Is owning a home still affordable? Craig Turnbull

GUEST OBSERVER

Every day I read that the Great Australian Dream, home ownership, is becoming more a nightmare than reality.

It is reported that buying a home is no longer possible as it is completely unaffordable.

That is itself is a very loose statement and if I might say, incredibly sensational. But big bold bad news sells. If all homes were unaffordable no one would be buying them. And if no one was buying there would be no boom nor a bubble. And prices wouldn’t be rising in Sydney & Melbourne – though they are pretty much sideways elsewhere in Australia.

Let’s examine this thing called “home ownership” and ask ourselves why it is such a dream. A place called home, a roof over our head, a place to retreat, to feel safe and secure, where you are the King, (or Queen) and you have a store of wealth. Your home - complete with yard, a fence, a dog and maybe a Holden car in the garage.

It’s not an idea unique to Australians either – all over the world people aspire to that comforting feeling of the security and privacy of their own four walls. The concept isn’t new either – the ancient Romans had a good sense of what it meant to own your own home. 

What more sacred, what more strongly guarded by every holy feeling, than a man's own home? – Cicero

Over 2,100 years ago, owning a home was important to the psyche of the dominant culture of the Western world. Not much has changed, except the level of angst around the subject. Exacerbated by the ability of the public to discuss the idea more widely.

According to a recent Neilsen survey, in most states of Australia just about 50% of respondents said that home ownership was viewed as unattainable. Only in Tasmania, where prices are much lower, did about a third of people hold the same view. Yet the same survey revealed that about two thirds of respondents actually owned a home and this is consistent with other statistics on home ownership such as those provided by the ABS. So a lot more people owned a home than what they thought was reality. 

It is not easy to determine, exactly why people think more negatively than what is fact, but my instinct is that people tend to believe what is repeated over and over in the media – we have a bubble, prices are too high and will surely crash. Well frankly, there are none of the conditions that I can see in our marketplace now that could lead to a real crash in values. Oh, you will certainly see Sydney peak and prices ease back from their highs as their cycle ends – there is nothing new here, it has been happening for a long time and will happen again in future cycles.

But what are some of the reasons our prices have moved up over the last few decades?

A few of the key reasons are:-

• Population growth – Australia has one of the higher growth rates for a Western economy, a combination of natural births and immigration. No matter the naysayers, overseas people know how good Australia is and they want to make a life there.
• Supply – tight development restrictions, inefficient local governments and long time periods for approvals means development pipelines are stretched way beyond what could be considered reasonable by international standards. A lot of red tape cutting needed here to increase supply of homes.
• Taxation – anecdotally, about 40% of the cost of a new home is tax – federal, state and local – these costs are passed on to consumers. 
• Zonings – the humble backyard and the desire for a lot of land has meant that too few homes can be built on land in near proximity to the city – Australia is moving slowly towards more medium and high density living. This means homes on larger lots nearer the city rise in price.
• Home sizes – according to the ABS over the last 30 years average new home sizes have increased from 162sqm to 248sqm – that’s about 50% larger. That has to factor in to cost. Interestingly units (other dwellings) followed the same overall path increasing from 99sqm to 134sqm. The trend over the last ten years for other dwellings (apartments) has seen a reverse – they have actually pulled back by 6%. This is a clear sign that units and apartments are getting smaller to make them more affordable. The average home in Europe is half the size of Australia and in the USA, the average is 10% less than Australia. So our love for bigger homes has a huge factor in pricing.
• Finance – the availability of mortgage insurance in the 1980’s made the banks happier to lend money. With more money pumped in to the marketplace, real estate values got a pump up.
• Australian Dollar – the lower AUD has made our property market look incredibly good value to our overseas friends – this adds to the demand in the marketplace.
• The Dream – it is deeply ingrained in the Australian psyche that owning a home is something incredibly desirable, and I heartily agree. 

These are just some of the reasons our property is more expensive than many of our international comparables. But the dream remains the same for many – we want to own a home.

I firmly believe the dream is alive and eminently possible. However, I wonder if the dream itself is changing? Many people are gravitating towards better located, smaller lower maintenance homes that may not even have a proper yard, particularly homes that are on or near transport lines. Apartment living is gradually becoming more acceptable, not just by younger buyers, but there is a trend among retirees who want to travel, buying in to lock up and leave units. Other buyers are starting to realize that they face a stark choice – start via a stepping stone or make a conscious choice to rent for the rest of their lives.  

That stepping stone might be a small apartment, or it could be a home in another city or state that is more affordable where they live now. Maybe the path would be live in the stepping stone, while others are getting smarter and renting out the first property they own – getting the tax benefits while they work to pay it off and build some equity on the way to the home they really want.

Or for many, the stepping stone will be the next generation of real estate investing – real estate crowdfunding - just like here – www.brickraise.com – where anyone can begin with small amounts of capital. 

Is the sacred dream a nightmare? 

No it’s alive and well. It’s just the path is a little different to one that our parents took.

Craig Turnbull is a property investor and author. He can be contacted here.