Australia's housing prices remain far too high for first-home buyers: Catherine Cashmore

Australia's housing prices remain far too high for first-home buyers: Catherine Cashmore
Australia's housing prices remain far too high for first-home buyers: Catherine Cashmore

So is Australia’s housing market “unaffordable” or not?

What we really lack in Australia is a realistic vision of how our housing market should appear. There are too many conflicting voices smothering the debate – from a myriad investors looking to profit from rising prices, hoping they’ll outpace inflation to enable retirement on a pot of ‘property gold’ to consumer organisations struggling to address the growing mountain of citizens requiring public housing or rental assistance.

Even with the peak-to-trough fall in house prices over recent years, with the median dropping nationally a little in excess of 6% coupled with an easing of lending rates to a little over their post-GFC record low, residential property prices in Australia still remain far too high for a large proportion of first-home buyers – the majority of whom don’t stand a chance unless they benefit from a deposit cash injection gifted by family or friends.

The  Annual Demographia Housing Affordability index, which generates the same media headlines year in year out, has once again highlighted what it claims is the “severely unaffordable” nature of our housing. However, last week its findings were disputed by APM senior economist Andrew Wilson, who suggested because there were buyers ‘buying’ property, housing couldn’t be all that unaffordable, could it? After all, suggested Wilson, prices were rising in Sydney, banks were lending, and there has been “activity” in the marketplace of late.

As Wilson is well aware, the reason prices continue to rise in Sydney (and other metropolitan areas) can be directly attributed to decades of poor planning for population growth by both state and federal governments, which have ensured a majority of buyers remain well and truly hamstrung to the inner and middle suburbs of our capital city locations.

In this respect, Sydney is no different to New York and London – these cities are also on an upward trajectory due to shortages of affordable supply (despite the woeful economic climate both countries face).

To some extent this places a ‘floor’ underneath the cost of metropolitan housing in the highly sought-after areas of our capitals and hence, investors can still be fooled into thinking there’s no ‘ceiling’ to price inflation. Despite low consumer confidence and our new aversion to debt, the crystal ball predictions of annual 10%-plus rises in house values continue.

However, this does not mean our housing falls under the definition of “affordable”. Household debt to disposable income in Australia stands a little below 150% – high by historical standards and certainly not healthy. We’ve borrowed more in order to pay more.

As for any perceived “activity” in the marketplace – putting aside the woefully low transaction figures of late, which although stabilising, are at levels not seen since the late 1990s, and a construction sector that is struggling to recover from an 18-month low – it seems the remaining buyers  active in the market arena are investors and second-home buyers – because as far as first-home buyers are concerned, the latest home loan data from the ABS shows a significant fall in the sector nationally (down to 15.8% in November 2012 from the 18.7% high recorded in October). It couldn’t paint a clearer picture.

Outside of the “carrot and stick” approach of grants and incentives, which disproportionally spike housing costs and activity, thereby forgoing any perceived benefit while the grants remain in place – first-home buyers are not showing any great enthusiasm to buy into the Aussie dream. Notwithstanding, if you took a national survey, the majority would tell you in no uncertain terms and probably not quite so polity as expressed here, Australian real estate is both inflated and unaffordable.

Exaggerating the problem is the long-term trend, and overwhelming preference from this demographic when they do step in is for established dwellings over new.

This should come as no surprise – new houses are generally located in outer suburbia away from family, friends and any hint of an adequate supply of social amenities. High-rise dwellings are built on the mantra of “squeeze as many in as possible” and better resemble a rabbit hutch than an abode to call home.

Buyers who do move outwards tend to be families upsizing to larger four- and five-bedroom properties and therefore make the choice to compensate distance (and the cost of a commute) for an increase in accommodation. First-home buyers on the other hand would rather take a smaller property to purchase closer to the hub and bub of city amenities – thereby favouring apartments.

Herein lays a further problem. Banks don’t like lending to first-home buyers finance for high-rise dwellings – so any suggestion to build as many as possible to ease supply is of little benefit to this sector. Furthermore, construction (as I point out here) has often proven to be overwhelmingly poor, owners’ corporation fees high, and purchase prices simply do not represent value for money.



