Will housing affordability stall our property boom?

My recent blog where I predicted median property prices will be well over $1 million created quite a stir, much publicity in the media with news interviews around Australia, as well as some controversy with comments on the blog and people emailing saying it couldn’t happened because of “affordability”.

There is so much misinformation about the topic of housing affordability that I felt I must address it in my blog today.

Now there’s nothing new about this debate… housing affordability has been a hot topic for quite a few years and everyone seems to have an opinion about it, and I regularly hear experts giving their opinions on how to solve the problem.

But let’s be honest… while many people may feel that house prices may be “too high” and the type of price growth we have enjoyed over the last few decades may be unsustainable, I feel that most of us also secretly enjoy hearing how house prices keep rising.

I know most of us are genuinely sympathetic for the average first home buyer struggling to get into their first property purchase, but we also take comfort from the fact that our home, our “castle” is quietly increasing in value. And we hope this continues, because it not only makes us “feel” wealthier, it actually does make us wealthier.

Only yesterday a radio host threw the following counter-argument at me:

“Property prices can’t keep going up because 20 years ago, the median house price in the capital cities was three to four times the average wage. Today, this figure is more like seven to eight times the average wage. This just shows you how expensive property has become.”

This often quoted statistic seems to counter my forecasts for property values doubling (or increasing even more) this decade, but it’s not really as simple as that.

Let me explain…

1. Twenty five years ago, the traditional Australian household was a one-income family. Today a much larger proportion of households have one and a half or two incomes. This means there is more income in the average household to support household expenditure, including housing costs.
2. Today the average Australian pays a lower rate of tax than 20 years ago, which means they have more to take home, more household disposable income and a greater ability to pay off their home loans.
3. We are enjoying lower ‘real’ (inflation adjusted) interest rates than we did in the late 1980s and early 1990s, which means the capacity of households to borrow more for housing has increased.
4. Increased competition in the banking sector over the past two decades has made access to housing finance that much easier.

I was recently reading a report by Christopher Joye, director of Riskmark International, who gave a presentation to the Melbourne Institute in November last year and argued that Australian housing was not “too expensive”.

He pointed out that over the last 20 years or so, Australian house price growth was in line with median price growth in our peer countries. He also explained that there was no evidence of unusually high growth in Australian housing costs or our house price to income ratios compared with other “peer” countries. Many countries had significantly higher growth.

He concluded that Australian housing affordability is better than our long-term average (since 1980) and that current mortgage repayments as a share of disposable income are better than average.

I bet someone who is reading this is saying: “Yes but look what happened overseas, their property markets collapsed and so will ours.”

The problem is absolute comparisons between countries don’t really work because of the differences in international:

• Legal and tax treatment of houses – for example in the USA you can claim interest on your home loan.
• Home ownership rates – they are proportionately high in Australia with close to 70% of Australians owning their own home.
• Urban densities – in Australia 60% of our population lives in our five biggest cities and this proportion is likely to increase.
• Population growth rates – Australia is experiencing a population boom creating enormous upward pressure on home prices.
• The distribution of income – in Australia there is not as big a gap between the wealthy, the average Australian and the poor as there is in other countries.

As you have heard me say before, there will always be affordable housing… just go out to the outer suburbs or regional or rural Australia. The problem is, that’s just not where many of us want to live.

So to me anyway, the conclusion is inescapable… we’re headed for another property boom where those who own the right type of property will make a fortune. Get set for the ride!

For a further detailed discussion of this topic, with some intelligent viewpoints, please read this article by the Hudson Institute by clicking here.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au. Look out for the newly updated 3rd edition of his best selling book How to Grow a Multi-Million Dollar Property Portfolio – in your spare time.