Why is housing so unaffordable – or is it?

Many young Australian families are having difficulty getting a foot on the rungs of the property ladder and the common catch cry is “property is unaffordable.”

Some blame the high cost of housing on greedy developers while others blame ugly wealthy property investors using tax dodges like negative gearing.

But is that really the case?

There is no doubt housing is our capital cities is expensive, but is it really unaffordable? Let’s do a quick Q&A.


[Note: there is some crackling sound on the video at the beginning, but this disappears after a few seconds]

Why are house prices so high?

House prices are obviously made up of the land component and cost of the dwelling on it.

The cost of building a new house has hardly moved (in inflation adjusted terms) over the last 20 years, however land prices have skyrocketed.

By restricting the amount of land available on the urban fringes of our cities, in part to cap urban sprawl and the associated costs of building infrastructure, State Governments have sent the price of entry-level housing through the roof.

I’ve heard it said that Australia does not have a housing affordability problem -it has a land affordability problem.

How much of the cost of a new home goes into taxes?
If I asked you how much of the cost of a new home goes to pay for various taxes, what would your guess be?

Five percent, maybe ten percent?

Well you’d be way of the mark. It could be as much as 44%.

Research from the Centre for International Economics, commissioned by the HIA found that Sydneysiders paid about 44% (or an average of $268,000) in various taxes when they built new homes. This figure was about 36% or $191,000 in Brisbane and in Melbourne tax accounted for 38% of the cost of new homes.

In other words new housing is one of the most heavily taxed sectors of the Australian economy.

Are houses really unaffordable?

Having said that, do today’s first home buyers really have it tougher than their parents did?

Is it all really as bad as what many commentators and the media would have us think?

I know when I bought my first property close to 40 years ago properties were unaffordable then.

My first mortgage was for $16,000 and I had no idea how I was ever going to pay it off over the 20 year term. Remember I was only getting $12 a week rent from my tenant back then in the 1970’s.

According to head of property research at ANZ Bank Paul Braddick, those looking to get their foot in the proverbial property door are no worse off today than purchasers from the 1980’s.

Contrary to popular belief; Australian property prices have increased in line with rising incomes and lower interest rates over the past thirty years. Over the last few decades, increasing income and falling interest rates have been capitalized into house prices.

The increased number of households with two wages, as well as higher average female incomes, have put buyers in a better financial position than they enjoyed three decades ago. And recently flat or falling house prices plus falling interest rates have made properties more affordable for many.

A reality check

Before we complain too much about the cost of new housing, let’s not forget that the type of property many first homebuyers expect today is very different to what their parents started off in. In fact they expect to start off in the type of house it took their parents 30 years to be able to afford.

Today’s first home buyers are looking for bigger homes on a large block of land with an ensuite, probably a double garage, all the modern conveniences including air conditioning, a dishwasher and let’s throw in a media room for good measure.

It’s also worth noting that today around 70% of people own their own home and just 30% rent. In 1911 those figures were reversed at that time the typical house would have only had one bathroom an outside toilet.

By the way… did you know Australia can lay claim to having the largest homes in the world with the average size of our new homes being 214.6 sq mts.   While US home-builders have been building smaller homes over the last few years, Australian homes have continued to get larger.

So what is affordable?

There are many ways to measures housing of affordability and many of the models used by overseas economists are not really relevant to Australia.

To me the key question is: do households in 2013 have more or less disposable income after buying a home and paying down the mortgage than their predecessors?

Last year the RBA found that, contrary to popular myth, today’s households actually have more disposable income than at any other point since they began their analysis in 1993.

Of course, there are some good explanations for this. Per capita disposable income has been growing very strongly, and has outpaced house price appreciation, over the last 7-8 years.

Over the longer-term, we have had a structural decline in the unemployment rate from the double digit peaks in early 1990s to just over 5% today. And then we have had the rise of multi-income households care of a secular increase in the female participation rate.

Last month, the Reserve Bank Assistant Governor Christoper Kent presented the following chart which shows that payments on new housing loans now represent less than a quarter of disposable income due to the property price correction we experienced in 2011 and the in first half of 2012, at a time when interest rate fell from 4.75% to 3.00%,.

On the other hand, wages continued to grow on average across Australia last year by 3.4%.

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In summary:

Currently interest rates are at record lows and may even going to fall a little further at a time when incomes are likely to keep rising as our economy chugs along and this will make housing even more affordable for many this year.

Now may be as good a time as any to buy your next property.

What are you going to do?

If you’re interested in securing your financial future through property investment, now may be a good time to buy property – the property markets are moving before our eyes.

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

Just click on this link to find out more and reserve your place.

Of course I’ll keep you up to date with how to take advantage of the changes happening in our property markets in future updates, but as so much is happening in property nowadays I’ll keep you updated almost every day with a short post in my blog – just click here and subscribe to it – that’s a different subscription to my regular newsletter – it gives you my short daily updates.



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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 one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au

'Why is housing so unaffordable – or is it?' have 4 comments


    April 24, 2013 Lois

    How has it affected rent prices? I was paying $130 a week in 2001 for a two bedroom inner city apartment, and that same apartment is now $450 a week – a 246% increase (Yes, it’s been ‘done up’ a little on the inside). My income has only increased by 50%. I understand the inner city might not be a good gauge as apartments get scarce, they are surely to rise in price on a different scale, but 246%?


      Michael Yardney

      April 24, 2013 Michael Yardney

      Over the long term, rents go up around much the same as values do – they just move at different stages of the cycle.



    April 21, 2013 sharepoint designer training

    Howdy! I just want to give an enormous thumbs up for the nice data you’ve gotten right
    here on this post. I will be coming back to your blog for more



    April 18, 2013 Nigel Baker

    Thanks Michael
    You are right property has always “seemed” unaffordable for some – and it’s not only the younger members of our community, but those who haven’t developed a savings discipline.
    Young families want to start off in a big home with all the stainless steel appliances and the mod cons.
    When I started it was in a small apartment and it seemed very expensive. But it was the beginning of my now significant property portfolio


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