Hello fine readers! As promised last month I am going to delve into the world of ‘housing affordability’ come on this crazy journey with me as I try to understand the complex world that is….economics.
Unless you are literally living in a cave or under a rock, housing affordability is going to matter to you, hence why the current ‘crisis’ is getting such considerable media coverage.
The topic is complex as it is influenced by many economic factors. Any combination of such factors can create varying outcomes on individuals and community. Economists, banks, politicians and business people all monitor certain statistics to map trends and anticipate moves in the market. These factors and statistics include:
- The number of new housing approvals
- The reserve banks’ interest rates
- Credit and debt and international markets
- The number of approved home loans
- The housing costs to purchase, rent, build and renovate
- Individual income rates of pay
- Consumer confidence and employment growth
- Inflation rates
- Growth in population
To try and understand what is contributing to Victoria’s low housing affordability I will look at each of the above basic factors and discuss the influence they may be having. As you read you will see that each factor relies on and influences each other.
New Housing Approvals
Housing approvals are important as they can forecast what will be built in the coming months and years. In July housing approvals increased by 15.3 per cent from the previous month to 3,625, but they were still down 5 per cent on the same time last year. Housing approvals peaked in August 2002 and five years on there is still no recovery despite Government first homebuyer and rebate incentives. 2006/07 figures show there would have been approximately 39,000 new dwellings built in Victoria, which is 3,000 fewer than the required 42,400 to fill the need. As fewer homes are being built and more people move to Melbourne supply decreases and demand increases. This will lead to an increase in cost.
Housing Costs
The average house price in Melbourne is now $420,000, up more than 10 per cent over the past 12 months. In Sydney, this figure is closer to $520,000. Both cities are now among the English-speaking world's least affordable housing markets. Research has shown that in Melbourne a 605sq m allotment in Tarneit, 27km southwest of the CBD, costs $249,600. 2km further west at Manor Lakes, prices are starting at $255,600. In Sydney a house and land package on a smaller block in St Helen's Park, 48km south of the CBD, is $400,000.
Affordability is affecting the whole country. In Brisbane, outer suburban housing starts at $320,000 in Jimboomba. On the Gold Coast places like Yatala and Pimpama, halfway to Brisbane are starting at $320,000. In comparison suburban affordability in Melbourne is quiet attractive to many Australians. This has lead to an increase in Victoria’s population which places a greater demand on the market.
Other housing costs have also increased contributing the low housing affordability. Renovation costs have jumped almost 6 per cent in the past 12 months dramatically increasing the price for those hoping to enter the property market by purchasing a ‘do-er up-er’. Rental prices have also increased with the decrease in available rental properties due to the number of owner occupiers purchasing.
Home Loans
Australians took out fewer home loans in July then June 2007. Some believe the fall was a correction after a strong rise in June as a result of this years’ superannuation opportunity to put up to $1 million in and receive a tax discount. More than 63,500 people took out home loans in July, down 4.1 per cent. Economists had expected only a 2 per cent fall. The number of loans for new dwellings dropped 3.3 per cent. In general, fewer home loans reflect the restraint on purchasers to enter the housing market and poor value available. Less homeowners can also lead to more renters as people choose to rent or stay in the family home longer before they purchase, thus putting pressure on the rental markets.
The reserve banks’ interest rates
It must be made clear that the Reserve Bank is independent of the government and the forthcoming election, despite general opinion, will have no bearing on their decisions to change rates.
On Tuesday 7th of August 2007 the Reserve Bank of Australia announced it had lifted official interest rates by a quarter of a percentage point to 6.50 percent, an 11-year high and the first rise in rates since last November 2006. The rise in interest rates will add around $50 a month to repayments on the average $250,000 mortgage. Many believe that rates may rise again this year if a return of stability to the money market does not occur and international economic pressures are not contained and spill over into Australia.
The fall in home ownership is expected to worsen in coming months as the effects of the interest rate rise takes hold. An interest rate rise can often taken 6-18months for its full effect to be felt. The possibility of a November rate rise is currently at 50 per cent at best.
Many believe the deciding factor would be an abnormally high October inflation figure.
This speculation of another interest rate rise may be the reason behind the slowing demand for home loans discussed above. Any interest rate rises will affect anyone with a mortgage particularly those first homebuyers whom may have already extended themselves to meet their current home loan.
Growth in Population
Melbourne attracted 61,000 new residents in the year to June 2006, while Sydney attracted only 35,000. For the first100 years after Federation, Sydney achieved a greater annual population growth than Melbourne every year. But this is no longer the case as Australians choose which city and which living environment they prefer. Of the new population a considerable amount are nuclear structured families. Research shows that over 5 year Sydney attracted 5,000 net extra traditional nuclear families where as Melbourne attracted 11,000. This population growth coupled with the shortage of new housing approvals would lead to a rise in housing costs in the year ahead.
Individual income rates of pay
As the gap widens between the rich and the poor, even people in ‘good jobs’ are finding themselves unable to live near their place of employment. A large proportion of these people are spending up to 50 percent of their income on their homes. With such a large percentage of income being spent on rent or house payments tremendous burden has now been placed on finances for food, utilities and transportation.
The deterioration of housing affordability has been worsened by salaries that haven't risen nearly as fast as house prices.
Studies have shown that the median house price in Melbourne is between six and seven times median household income and in Sydney housing costs measured between eight and nine times earnings. This unbalanced relationship between housing costs and income is a major contributing factor to the low affordability being experienced across Australia.
So, I hope this whirlwind tour of economics and housing factors has been beneficial! Despite sounding quiet doom and gloom for the future it must be remembered that all markets work in cycles and everything therefore is relative. So stay positive and continue to look for the bargains and opportunities that can be found in all sorts of markets.
Look forward to next months issue where I tackle the most frequently asked Real Estate questions.
