Hysteria is a funny thing. People seem to get so worked up about the latest meme that it blinds them to obvious truths; one being that housing is still actually very affordable.
Sure, it may not seem that way in some areas and headline statistics certainly don’t support that view -- I don’t dispute that. Although a lot depends on what you think the median household income is. So, for instance, on the latest figures -- and taking the median annual household income (from the ABS) of about $75,000 to $80,000 -- house price-to-income ratios on the east coast are high, at around 9.7 times in Sydney and 7.3 times in Melbourne, while in Brisbane, house prices are slightly more affordable at six times income. But even Brisbane is still regarded as unaffordable because it is higher relative to what you see around the globe and well up on ratios seen in the 1980s and 1990s, which were three to four times annual income.
Now, even if we can accept those measures as an accurate tool for assessing housing affordability (and there are good reasons not to), aggregate numbers often hide the real picture.
So, take Sydney’s ratio: on the face of it, someone on an average salary is paying nearly two-thirds of their income just in interest – this is clearly not affordable. Yet, not every household earns between $75,000 and $80,000.
Indeed, recent research from Barclays used a figure of $122,000, which lowers some of those ratios mentioned above considerably and makes housing much more affordable. It’s probably fair to use a higher income estimate as the ABS figures would include groups like pensioners and the sick, that is, people who aren’t generally in the property market at any price.
Anyway, on ABS data, 16 per cent of Australian households -- over one million households -- earn more than $150,000 per year, while just over one third (three million or so households) earn more than $100,000 per year. Most of those households would be in the capital cities.
Think about that for a minute. A household on $150,000 could afford a $1 million-plus house -- no dramas. Someone on $100,000 could afford anything in the vicinity of $650,000 to $800,000. A lot depends on the loan-to-value ratio they’re taking -- I’ve used 70 per cent -- but it can be done.
Looked at through this prism, prices don’t look so crazy.
Similarly, not every house in Sydney costs $752,000. That’s a median dwelling value with half above and half below. The fact is you can still get a house in the Sydney region for around $450,000 to $500,000. Outside of Sydney it’s even cheaper. Houses can be bought in the $300,000 range. That’s affordable for a household on the median income, and that’s not even including apartments.
What this highlights is that, as a general principle, housing is still very much affordable. So, when you hear people talking about a housing affordability crisis, what they’re really referring to is the fact that they can’t find a dwelling they can afford in the area they want -- usually the inner city. That’s a different issue. That’s not a housing affordability crisis, its basic economics. It’s a scarcity issue.
You see, not being able to buy in the area you want just reflects good old fashioned supply and demand. The population is growing, yet the stock of housing in Newtown, Paddington, Carlton or Mosman isn’t. Well, at least sufficiently to offset apparent demand. Think of this: 10 to 15 years ago, the ABS reports that only about 250,000 households earned over $3,000 per week. Nowadays that’s over one million households. It’s the same story further up the salary chain. The number of people earning $5,000 or more per week has more than tripled as well. Yet it’s a good bet that the stock of housing in the fashionable areas hasn’t tripled.
So, when people complain of unaffordable housing, it isn’t actually an affordability crisis. It’s not that housing is less affordable now -- there is ample stock of affordable housing around the country -- it’s just that with population growth, income growth and ultra-low interest rates, the competition for the traditionally attractive or desirable areas, which is finite in supply, is becoming fiercer.
The push toward higher density living is only going to exacerbate this problem and its naive to think that scrapping negative gearing or banning foreigners is going to help in any way. At best, it may slow the process. At best. But it won’t end it because it does nothing to solve the fundamental problem of scarcity.
When you cram an increasing number of people into a hand full of cities, what do policymakers expect will happen? That house prices will fall?
Ultra-low rates just add fuel to the fire. It speeds the process up as those who’ve already saved the required deposit realise their purchasing power has just gone through the roof.
It would help enormously if interest rates were calibrated appropriately. Ultra-low rates are not good for the country and they exacerbate the problem of scarcity. Yet, what the country needs even more than that is good government; that is, administrators who will do their jobs and provide quick and efficient transport for a growing population. In that way, the growing populace won’t be forced to fight over an increasingly short supply of land.