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?
Before you think I’m a rich property investor who doesn’t understand the plight of first home buyers, let me give a disclaimer. 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 two ways:
1. Give home buyers more money to spend on property, either by increasing their wages or by handing out grants or incentives. 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 two groups:
1. First-home buyers wanting to get into the market but 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.
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 about creating affordability, property values will need to drop considerably. 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 …
5. A halt to rising population that is underpinning our growing property markets;
6. A substantial slowdown in foreign investment; and
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.
You just have to look overseas and see how the property crashes in the US 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 believe there are seven good reasons why our property markets won’t crash any time soon.
In summary they are:
1. Our robust population growth;
2. A healthy economy;
3. A sound banking system;
4. Rising business confidence;
5. Consumer confidence that has been rising;
6. A healthy level of household debt; and
7. A culture of home ownership, with two thirds of properties owned by home owners and around 50% of these homes without 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 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 London 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 investing 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; and
• 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 people want to live — close to where all the action is and where their jobs are, close to the CBDs of our major capital cities.