The Home Ownership Affordability Myth – is it really beyond the average Australian?

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Treasurer Scott Morrison recently came out in the press all guns blazing regarding Home Ownership Affordability – and he made a valid point.

Recent statistics show that only 8% of new mortgages relate to first home buyers which is a sharp decline of 40% over 5 years suggesting that first home buyers are finding it increasingly difficult to buy their first home. Now, many are calling for a scrapping of stamp duty for first home buyers as a measure to help first home buyers get into the market. The opposition fired back saying policies need to change to make home ownership more affordable, including opening up the old chestnut negative gearing and Capital gains tax.

But is property just being used as a political football, or has home ownership really gone beyond the average Australian?

recent-study-on-home-ownership-affordability

A closer look at the FACTS exposes the ‘Home Ownership Affordability Myth’.

My research shows that it is certainly more difficult today to accumulate a deposit to acquire a property, however it also shows that a mortgage is no more or less affordable than three decades ago.

Being an Accountant, I wanted to look at the numbers to assess the facts for myself rather than listen to rhetoric. In so doing, I have reviewed various data drawing comparisons on both Houses and Apartments over the last forty years and have focused on the Sydney market by way of an example.

I took Sydney as my sample because Sydney would be the worst case scenario as Sydney median prices are the highest in the country. However, if you did a similar comparison with the other capitals around the country the numbers will be better than shown in my spread sheet below due to lower median values.

My sources:

  • Australian Taxation Office (average annual adult salaries and historic tax rates), Reserve Bank of Australia (Interest Rate History),
  • Australian Bureau of statistics (Median House prices and incomes)
  • Various Financial institutions (Mortgage calculations).

My Approach:

  • I have looked at the median Housing and apartment price in the year and the interest rate applicable as at 31st December of that same year.
  • I have then worked through what the Repayments would be based on a principle and Interest loan over a standard 30-year mortgage.

My Assumptions:

  • My assumptions are we have Borrowed 80% of the median Price of the property on a standard 30 Year Principle and interest loan.
  • Furthermore, I have also calculated what the disposable income after Tax on the average adult annual salary would be for that year, to give me the true picture of affordability.

 

I analysed the data with the above in mind… The results and my findings are quite interesting.

 

Home Ownership Affordability (HOUSES) in Sydney since 1970.

As you can see from the below table our average annual salaries as a percentage to the prices of property have decreased from 23% in 1970, down to 8 % in 2016. Whereas Apartments have dropped from 32% to 12% over the 46 years.

 

year Median House Price Sydney ($) Average Adult Salary % Salary to home value Average adult salary after tax Interest rate 31/12/ Repayments P.A P & I  r30 years % Repayments to salary
1970 18,700 4,352 23% 3,476 7.25% 1,224 35%
1980 68,850 13,348 19% 10,181 11.00% 5,928 58%
1990 194,000 27,073 14% 21,326 15.00% 23,520 110%
2000 287,000 40,778 14% 30,642 8.05% 20,352 66%
2010 595,000 65,005 11% 56,155 7.40% 39,552 70%
2016 995,000 81,920 8% 63,663 4.0% 45,600 71%
**2016~ 995,000 81,920 8% 63,663 7.50% 66,792 104%

 

The big question is how do first home buyers enter the market today, the first one being the ability to raise the 20% deposit on the median price property (apartment or house) and pay associated costs including stamp duty – let’s assume 5%.

It is clear that in quantum 25% of the median house price in 1970 being $18,700 x 25% = $4,675 (approx. 1 years’ salary) is a lot less than that of today 2016 $995,000 x 25% = $248,000 ( approx. 3 years’ salary) so that means its three times more difficult today than 40 years ago to save for a deposit.

This is the real issue and the reason why government’s need to focus on relief to first home buyers in associated costs like stamp duty to enter the market.

 

But is it costing us any more to fund our Mortgage today in comparison to decades before?

