Firstly, I have received a lot of curious emails expecting me to go on a rant and rave about the recent “changing of the guard” in Canberra.
Here is my contribution. Gillard out, Rudd in, Labour to lose by about 10 goals… Hey it’s footy season after all.
More importantly, Liberals to win and property boom to continue.
That’s what I want to talk about today, so lets not waste time on B.S. and get on with it.
You’re probably really confused with the subject line of this email… but don’t be, I will explain.
One of the surest signs that property is about to swing into a boom phase is an improvement in affordability. And if you look at the data, house prices are the (relatively) cheapest they’ve been in a long time. Says to me it’s going to be a very big boom.
“But Jon! Houses are crazy expensive. My two adult kids are living in cardboard boxes under a bridge on the train line!”
Sorry, just had to get that out the way up front. Something like that’s bound to come up every time I say that property is “affordable”.
I’m really enjoying the comments I get on these posts. Often I’m amazed at how much our readers know. And humbled. Why are these brains reading a hack like me?!?
And I love the diversity of opinion that sometimes comes through. But I often find that comments like that aren’t based on data. It’s just a general ‘feeling’, based on personal experience, or something they read in the paper… once. I don’t remember when.
But not me. I talked to my cousin who’s daughter just bought a house AND I did some research into the statistics.
Let’s take a look.
There’s a few different measures around, each doing it slightly differently. The starting point here is the Adelaide Bank/Real Estate Institute of Australia (REIA) affordability measure.
This measure just compares a measure of household (family) income against average loan repayments.
You can see there’s been a pretty solid trend decline in the share the mortgage eats up of family income over the last three years or so. On this measure, it’s around the best it’s been in 10 years.
Affordability is improving.
Same story if you go to the CBA-HIA Housing Affordability Index. This is based on CBA’s measure of house prices against the ABS measure of wages.
It’s a smaller window of time, but again, it’s showing three years of consistent improvement. In fact it’s the best it’s been since the GFC gave prices and interest rates a knock on the head back in 2008.
But there’s something a little unsatisfying with both of these measures. Because what they do is take “total” income measures, which means they ignore the trend decline in the relative share the “basics” take up of our income.
“Disposable Income” – income that’s left after all the essentials have been taken out – is going to be a better measure. Why? Well, it’s your disposable income that determines your ability to service a mortgage. Once the basics are sorted, how much can you spend on repayments?
And if we’re interested in knowing to what extent people can support a run up in prices, this has to be your best measure.
Chris Joye, in a piece he did for the AFR earlier this year tried to cut it up this way. This is what he found:
So we’ve got the same story again. 3 years of steady improvement in affordability.
But look at what’s happened to the level. Mortgage repayments are down to 21 percent of disposable income. Affordability is the best it’s been since the late 90s!
Yes, yes. Your son’s in a box. I heard.
Does it make sense? We know house prices have come a long way in the past 15 years or so?
But so have incomes. And so have incomes relative to the costs of the ‘basics’.
So houses might be ‘expensive’ in a level sense, but the average household is very well placed to afford them. And that’s what matters.
And you can also see that the peaks in the series – when affordability was at it’s worst –was just before downturns in the market. The troughs in the series – when affordability was around where it is now – were just before the booms.
I think you see where I’m going with this.
Affordability improves just before the boom. We get a slow patch in the market. House prices fall or go sideways, but incomes keep rising.
I mean, over the last three years, house prices have been flat, but incomes have increased 11 percent. At the same time we’ve had 200 basis points worth of rate cuts. Of course affordability’s improving.
And improvements in affordability mean that people can afford to spend more on their mortgage. Then, unless supply is outstripping population growth, people can, and will, bid up the price of property.
This is the mechanics of the market. The mechanics of a boom. It happens every time.
And it will happen this time.
And if we’re talking affordability, then we also really need to factor what’s going on with rents – because the other option to owning a house is renting one.
On that front, the Adelaide Bank / REIA measure is the best we’ve got. What we can see is that there has been very little change in the affordability of rentals. In fact, over the past 6 months or so, it has worsened sharply, as rents started picking up again.
So renters will soon be wondering why they’re paying more and more for rents, when the alternative is so darn affordable.
