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Is Housing Unaffordable?

Is Housing Unaffordable?

By Guest Blogger, Peter Koulizos, property lecturer and author www.thepropertyprofessor.com.au

There is a lot of talk about housing affordability and how much harder it is today to save for a deposit and to pay off a mortgage. There is no doubt that housing is more expensive today as it costs more to buy but what about affordability.

To make a comparison, I am using the situation as it is today as compared to 30 years ago.

To calculate housing affordability, we need to consider more than just wages and the price of houses. We also need to factor in interest rates, mortgage repayments and the deposit required.

Year

Average Wages (pa)

Median House Prices

Home Loan Rates

Deposit Required

 

 

 

 

 

1987

$20,000

$100,000

17.5%

25% ($25,000)

 

 

 

 

 

2017

$60,000

$800,000

4.5%

5% ($40,000)

 

Home Deposit

At first glance, you will see that in the past 30 years, wages have increased only three times but house prices have gone up eight times. Wow!

However as I stated at the beginning, we need to include other factors when calculating housing affordability.

In 1987, you needed a 25% deposit to purchase a home. With an Australian median house price of $100,000, you needed $25,000 deposit to purchase the property. The average Australian wage in 1987 was $20,000. This equates to the deposit being the equivalent of 1.25 years (or 15 months) salary ($25,000 ÷ $20,000 = 1.25).

In 2017, the Australian median house price was $800,000 and we now only need a 5% deposit to purchase the home. This means you need a deposit of $40,000. This equates to a deposit being just 0.67 years (8 months) salary ($40,000 ÷ $60,000 = 0.67).

Based on these figures, it should actually be a lot easier to save for a house deposit today because you only need the equivalent of 8 months’ salary whereas 30 years ago you required the equivalent of 15 months’ salary.

(I haven’t factored in stamp duty costs as in most states in Australia there are many exemptions or discounts based on whether the property is brand new, it is an apartment, you are a first home buyer, etc.)

If it is supposed to be easier to save for a deposit today, what about the mortgage?

Mortgage Repayments

In 1987, home loan rates were 17.5%. Assuming you already had the $25,000 deposit and you borrowed $75,000 at 17.5% for 30 years, your principal and interest repayments would be $13,200 per annum. This was 66% of the average Australian annual wage in 1987 ($13,200 ÷ $20,000 = 66%).

In 2017, home loan rates were 4.5%. If you were to borrow 95% of the value of the property (assuming you have a 5% deposit), the bank would lend you $760,000. If you were to borrow $760,000 at 4.5% for 30 years, your principal and interest repayment is $46,000 per annum. This is 77% of the average Australian annual wage in 2017 ($46,000 ÷ $60,000 = 77%).

In summary, to determine relative housing affordability I have compared how much of the average wage was needed in 1987 and 2017 for a deposit on a home and for the mortgage repayment. So far as the deposit is concerned, in 1987 you needed the equivalent of 15 months’ salary whereas today, you only need the equivalent of 8 months’ salary. In relation to how much of your wage is spent on the mortgage repayment, in 1987 it was 66% of the average annual wage and in 2017, it was 77% of the average annual wage.

Based on saving for a deposit, it is actually easier today than it was 30 years ago. However, the mortgage repayments are harder to make now than they were 30 years ago.

So, how can you make housing more affordable for you? You can start by buying a cheaper home. These calculations are based on an $800,000 home which in most capital cities, would be a very nice house on a good sized block of land. Why not start with a smaller home and/or on a smaller block of land and/or slightly further from the CBD.

The key for first home buyers is to get your foot on the first rung of the property ladder. Your first home may not be your forever home but just ensure you buy the right type of property (the older the better), in an up and coming suburb so as to maximise the capital growth potential and give you that boost to move up the property ladder.

 

Peter Koulizos, property lecturer and author – www.thepropertyprofessor.com.au

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