To determine this, I worked with disposable income of the average adult for that year (after tax). In 1970 it cost us 35% of our annual salary to fund the mortgage of a median house in Sydney compared to 71% today, if you look back at 1980, 58% of our annual salary ,1990 110% of our annual salary , 2000 66% of our annual salary 2010 70% of our annual salary to fund the mortgage. so there has been little movement upwards over the last 3 decades. It’s all predicated on the price of borrowings (interest rates).

affordability-of-property-ownership-in-sydney-houses-1970-2016

In the 80s with Interest rates at all-time highs it was near impossible to fund a mortgage on the average wage at the time at 110% of the average annual salary, but since then around the 70% mark. The real concern based on this research is what would happen if Interest rates increased?…

**I note that as an average interest rate over the last 50 years is approx. 7.5%, if Australia’s interest rate drifted out to 7.5 % affordability becomes a real issue and it would require 104% of average adult salary to fund the standard 30-year Principle and interest mortgage.

 

Home Ownership Affordability (UNITS) in Sydney between 1970 and 2016.

Now let’s look at units/apartments over the same period, this explains the reasoning behind government policy on median density and the focus on this style of development as they really have no choice. If you look at the spreadsheet and history of apartment prices it’s much more affordable for the average Australian to purchase an apartment than a house. this graph emphasis my point and in a previous newsletter article that our major cities especially Sydney, Melbourne and Brisbane will end up like the London’s and New York’s with high density inner city apartment living being the norm.

Table: Home Ownership Affordability (Apartments/Units) in Sydney since 1970
year Median Unit Price Sydney ($) Average Adult Salary ($) % Salary to home value Average adult salary after tax Interest Rate 31/12/ Repayments P.A P & I  r30 years % Repayments to Salary
1970 13,490 4,352 32% 3,476 7.25% 880 25%
1980 56,500 13,348 23% 10,181 11.00% 5,160 50%
1990 137,715 27,073 19% 21,326 15.00% 16,692 78%
2000 256,250 40,778 16% 30,642 8.05% 18,132 59%
2010 405,000 65,005 16% 56,155 7.40% 26,916 48%
2016 656,000 81,920 12 63,663 4.0% 30,060 47%
**2016~ 656,000 81,920 12% 63,663 7.50% 43,968 69%
Loan Repayments on average Unit price as a percentage of the average adult salary – showing the relative affordability of property ownership (units) in the decades since 1970.

affordability-of-home-ownership-in-sydney-units-1970-2016

 

Although there has been increase in apartment values over the same period the affordability has been consistent and in fact it is more affordable to fund a mortgage on an apartment today than it was nearly 40 years ago. In 1980 it would cost you 50% of your after tax salary to cover the mortgage whereas in 2016 it is 47% of your annual salary, even if interest rates drifted back to the average of 7.5% it would increase to 69% of the average adult salary.

 


GRAPH: Comparing both Median House Prices & Apartment/UNIT prices as a percentage of the average adult salary since 1970.

repayments-as-percentage-houses-vs-units-affordability-of-home-ownership-in-sydney

 

GRAPH: Comparing the average Loan Repayments for Houses and UNITS as a percentage of the average adult salary since 1970.

affordability-of-home-ownership-in-sydney-houses-vs-units


 

There is no one solution to this problem and it will require a multi-pronged attack, some ideas being making it easier for property developers to build more affordable housing, relief of the onerous entry costs like stamp duty for first home buyers, managing interest rates and inflation so property prices don’t get out of hand and many others.

I would encourage the government to look outside the box and consider the option for first Home buyers to use their superannuation savings as a one off to assist with the deposit on their first home, also consider the ability for first home buyers to access their Super contribution levies to assist with mortgage payments for say the first 5 years of ownership.

Whatever the argument Home Ownership Affordability is a real issue today, but let’s not get caught up in the politics, as it has proven to have been an issue for many decades and governments have done little over this time to alleviate the problems. The most pressing challenge for the government at present is maintaining low interest rates as any rise in the cost of funding will make matters worse and have an immediate impact on the housing market.

