Article written for The Australian – Aussie home ownership dream starts to fade
- BY:JAMES GERRARD
- From:The Australian
- May 22, 2012 12:00AM
Graham Roberts believes his children, in their 20s, will struggle to afford an inner-city property similar to his in Sydney’s Lewisham. Picture: James Croucher Source: News Limited
AUSTRALIANS have long had a love affair with the housing market. The attraction and security of owning a place to call their own has been a driving goal for generations of Australians, but this great housing dream is slowly slipping away for many today. Few people would consider house prices within or near any Australian capital city as being cheap; in fact, most people would consider them to be expensive.
But this hasn’t always been the case. Sydneysider Graham Roberts purchased his first house in 1978. It was a three-bedroom terrace in the now trendy suburb of Lewisham, in Sydney’s inner west, for $55,000.
He worked as a sales representative earning about $30,000 a year. When asked whether he would be able to purchase the same property had it been 2012, Roberts says: “I suspect not. In a lot of respects it is a lot more difficult for people to purchase a property in today’s market. I have children in their late 20s and I anticipate they will both struggle to purchase an inner-city property and something further out in the outer ring is more likely. In the 70s, the banks were very strict on ensuring you had a large deposit and they were also unwilling to lend if the interest cost of the loan was more than 30 per cent of your net income. Today, it is not uncommon for mortgage repayments to represent more than 50 per cent of net income.”
One indicator to measure whether house prices are expensive is to see how many years of the average income it would take to purchase the average house. Statistics published by AMP Capital show that now it would take 9.6 years of the average income to buy the average house in Sydney and 9 years of the average income in Melbourne.
Australian property prices are even more expensive than in most US capitals. The average property in Sydney is more expensive than it is in New York, Los Angeles and Boston.
Looking back to 1970, the median house price in Sydney was $17,750 and in Melbourne, it was $12,670. When compared with the average income of $4556 in Sydney and $4498 in Melbourne, it took only 3.9 years and 2.8 years to purchase the average house in these respective cities on that average income. Imagine if the income-to-house-price metric remained stable from 1970 to this year. That would result in the average house price in Sydney being $258,180 today and $176,680 in Melbourne.
Charles Tarbey, chairman of Century 21 Australasia, believes that during the past 30 years Australia has joined the world stage.
The country is largely perceived as a strong, safe and sophisticated destination for investment and living. Increasing globalisation and local supply and demand forces have helped propel property prices in recent decades,
However, an undesired consequence of Australia’s success and subsequent high house prices is that young people are having to rent longer than they would like, to save a sufficient deposit for their first home.
Aimee Steel, 27, and fiance Jamie Richardson, 28, are renting and saving for their first property on the northern beaches of Sydney.
Steel says they feel “high property prices are pushing up demand for rentals, so not only are property prices high, rental prices are also high. We want to buy a place to fulfil the great Aussie dream but we also realise that we are not going to make a lot of money on property given how high it already is.”
So where to from here? It is unlikely that we will experience a US-style crash in property prices. With strong migration and population growth in Australia, there will always be a strong underlying demand for property, especially for properties within a 15km radius of the capital cities.
Australia also has a healthy banking system and comparatively better lending practices than in the US. Although lenders in Australia were more lenient in credit assessment guidelines before the 2008 global financial crisis, Australia has never had NINJA loans whereas someone in the US before the GFC with no income, no job or assets could acquire a home loan.
As we now know, this sort of lending practice was a significant factor in the subprime lending crisis and subsequent property crash, which still has not found a bottom as US property prices are still falling.
The likeliest scenario for Australia is that property prices will continue to grow but we may have to get used to lower growth rates across the next 10 years compared with what we have experienced in the past.
Gradually, as affordability improves through wages growth and demand builds through population growth, house prices will eventually resume their healthy long-term growth rates.
This, however, is little comfort for the present generation of first-home buyers who remain shell-shocked at the prices of property and may never experience the joys of owning their own home.
James Gerrard is a certified financial planner with PSK Financial Services Sydney and can be contacted at firstname.lastname@example.org.