It’s a potent cocktail. Expensive rents, affordable houses, interest rates at 50-year lows…
It’s everything a boom needs.
Quick. Tell your kids in a box to get themselves a house!
Miggi says
Big problem with using averages is data validity – you cant apply a sample mean from sample a to sample b, even if sample b is in sample a.
Your data is right (or at least from reliable sources), but it comes down to a few factors:
– there’s a big difference between mean incomes based on age. ABS stats show about a 40% difference between 20-34 & 35-60. This means that the sample mean is skewed by higher earning applicants, and is not a valid inference. Also important to note is that these averages are based on people who are employed (very high une
– The same as above applies to CPI.
Still, it’s great for investors. It just doesn’t really apply to the kid living in a box under a bridge 😀
Mike says
You don’t think the ‘boom’ would happen if labour gto back in John?
Michael Campbell says
Hi, I’m no property expert however I believe the reason people are spending less on their mortgage payments is because the cost of living paying utility bills, petrol, rates, transport, food etc is chewing up their wages. I also feel the younger generation who have purchased new homes spend their money on luxury items e.g. electronic devices, travel, clothes, personal items etc. They are use to living with a large credit card debt so why spend more to reduce the mortgage.
Interest rates are low so as to encourage investment, only investors are making use of this period. There is absolutely no security in holding a full time job anymore, when the government start putting off hundreds of long term employees by having them to reapply for their positions and most of the young and older unemployed are working under short term casual contacts.
The job market is flooded with highly skilled and uni educated people and very few jobs available.
I don’t see the property market improving (maybe very gradually) for another few years or until a very large number of businesses start up and employ people on a full time basis. Security for the workforce is required before ordinary people decide to invest in a property so demand increases.
Cheers
Michael
GS says
Micheal u ar genius n a true man …..mate you caught the property gurus lying …..!!!
Andrew Charlton says
Thank God for you Jon! You are the voice of reason amongst all the doom and gloom merchants. I love reading your no-nonsense, technical jargon-free stuff. It provides a great levelling insight.
ron goddard (licensed real estate agent) says
thank you for the good story. my national bank book..housing in australia (1964!)tells me that house prices in australia are roughly 200 times the average wage ..ok that was when tax was almost negligable(2.5%)..1967 model tax scale on au$90 per fortnight, which was about average income for that time.. now the tax bracket on say au$2,600 per fortnight is 30%? leaves au$1,820 p.f…so maybe a house being 100 times that should be realistically au$182,000.00..one wonders 🙂
Andrew Charlton says
Miggi – Don’t you think that has always been the case? For hundreds of years (since the industrial revolution) early workforce participants have earned less than their experienced counterparts. Forever and a day, young people have bought the proverbial “cardboard box” as their first home as a stepping stone to greater things. I believe this to be Jon’s point entirely.
Johanna Makris says
Not all wages have gone up – my son is a qualified bricklayer and his boss is finding times hard with less work available – thus my son gets a pay cut – but he has to accept it because there is not much work out there.
Ken says
Johanna M, If your son was working for himself, the going price of block laying is $2.60 + GST, at the present time. So this is still a lot of money. Cheers, Ken.
Darren says
I think the main problem for new home buyers is saving the deposit for a home not the repayments itself.
Anth says
Johanna, my experience is somewhat polar to yours.
I can’t find enough Brickys.
mark says
my cats breath smells like cat food
Paul says
Not so much about the email, which may well prove correct. But, about the 12month millionaire link. Each time I try to open this link it just freezes. I also tried to get into the site from Google, but no joy. anyway, for your information, as it has happened with other KS emails.
Ken. says
No one gives a rat’s ass about wheather you can afford a house or not. If you don’t buy it, somebody else will. Too many ”GALOOTS,” somebody who wants or expects something for nothing, are always trying to live in a fool’s paradise by wanting and buying houses that they can’t afford. There’s still plenty of cheap houses about that you can afford to buy if you want to put up with old, instead of new. Also try group purchases or building your own home. It’s simple really. That way you only need a deposit for land. A livable besser block shed that can be converted to a house later is another idea to start off in. Ken.