In the coming months I will be putting forward some ” outside the box” strategies to make Home Ownership more affordable, but in the meantime I would like to gather your feedback: Should the government scrap Stamp Duty for first home buyers?  click the button below to give us your thoughts in this survey / poll.

Poll / Survey
 

Thanks in advance for your response.

 

David Naylor

David Naylor

 

Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

5 responses to “The Home Ownership Affordability Myth – is it really beyond the average Australian?”

  1. Alan Lavocah says:

    Great article. Thanks.

    Alan

  2. Harry Burr says:

    Greetings,
    Comparing AVERAGE salaries and MEDIAN home prices : Hmmm
    — Average and Median are not the same thing and are frequently misrepresented.
    Sometimes in error, sometimes on purpose.
    I’m not sure how the tables and graphs would change if the true average home prices were used alongside average INCOMES.

    Really? An ‘average’ annual income of $82 k before tax? (2016, Sydney)
    Certainly the old fashioned, ‘traditional’ first home buyer group of young folk starting out in the work-force is definitely not in this group.

    You write:
    “a mortgage is no more or less affordable than three decades ago.”
    Question : Why did you choose not to go back 4 decades?
    3 decades ago interest rates were at an all-time high for my lifetime; you’ve quoted 15%, but many were 2%, or more, in excess of that. – I know – I had one. At that time MANY people had to close down their mortgage and get out. Not fun. As well, it was not easy for first home buyers to get in to that market. Why use 3 decades ago as a benchmark of some sort in order to suggest that things aren’t so bad today? Why not go back 4 decades?
    Very strange.
    I notice that your discussion of the difficulty of saving a 20% deposit does go back 4 decades, to the 1970’s. Perhaps inconsistent.

    Being of a more matured vintage, I remember when prudent lending for a home mortgage carried a requirement that debt servicing use no more than 30 to 35 % of the “income after tax.” Clearly this prudent fiduciary responsibility, once a hallmark of the lending institutions, has gone by the wayside. How is it even possible to contemplate 70%, or 100%, or more?
    Ahhh. I know. Then, we needed ONE income. Now we need TWO incomes per household in order to service the loan. Two partners, each with a secure, long term income of $82k or more, before tax. In an environment characterised by increasing job insecurity, diminishing wage growth, and with women still being paid significantly LESS for equivalent work. Does this couple sound like your average first home seeker?

    You write:
    “As you can see from the below table our average annual salaries as a percentage to the prices of property have decreased from 23% in 1970, down to 8 % in 2016. Whereas Apartments have fared better dropping from 32% to 12% over the 46 years.”

    Hmmm Well then, let’s see, From 23% down to 8% is a drop of 15%.
    From 32% down to 12% is a drop of 20%.
    Although an average salary is now worth only 8% of the cost of a median home, it has dropped 15%.
    Apartments appear better; a salary is worth 12% of the cost of a median apartment- but that is a drop of 20%.
    A moot point which is better.
    Perhaps the supply of high end apartments has increased, moving the median price upwards, and the AVERAGE salaries and incomes have not kept pace.
    According to your figures:
    In 1970 a median house cost just over 4 years of average salary,
    In 2016 it costs just over 12 years of salary.
    Note: If the average salary is closer to 60 000 rather than 82 000 then the median home costs more than 16 years of total salary.

    You write:
    “The big question is how do first home buyers enter the market today, the first one being the ability to raise the 20% deposit on the median price property (apartment or house) and pay associated costs including stamp duty – let’s assume 5%.
    It is clear that in quantum 25% of the median house price in 1970 being $18,700 x 25% = $4,675 (approx. 1 years’ salary) is a lot less than that of today 2016 $995,000 x 25% = $248,000 ( approx. 3 years’ salary) so that means its three times more difficult today than 40 years ago to save for a deposit.
    This is the real issue and the reason why government’s need to focus on relief to first home buyers in associated costs like stamp duty to enter the market.”

