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Housing affordability is now the best its been in a decade

There’s always talk in the media about housing affordability – or the lack of it.

Leith van Onselen discusses it in an article in MacroBusiness article here. “This week, Commsec published the below chart showing that Australian housing is the most affordable in a decade, requiring only around 380 weeks on the average wage (just over 7 year’s income) to buy a typical house. This is down from around 430 weeks average wages (just over 8 year’s income) required to buy a home in 2008 and 2010. While the improvement in housing affordability is clear, Australian housing still remains unaffordable compared with pre-2000 norms.

According to Commsec, a typical Australian is still required to work some 90 weeks more to buy a house currently than was the case during the late-1980s peak or when  mortgage rates hit 17% in 1989-90.”
What does the chart below actually mean?It’s important to understand what the chart below actually means. Of course, as MacroBusinesswill always point out housing is far less “affordable” on this measure than it was before the turn of the century.I would suggest, however, that those sitting back and waiting for Australian property to revert to the lower levels of debt used in 1990, might be in for one heck of a long wait. Note that the X axis in the below chart does not chart commence at zero and thus shows an incline that appears to be incredibly dramatic.
Interest rates today are at 3.25% and falling as compared to a pain-inducing 17% a couple of decades ago, so households naturally have far more capability to service debt than they did before the structural shift to lower interest rates.Furthermore, the reality is that today there are many, many more households with two incomes therein than there were in days gone by.
Thirdly, it is worth noting that in capital cities more Aussies live in apartments or units than was previously the case. Units are significantly more affordable than houses, which is why I tend to look to units in the major capital cities. In cheaper cities where debt levels are more easily serviced houses might sometimes represent the superior investment.Moderate growth?
What the chart below does show is that if the property market rebounds as many have anticipated, investors and homeowners would be wise to bank only on moderate increases in real estate valuations.Logically, on a nationwide basis growth in real terms of more than 15% looks unrealistic, though in absolute terms prices can obviously increase over time as household income increases.

Obviously if you are a property investor you should be looking towards landlocked suburbs where the population is growing and where massive demand will far outstrip the rate of dwelling construction. You should also be directing your attention away from the the cities which have recently experienced booming prices, in order to begin moving ahead of the median national rate of growth.More of us…One final point: the population of Australia at the beginning point of the below chart was 15,750,000.At the time of writing the population of Australiais 22,821,770 with that figure continuing to increase every one minute and 31 seconds. Millions of extra people wanting to live in the same limited number of prime-location, desirable suburbs tends to push prices upwards over time.Australia’s population continues to increase by more than 6,000 people each week, with most of the new heads heading to the existing capital cities.

 population of Australia

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About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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