices to fall?

They seem to fall into one of 2 groups:

  1. First-home buyers wanting to get into the market buy having difficulty saving a deposit, or
  2. Australians who want to get into property investment but they feel they’re priced out of the market.

But if you think about it, both groups only want prices to fall for a short while – until they can afford to buy a property.

Then they want prices to increase again – they don’t want prices to keep falling further once they’re in the market – do they?

What could make properties more affordable?

For properties to become more affordable to a wide range of buyers, property values would need to fall significantly.   property purchase money

By this I mean we’ll need more than the typical cyclical correction that is likely to happen over the next few years.

At the end of every property cycle property price growth moderates in some locations, prices stagnate in others and in some areas home values fall say 5% to 7%.

But if we’re talking creating affordability, property values will need to drop considerably, meaning that people will be forced to sell up their homes, but because there won’t be anyone willing or able to buy them, property prices will drop significantly.

For this type of property crash to occur we are going to require one of the following:

  1. A very severe recession – leading to…
  2. Severe unemployment – high enough to trigger forced home sales
  3. A severe credit squeeze or interest rates to rise significantly and cause a raft of mortgage defaults.
  4. A significant oversupply of property – this is only occurring in a few selected markets, but in general we won’t have a significant oversupply unless we get a…
  5. A halt to rising population which is underpinning our growing property markets
  6. A substantial slowdown in foreign investment.
  7. A major change in Government legislation that affects property.

What would the effects of a property crash be?

Now…I’m not suggesting any of the above issues are likely to occur.

In fact, we don’t want them to – the consequences would be terrible. property

You just have to look overseas and see how the property crashes in the USA and Europe affected people.

Sure properties were more affordable there, but this didn’t really affect the wealthy property owners who could ride out the property crash as much it affected ordinary working class citizens who lost their jobs and their homes.

And interestingly when the property crash occurred overseas and properties became more affordable, the banks were in trouble and not keen to lend to those who wanted to soak up the bargains.

Are property prices likely to crash in Australia?

I can’t see that on the horizon – in fact I’ve outlined seven good reasons why our property markets won’t crash any time soon in detail in a blog here

In summary they are:

  1. Our robust population growth Australia Economy Concept
  2. A healthy economy
  3. A sound banking system
  4. Rising business confidence
  5. Consumer confidence has been rising
  6. A healthy level of household debt.
  7. A culture of home ownership with two thirds of properties owned by home owners and around 50% of these homes don’t have a mortgage against them. This significant level of owner occupiers who would rather eat dog food than give up their homes will underpin our property markets.

So what is the answer to the affordability problem?

Clearly there is no simple answer – smarter minds than I have been debating this all around the world and have not come up with a solution.

However, here are some of my thoughts:

  • This is a first world problem related to living in the best country in the world at the best time in history.
  • If you’re keen to get into the Sydney or Melbourne property markets, which are now global cities, it is unrealistic to expect to buy your first home near town. If you lived in Paris, New York or property economy marketLondon you wouldn’t really expect to be able to buy a home there is a first-time owner. In fact, you wouldn’t even expect it to be able to afford an apartment.
  • Many first-time buyers will have to alter their expectations. Some will need to rentvest – renting where they want to live but can’t afford to buy and invest in property in locations where they can afford to buy.
  • Others will have to learn delayed gratification, spending less than they earn and saving for a deposit.
  • More first-time buyers will have to count on the bank of mum and dad to help them get a foot onto the property ladder

So while I am sympathetic to the plight of those currently wanting to get into the property market, it is unlikely that home prices will become significantly more affordable in locations where most millennial’s want to live – close to where all the action is and where their jobs are.

Close to the CBD’s of our major capital cities.

WHAT CAN YOU DO TO STAY AHEAD?  

As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions.

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole

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Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Do we really want houses to be more affordable?' have 7 comments

  1. Avatar for Property Update

    June 30, 2017 @ 11:38 am Jerry Nguyen

    I love this

    Reply

  2. Avatar for Property Update

    June 30, 2017 @ 12:01 pm Kat B

    How can there be 0 million private dwellings with on average 2.6 residents?

    Reply

  3. Avatar for Property Update

    June 30, 2017 @ 1:02 pm Peter Fritz

    Michael, this is a wonderful and intelligent take on the current dilemma. In fact, it’s one of the most insightful articles I’ve read on the paradox this issue presents. This is so true: “But if you think about it, both groups only want prices to fall for a short while – until they can afford to buy a property. Then they want prices to increase again.”

    Every generation has its struggles, and delayed gratification, plus a shift in perspective about what’s realistic for first-home-buyers, are things many people could do to learn. Bravo.

    Reply

    • Avatar for Property Update

      June 30, 2017 @ 9:24 pm Michael Yardney

      Thanks for the kind words Peter and thanks for sending me a copy of your great book – well done!

      Reply

  4. Avatar for Property Update

    June 30, 2017 @ 3:01 pm Lloyd

    The prices of properties are controlled by supply and demand. There is nothing wrong with the demand, but there are lots of things wrong with the supply. Many older owners are not selling because of the huge capital gains tax they would have to pay. Why not give a capital gains tax reduction on properties owned for more than 10 years? The result would be a massive increase in the supply. The real estate agents would be happy too!

    Reply

    • Avatar for Property Update

      June 30, 2017 @ 9:23 pm Michael Yardney

      Llyod – there is no capital gains tax on people’s homes so I’m not sure that is correct

      Reply


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