Ken. says
Paul, If you’re having trouble downloading stuff and you have all the right stuff to open these emails on your computer, like I used to have, Adobe Reader and the like, I’m sure Jon would give you Mark Rolton’s, or Dympha Boholt’s email addresses. Cheers, Ken.
peed off says
can super secure a deposit. Although 9 years off retirement with some savings? I’ve had 3 properties never a first or help towards home loan. Working full time in qld and renting again. Bring out help to people who have never had opportunity for “1st home loan”
Justin says
Houses are äffortdable” rates at record lows but loans (principal) at record highs. Maybe the market is cautious about taking on the risk of record loans for properties at record prices. An income- compare the disparity between median and average. The average Joe earns less than 50K.
David Kirke says
Dear Jon,
What would be interesting is a measure of affordability based on “debt in relation to income” not affordability based on repayments with current low interest rates. Obviously if interest rates doubled in the next 5 years and who can say what will happen there, the ‘affordability’ picture that you mention turns into a crisis of affordability – downward pressure on prices etc. Not so much a boom as a kaboom. Do you have figures comparing affordability relating “house prices : average income” for the same time period (excluding mortgage rates from the picture)? P.S. I base my ability to pay a house loan on the long term average variable mortgage interest rate of the last 60 years which is equal to around 7.25%. That at least allows me to cope with a realistic return to long term averages. I am old enough to remember when my parents struggled to pay their mortgage when we were kids when mortgage interest rates were around 18%!!
mawee says
Are you kidding me here your nothing but a snake salesman. He doesn’t give dam about the ordinary person whose on edge working harder and harder everyday finding out he loses his job then has to payback a 30 year mortgage. The banks don’t give a crap they will rip the house from under you and you will lose your so called asset which is really not an asset. A house is your greatest liability and if you fall in2 this guys trap you will only set yourself up for a huge fall don’t do it!! he’s an agent for the banks and the rich like himself. This guys advice in a economy that is at a very volatile stage and getting worse not better is just suicide. He wants you to buy a house so that down the line when you foreclose your property he will be waiting like a vulture picking and eating up the profits he makes off your misfortune don’t do it. finally if this post at all gets posted which I don’t think it will, take heed, look around you the economy is not getting better and neither is the property market. it’s getting worse and he knows it
Bill Coulter says
Mawee, your statement is not about what Jon Has said it’s about how you see things.
“you see the world how you are not how the world is”. At 64 I’ve seen booms and busts made money in both. this year I’ll make approx. $300k on a small properrty deal. How????? education. get some you’ll see the world differently. TRUST ME…LOL.
Bill
The Mug Millionaire says
Wow, a lot of opinions here.
Last night my wife and I had drinks with friends from our neighbourhood and sitting there listening to everyone speak was interesting. They all talked about how hard life was, the holidays they went on, the cars they bought, the knick knacks they buy while complaining they had no money in the bank and worried about retirement.
All the while I’m sitting and listening and putting in an occasional opinion, which incidentally is contrary to their reality by saying that life is good, it’s easy if you have goals and believe in what you want to achieve financially. They thought I was full of BS and dismissed my comments BECAUSE my reality is different to theirs.
None of our friends realise that my wife and I started with nothing and are now self made multimillionaires with a 6 figure passive income through property. We did it through financial education and Traill and error. None of them know that we are as comfortable as we are.
Their reality and attitudes are one of never being able to afford anything and because of this they choose to remain ignorant about wealth.
My wife and I are always looking for reasons why something is possible rather than why something is not possible.
If you don’t know how to create wealth, then learn from someone that’s already done it. That’s how we did it, and anyone in this country can do the same. Your biggest obstacle is YOU!
cristina says
I could not agree more with you.
educate yourself then you will see the world with different eyes.
mawee says
Bill I admit that I don’t really know John and what kind of investment projects or systems he uses. My comments are based solely on the article John has presented here. And If I have read this article right he is encouraging people to buy a house on the fact that market trends are predicting a property boom. The article also does not mention anything about investment in properties but the insinuation of people going a head and just buying a house on a whim. This is absolutely bad advice and also his scarcastic remarks concerning people living in a box under a bridge was not funny at all because the truth is that’s exactly where millions of people are living right at this moment. Now what you have mentioned here about your own investment deals coincides with some of the investment deals I have made as well and the key word here is investment. Investing in real estate, acquiring assets and receiving cashflow. Is this not the advice that should have been this article or have I read this article wrong?