On the other hand, established dwellings hint of an era when property was built with the home buyer in mind. Unlike new dwellings, which come with a “wow” premium on the initial price, older properties offer the potential to buy in at a lower cost and renovate. The floor plans in apartments are generally more spacious and the low-rise facade is in keeping with the predominant street aspect.

Living in a smaller block with an owners’ corporation of 12 occupiers is highly preferable to a high-rise monstrosity that contains 150 offshore investors who won’t be so actively motivated to pay future levies for long-term building improvements and general upkeep. It’s no wonder first-home buyers prefer the option.

Of course, local investors under our current system of negative gearing also prefer established over ‘new’ and therefore, considering our current terrain low fixed interest rates, and rising yields, it should come as no surprise that when a first-home buyer does come across an attractive property seemingly priced within their allocated budget, when faced with competition from an investor, the first-home buyer won’t be the one leaving the property with a signed contract in hand.

Research from RateCity suggests it takes an average single income wage earner on $70,000 per annum five years to save a deposit– with more than half of buyers in their 20s receiving help from family and friends.

Other analysis based on ABS borrowing figures places a single-income first-home buyer’s budget around the $300,000 mark.  To purchase something larger than a one-bedroom apartment at that price in Victoria, you need to head some 25 kilometres outside the city to areas such as Melton and Werribee – is it any wonder our ‘new’ buyer market is diminishing?

As for the Demographica study, comparing property markets across the world is difficult due to the way statistics are collated, with some markets substantially less transparent than others and each having its own unique demographic and structural requirements.

Australia and Hong Kong are both classed as ‘severely unaffordable’ – however I’d guess that you’ll find far more attractive living options in Australia for $350,000 than Hong Kong, where most are confined to an apartment in the sky.

The survey rates each selected country by dividing the median house price by the annual median pre-tax wage. This places Sydney’s ‘median multiple’ at 8.3 and Melbourne’s ‘median multiple’ at 7.5

I’m not a fan of the methodology – comparative ‘medians’ are a poor way to analyse effective cost.  However the result of the survey speaks volumes for a growing demographic of first-home buyers wanting more than a dead duck of a property in outer suburbia, or a boxed-sized room in the clouds.  As far as this demographic is concerned, Australia’s real estate – at least the options worth buying – is ‘severely unaffordable.’

It doesn’t have to be this way – there are many things both government and planning authorities can do to increase the supply of both affordable and quality accommodation. For example, if you dig down deeper into one of the previous International Housing Affordability surveys, there is an interesting picture painted comparing Sydney and Melbourne with Dallas-Fort Worth and Atlanta in America.

In 1981 both cities in the USA were a similar size to our biggest capitals with similar rates of projected population growth, however, unlike Melbourne and Sydney, authorities in Dallas and Atlanta ensured cheap land was made available on the outskirts of their cities and more importantly, Dallas and Atlanta expanded their train lines into the new suburbs as part of the plan.

Consequently, neither city suffered the same level of price inflation we’ve experienced in Melbourne and Sydney, and Dallas now boasts the largest light rail system in the United States, with further plans to expand into the outer-suburban locations as part of its 2030 plan.

But let’s face it. The property market in its current capacity has little interest in the ethics of providing shelter or affordable accommodation – it’s a money-making vehicle, and as long as someone out there is willing to pay in excess of a $500,000 for a modest one-bedroom apartment with the mindset that it will be worth a lot more when they sell – regardless of their means to fund the purchase – the debate over whether our market is ‘unaffordable’ will fall on deaf ears within both the property industry itself and the political domain.

As such, the addiction to ‘building wealth the property way’ will continue to the determent of increasing numbers of individuals who will struggle to rent, let alone buy.  Looks like we’ll need to hurl straight into the iceberg ahead in order to learn a ‘better way.’

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

Catherine Cashmore

Catherine Cashmore

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.


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