By Michael Yardney May 7, 2019

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With house prices falling is property more affordable?

Michael Yardney's Commentary
With house prices falling is property more affordable?

Housing prices are falling in Sydney and Melbourne, so housing must be becoming more affordable — right?

Well you'd think that would be the case, but it's not really as simple as that.

A rise in house prices is a mixed blessing.

For those who have developed the financial discipline to save a deposit and buy a home, price inflation is a good thing — the value of their house rises while the mortgage debt stays the same, or falls.

But others have found it harder to save and get into the property market.

This should mean falling house prices are bad for home owners and good for aspiring home owners, right?

Finder.com.au asked a series of experts (including me) to comment on this issue and here is what they found:

CoreLogic research analyst Cameron Kusher explained:

Housing affordability improves as prices fall however, the declines need to be put in context.

In Sydney for example, values are down -13.9% from their peak, values have still increased by 23.3% over the past five years.

It is a similar story in Melbourne where values have fallen by -10.3% from their peak however, they are still 25.5% higher over the past five years.

It's not all a story of price falls either.

In cities like Adelaide, Brisbane and Canberra property prices haven't budged as much.

In Hobart they've soared.

And sure lower property prices are having some effect as are first home owner grants encouraging first home buyers to take the place of the many investors who have left the market, but it seems these buyers have gone on strike

According a Bank of Melbourne spokesperson quoted in finder.com.au,

The proportion of FHB loans peaked in November last year, but this has since eased, suggesting that first home buyers are still not so willing to enter the market.

First home buyers are also perhaps deterred by ongoing negative sentiment with expectations of further falls. But we also need to remember that prices are not the only factor impacting affordability; interest rates and incomes also play a part.

At Metropole we have found that currently homebuyers are having difficulty getting into the property market, or upgrading the existing homes because of the “ credit squeeze.”

Bank’s tighter lending criteria are making it harder to prove serviceability for home loans.

At the same time, the deposit gap is creating an issue for many first-time buyers who are having difficulty saving up sufficient deposit to get a foothold into the property markets

When asked if affordability will improve with further price falls predicted, I suggested that further price declines will not be uniform across our many property markets, with the value of well-located homes and “investment-grade” properties will hold their values better than secondary properties in poor locations.

There are multiple property markets

Every city is its own property market, and the story in regional cities is also very different.

Head of Economic and Market Research at Bendigo Adelaide Bank David Robertson says,

"There are certainly a lot of disparities within each city. And also in high rise versus detached dwellings.

I think in Brisbane the high rises have been doing a bit worse whereas in parts of Melbourne high rises have been better than detached dwellings.

So it's dangerous to make sweeping statements."

Robertson also notes that people are moving to regional areas, which are cheaper than the big cities but have in many cases been performing well in price terms.

"If we're talking about affordability and if there isn't much of an improvement in living standards and wages growth then regional Australia is part of the solution.

If you look at the ABS data on interstate migration people are voting with their feet. The NSW population went backwards last financial year and Queensland, Victoria went forward."

Areas of regional Victoria like Bendigo and Geelong have been particularly strong markets, often representing better value than the bigger cities in price terms but also future growth prospects.

To get a clearer idea of housing affordability Finder.com.au crunched some basic price data.

Affordability by city

Sydney

Finder calculated an actual mortgage using the median Sydney prices mentioned above.

For each example they assumed a 30-year principal and interest mortgage with a 20% deposit. They also assumed a variable interest rate of a competitive 3.59%.

That's a difference of $448 a month, or $5376 a year. And your deposit is $24,689 lower.

Melbourne

Finder also ran the same scenario in Melbourne, which had a median value of $710,420 in October 2017. That has now fallen to $624,425.

With the same loan details that gives the following :

That's a difference of $312 a month, or $3,744 a year. And your deposit is $17,199 lower.

Perth and Darwin

Prices in Perth and Darwin have been falling for years as the mining boom began to subside.

Houses are more affordable in Perth and Darwin now, but we need to look even further back to see how high they had been.

CoreLogic median values from December 2014: Perth: $525,000, Darwin: $540,000
And from the most recent data in March 2019: Perth: $442,716; Darwin: $400,316

Adelaide, Brisbane and Canberra

Property values in Adelaide, Brisbane and Canberra haven't seen the same decline.

While these markets may not be growing much at present, median prices haven't really fallen.

So while affordability may not have improved much in these cities, prices remain lower than in Sydney and Melbourne.

This is especially true in Adelaide and Brisbane, where the median prices remain well more than $100,000 lower than in Melbourne.

Hobart

Hobart's market is Australia's recent runaway success story, which unfortunately means bad news for first home buyers in Tasmania's capital.

The median Hobart price in October 2017 was $396,393. At March of this year that has jumped to $464,168.

That's an extra $247 a month in repayments, or $2,964 a year. And your deposit is $13,555 higher.

Will affordability improve further?

It is likely for prices of some properties to fall further before our property markets bottom out.

However, price declines will not be uniform across our many property markets, with the value of well-located homes and 'investment-grade' properties holding up better than secondary properties in poor locations.

Susan Mitchell from Mortgage Choice says,

"If dwelling values fall further, particularly in the nation's capital cities where median dwelling values are the highest, it may take the pressure off Australians currently saving for a home deposit who may not need to save as much."

Dwelling values are still at record highs in many parts of the country, so it remains to be seen how much further dwelling values would need to fall in order to significantly improve affordability."

Bank of Melbourne says:

There is a risk that interest rates will fall, which would result in a further improvement in affordability.

That being said, house price falls presents a greater risk of weaker economic growth and therefore weaker employment. Ongoing soft growth in incomes could limit the improvement in affordability.

David Robertson agrees that wages are an important part of the equation.

He says it's worth paying close attention to the Reserve Bank data on housing costs to income ratios.

"And those have definitely come down in the last year and a half. But the lack of wages have been fairly problematic. Wages have been increasing. They just haven't been increasing at a rate that we were used to a decade ago."

In short, property is getting more affordable in many places, but it's a complicated story. If you're a first home buyer you're probably in a better position than you were two years ago. But that doesn't make it easy.

Some tips for home buyers and property investors

Finder.com.au suggested that with banks getting stricter on lending you'll need to keep your spending to a minimum and ensure your mortgage documents and application are airtight.

A 20% deposit will make lenders look more favourably on your application.

Saving requires "discipline and a clearly defined plan outlining how you will achieve your goal," says Mitchell.

Check out our in-depth home loan deposit saving guide for more advice.

My suggestions are that investors should only buy properties that are likely to outperform with regards to capital growth in the long-term , by following my 6 stranded strategic approach

I only buy a property:

That would appeal to owner occupiers. Not that I plan to sell the property, but because owner occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the future as the percentage of investors in the market is likely to diminish
Below intrinsic value – that’s why I’d avoid new and off-the-plan properties which come at a premium price.
With a high land to asset ratio – that doesn’t necessarily mean a large block of land, but a property where the land component makes up a significant part of the asset value.
In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area as mentioned above.
With a twist – something unique, or special, different or scarce about the property, and finally;
Where they can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to do the heavy lifting as we’re heading into a period of lower capital growth.

By following my 6 Stranded Strategic Approach, you will minimise your risks and maximise your upside.

Each strand represents a way of making money from property and combining all six is a powerful way of putting the odds in your favour.

About Michael Yardney Michael is the founder 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.