    Two points to query:
    1 What do you think is the actual, on the ground, real world probability that a first home buyer couple has the median incomes of 82k? and b) can (let alone will) save 4 years worth of complete salary (100% of 4 years salary) in an acceptable time, just to qualify for a loan that they may not be able to afford?

    2 Focusing on getting a deposit implies that there is only one big question, when in fact there are two – how to get a loan AND how to service it. Even if Governments were able to modify markets, so that having access to 20% deposit became easier, for first home buyers, the debt servicing difficulties still over-ride the issue. ( standard market competition has already shown that governments cannot be effective in this area with their current levels of control)

    With respect to Debt servicing capacity: you write:
    “so there has been little movement upwards over the last 3 decades. It’s all predicated on the price of borrowings (interest rates).”
    – – That is over 3 decades.
    BUT Over 4 decades it’s moved from 35% of income after tax to 70%.
    That’s a DOUBLING
    And of further concern – 70% of income after tax needed to pay a mortgage loan is clearly in the realms of irresponsible lending.
    As well, lending today as if today’s interest rates are valid for the next 30 years is not a clever move. – In particular, because job security, job permanency, and consistency in income levels are diminishing.

    I’m in my 60’s, well-aged and still improving, with a lifetime of economic‘cycles’ to ponder, I’m surprised by the assumptions made but not specified (glossed over) in this analysis.
    In Victoria in 2016 a teacher would need to be consistently in the service, without a break, for a great many years in order to reach the “average” salary used in these tables.
    In Victoria at least, for the past decade or more, Education Providers have focused on casual and part time, short term contracts for most new entrants to their system, and have encouraged retirement of the older, more experienced, more expensive, work force.. As employers they are not alone in this.

    In most other work places the salaries and the permanency and security of full time work is nowhere near what is necessary to achieve the ‘average’ income mentioned in these tables for 2016.

    Banks SAY they will not lend (Debt Servicing Capacity) to folks who cannot demonstrate a LONG TERM ability to make repayments on the loan; banks are looking for an indicator of permanency in the employment. Or they are looking for loan insurance covers and the possibility of foreclosing on the mortgage in the future and using the capital growth in the property to their advantage.
    This means that Short term work contracts instead of permanency, plus much lower incomes than those used in these tables, make the calculations for a median house pretty well out of reach for an increasing number of people.
    For example, Two first year out teachers, both on one year contracts (or even 11 month contracts), together, would not qualify for a loan and would probably not have saved the deposit by the time they started their first jobs. –
    In the early ’70’s this was possible and not uncommon.;
    Another example – in 2016 a casual employee on $20/hr, even in the unlikely situation that they were working for (AND were fully paid for) 40 hours a week, would not qualify.

    4 decades ago many a young couple might have worked during their post high school years, while training for a career, and saved the deposit for a home; then the career they moved into offered security of long term income, and banks were prepared to lend accordingly, within responsible limits. None of these factors is in reach for most youngsters today.

    Things change. That’s life.
    But let’s not ignore the very large and very purple elephants in the room, let’s not pretend that everything is really not so different, – just so long as a government intervenes the way we want it to, when we want it to, to suit our own goals, and stays out of our way for the rest of the time.

    Competition for housing amongst people with the capacity to pay has increased markedly.
    The simple laws of supply and demand have driven up the prices.
    If we want to ‘assist’ young first home buyers into the market then we have to do two things which might be possible and a third which is probably not:
    Each requires government intervention – ( now there’s another discussion to have)
    1 Find a suitable way to assist them to get a deposit together
    2 Find a suitable way to organise employment so that these first home buyers ( and the lenders who service them) have reasonable expectations for long term employment that covers the mortgage payments with 35% of one salary after tax if we want one person to be at home with the kids, or 30% of two salaries after tax if both adults are expected to work (30% and not 35% because we still pay women less for equivalent work)
    3 Here is the most difficult intervention of all – somehow manipulating the market so that the increased capacity of these first home buyers to bid at an auction is not simply over-ridden by cashed up buyers who can outbid them – thus driving the prices of the underlying stock higher. This is the current situation.
    Decreasing or removing stamp duties or other costs does not quarantine a sector of the housing supply for particular targeted buyers such as first home seekers.