Deborah says
Well said Mug Millionaire, have been investing and learning since 2003 and have enjoyed every moment of it. Friends and family often ask “How is the investment going? Have you had to sell yet?” Disappointed when I reply “No, settling on a property next month”.
Craig. says
Only fools fight in a burning house! The House my family bought in England to come out here with cost $15,450 and some real estate salesman now will probably sell it for $3-400K these days. It is not actually worth that much money because it is in a worse state now with White Ants, Black Ants and Bugs devouring it from the inside out. The house was built using the old method of Being raised off the ground by Limestone Blocks so that should slow them down but it is still rotting out from underneath the Owners. The Land also has more White Ants, Black Ants and Bugs in it just waiting for a New House to be built on it so that they can have a nice new Lunch to Munch on.
That is what Property Investing is all about. The chance to sell something for more than you paid for it while the Item concerned is in a worse condition than when you bought it. They say the average stay in a house is for about 7 years and so that gives the Bugs 7 years to have some feasting. As I am now doing, I am investing in myself by learning about something I can bring to People and not Rip them off with (usually) all other forms of Investing. As an example, in the old testament, there was a 50 year period known as the Jubilee. the Family that owned the Property at the beginning of the Jubilee got it back at the end of the Jubilee. The Owners in between received a reducing amount as the years went buy.
Thusly the System was based on Honour (you had to be honourable enough to give the Land and House back) and was the basis for Property Deflation and not Inflation as the Current system relies on. The Government does want it’s cut in the form of various Taxes so it allows the Charade to go on. The only problem is the whole World Financial System is Strained by Gimics such as this by creating Debt for Every Country (with very few exceptions) to heap to itself and we shall soon see that happen when the Other Major Economies of the World scrap the U.S. of A. way of doing Business. My wife and I are Christians and could see this coming a mile off. It will not be pretty. The only solution to this Life is to bury it in Baptism and receive a new Life from the Lord. It’s called being Baptised in the Holy Ghost. Enjoy that if you read it here.
Ken says
Craig, I see what you mean by giving a house back when it is stuffed. One or two thousand years ago, you didn’t get town water or electricity or sewerage, or pest control, bitumen roads, kerb and channelling, or any other improvement, so the land was probably not worth anything. This is why the Red Indians and Aboriginals went on walkabout. To keep away from disease, and follow the food chain. Cheers, Ken.
Mike says
The number of people who seek to justify their own inadequacies by attacking the real estate market never ceases to amaze me – even a Real Estate Agent who can’t differentiate between 200 times and 100 times the average income to determine a house price– Let alone totally ignoring that the house purchased in 1967 did NOT have a double Garage, two bathrooms, Family room, Luxury kitchen or the endless array of expensive fittings and gee-jaws that young buyers expect to-day. It was not decorated and not landscaped- that was done by the owner over a period of time following purchase. Lets get real — housing is affordable, sooner or later the Me Me Me mob will dimly realise it—–Probably after prices have increased beyond their capacity to buy!!!
Ken. says
Good one Mike, spot on. Negative morons everywhere. It’s human nature to knock anything they don’t understand or can afford. Let them go to buggery. I’ve had a gutful of these Idiots. Ken.
Dev says
Dev,
thats right the choice is yours. I have come from overseas and my wife had a temp job with no saving . We bought a property thats Now Worth $550 000. determination and goals is important. Who said life is a bed of roses.
Shaz says
Everything is open to interpretation, by the giver and receiver of information. We all get so hung up about needing to create wealth, (have more than we really need) to what ends? It is the excesses of humanity that will eventually render the power, security or luxury you crave absolutely useless. If you have a roof over your head that is yours and a car and a job your pretty dam lucky why get greedy!
MikeN says
Investment is about making some money, sure. But its also about providing a roof over someone elses head. So the whole process does not work without a benefit to both sides.
If all the investors left the market I don’t believe that property prices would decline to any significant amount, but there would be less rentals available and renters would pay more and have less options. Nothing comes without some effort and commitment. Maybe a bit of luck too.