Seven reasons Australia's housing is expensive; is it out of reach for first home buyers?

Last year (according to the RP Data-Rismark Home Value Index), capital city home values rose by 9.8%, creating further affordability pressures for those segments of the market who are most price sensitive; the younger aged cohorts and first time buyers.  Our daily index data shows that home values have continued their strong pace of growth through the first month of 2014 with our combined capitals index likely to end the month slightly more than 1% higher.

Based on homes sold over the December quarter, the median price of a house across Australia’s capital cities is now $575,000; ranging from $775,000 in Sydney through to $350,000 in Hobart.  In the most expensive capital cities the challenge to buy a detached house within close proximity to where they work or socialise is simply out of reach for the vast majority of younger buyers.

Housing finance data indicates that as a proportion of the owner occupier market, first home buyers are currently at a record low level, accounting for just 12.3% of all owner occupier finance commitments. 

If first home buyers aren’t entering the market now, at a time of historically low mortgage rates, one might consider how and when they will ever enter the market.  In my opinion it is not always a case of not being able to afford to enter the market, it is often that the sacrifices a potential buyer would have to make in order to enter the market are too great.

There are some clear reasons why housing in Australia is expensive, including::

 Australian’s have high levels of personal wealth and high incomes relative to most other countries.

 Australia’s population is heavily centralised with around 55% of the national population residing in either Sydney, Melbourne, Brisbane and Perth.

 Job opportunities and employment availability tend to be most abundant within capital cities.

 The supply of new housing within the capital cities has consistently been insufficient to meet the level of demand over the past decade or so.

 Population growth is strong with relatively high levels of overseas migration and natural increase creating additional demand for housing.

 The cost of vacant land has been driven to unaffordable heights due to the slow release of new residential land supply and the restrictions of urban growth boundaries in most capital cities.

 Negative gearing (which is available on all asset classes) encourages many to invest in residential property as a way of reducing their tax liability which creates additional housing demand.

Although these factors all contribute to a relatively high cost of housing, it does not mean that purchasing a first home is unachievable.  An upcoming analysis which will be released by RP Data this month finds that as at the end of 2013, across the capital cities, 28.4% of all homes had a current value of less than $400,000. Even in a market which is considered significantly unaffordable such as Sydney, 17.5% (almost one in five homes) have a value below $400,000.  Of course most of these properties are not located in the desirable areas of the city, but they are available.

Many potential first home buyers either still live with their parents or rent within areas close to where they work and socialise. For those living with their parents, it’s likely that the home they are currently residing in was not their parents first home. I’m sure if you asked many of those parent’s they would say that their first home was vastly inferior to their current home (ie they upgraded when they could afford to). For those renting in inner city areas, the reason why property prices and rents are so high in these areas is that demand is very strong while supply is quite limited which in-turn results in the high prices you see within these areas.

Given this, the prospective first home buyer is, in most instances, going to have to make a sacrifice in order to enter into home ownership.  As I see it, first home buyers need to make one of two major sacrifices; either move away from their local area to an area where home values are more affordable in order to enter the market or buy something which is at the lower end of the local market (which will often be a unit rather than a house). The strategy for someone buying their first home should rarely be to buy at the  suburbs median selling price; it should be to buy an entry level property.  Of course varying levels of deposit and income will dictate what the purchaser can reasonably afford to borrow and repay.  Over time, the first home buyer should see some capital growth and it would also be reasonable to expect that they should also experience an improvement in their employment conditions (more pay/promotion/new role) which would eventually help in assisting them to upgrade.

Looking at my first home buying experience, the above scenario parallels my own. I have to admit, the home was pretty horrible but it was in the inner city location I wanted.

My first purchase was a two bedroom, one bathroom unit in Fortitude Valley in Brisbane.  The location was great but the unit was not so great.  The complex was largely utilised for short term accommodation and although the unit had two bedrooms and one bathroom, outside of those three rooms it had one further room which functioned as a kitchenette, lounge and dining room.  I purchased the property for $248,000 in July 2005 and sold the property in April 2010 for $334,000 effectively five years later.  At the time of purchase, the median unit price within the suburb was $309,240 and by the time of sale the median unit price in the suburb was $400,000.

The unit was purchased at a price well below the suburb median and upon sale the price had increased by 35%.  In comparison the median sale price across Fortitude Valley had increased by a lower 29%.  At the time I was single so I also had a friend come and live with me which assisted in making the mortgage repayments.

By the time I sold the property I had purchased a subsequent property which was a house, once again it was purchased at a price below the suburb’s median.  I had managed to make a profit on the sale of my first home and purchased a more expensive property, I had also benefitted from an increase in salary over the time which made repayments easier.

In my experience the choice to purchase a first home is never an easy one.  It is often the case that what you think you should be able to get for your money and what you actually can get are very different.  But having an understanding of your budget and doing your research to get a realistic expectation of what properties and in what location you can afford to purchase takes some of the pain out of the house hunting process and purchasing.

Undoubtedly some people will not be able or willing to purchase but bemoaning the high cost of housing in the local area is unlikely to change the situation outside of wide-spread changes to government policy(ies).

Cameron Kusher is senior research analyst at RP Data.