    The largest purple elephant in the room, ignored so often, is that affordability is made up of two sides:
    What’s it cost? And Can I afford it?
    The cost of housing has certainly risen remarkably.
    Incomes have not kept pace, short term contracting has risen markedly,and income security has diminished markedly
    The capacity for fist home owners to qualify for a loan and to compete successfully at an auction – and then to service the loan without serious social stress, has diminished even more remarkably.

    The analysis provided in your article supports powerfully the argument that affordability has decreased very significantly.
    Only folks with relatively secure, long term incomes, incomes well above the “average”, can afford a “median” home.
    First home buyers are not in this group.

    I have a different set of questions that may be worth analysing:
    Forget median priced housing; – what’s the current affordability of low end, entry housing?
    Is even that possible for someone with an insecure and not very well paid job?
    How far distant is it from established social support networks such as family?
    How far distant is it from secure, well paid work?
    To what extent should these questions be considered / catered for?
    To waht extent should we be re-focusing on what is an acceptable expectation for youngsters and first home buyers? Times change, Perhaps expectations must change as well.

    This is a large and significant social issue that needs lots of honest, open, far-sighted discussion, with a goal for long term social cohesion. Playing with stamp duties is fiddling while Rome burns. It deflects attention and serious adult discussion from bigger issues; issues that outlast one or even two election cycles. Only the courageous will go where politicians fear to tread. Looking for scapegoats to blame does no-one any good and further complicates the problem.

  3. David Naylor says:

    Thankyou Harry for your considered response , this is exactly the feedback I am looking for . The numbers can be debated but as you have elequently put the bottom line is that it is very difficult for the younger generations to enter the market , which means they don’t have the same opportunities as we did many years ago , which to me seems unfair . Governments need to think outside the box and not just fiddle with quick fixes like stamp duty , I really like the idea of younger generations being allowed to access their superannuation to assist with entry . Investing in your home is investing into your retirement . Once again your feedback has raised interesting questions and I agree perhaps expectations need to change .

    • Ashley W says:

      Hi David,

      Great break down but I do agree with Harry you need to compare Medium incomes to medium prices, it would also be interesting to see medium incomes to entry level properties also.

      Regarding solutions to this issue what do you both (Harry & David) think about a temporary reduction in immigration to boost wages and decrease demand? In my opinion we need some serious salary inflation to reduce house hold personal debt to acceptable levels and I cant think of any other way this is going to happen.

  4. Ashwini Dayal says:

    Hi David,
    I think the issue is clear through your analysis. How do we tackle it for first home buyers looking to get a foothold?
    1. One example from other countries is actually offering the negative gearing concept to first home buyers. Herein, we could offer a tax break to first home buyers on the interest portion of their loan. However, this should be offered if one has taken up a capital plus interest loan, not just interest only. How do we fund the tax chest you ask? By reducing the negative gearing being offered to investors. I say reduce, not remove, as there are good reasons to keep negative gearing. Market forces will drive how rents will behave, and if rents increase it is a good incentive for people to save and buy their first home.
    2. Since the wealth of most households is caught up in the family home, not really in the super, I believe the ability to leverage your Super savings for the deposit is a great idea. It is ultimately about having an asset that appreciates and Real Estate is a great investment vehicle as we all know.

    Manipulating the market for auctions doesn’t make things competitive, and is not what we should be teaching our younger generation. Competition is important, and here to stay in our global world, and working hard should be a quality we all need to have. Working towards getting a job with a dependable income is important, and is something that the younger generation needs to be conscious of. It shouldn’t be done by making the upcoming generation soft and giving them things on a platter. Helping is good, but not gifting. There are many options that the govt. can take to help, but it should not be a gift.

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