Housing affordability

Good morning readers.

Taken from SMH: http://www.smh.com.au/comment/how-to-fix-sydneys-housing-affordability-problem-20160725-gqd42f.htmlThis will be a multi-part blog where I will look at housing affordability in Sydney. The idea is to raise:

  1. House prices
  2. Tax concessions (relating to housing)
  3. Low interest rates
  4. Loans and lending practices
  5. Mortgages

As you might know, during the last six months we have been searching for a new home. If you follow my blog, you might have seen – https://blogofgreg.wordpress.com/2016/05/07/were-moving/ and https://blogofgreg.wordpress.com/2016/06/02/were-moving-part-2/.

I wanted to write about our journey through the process of selling our family home and buying a new one. I particularly wanted to write about the purchase process, as I have seen some really significant issues over the last six months.

Part 1. House prices

Sydney has the second most expensive housing market in the world.

In Sydney we have what some say is the second most expensive housing marking in the world – second only to Hong Kong. This fluctuates depending on the time of year and the article/s you read. Some put Sydney as the fourth most expensive.

I believe that this figure is determined by comparing median wage to median house prices.

Whatever the case, for a small country of about 25 million people, and a city (Sydney) of about 5 million this is quite obscene.

Over the last 70 years, owning your own home provided financial security for Australians. A roof over your head was certain, you had equity in your own home, there was certainty in your housing expenses and standard of living.

Over recent years (the last decade or so), our governments have classified home ownership as a privilege. In their minds it would seem that owning a house is no longer guaranteed and should not be guaranteed by Government.

What is certain is that home ownership for first home buyers and our children would appear unlikely to ever be affordable into the future (at least in Sydney and Melbourne – but many other capital cities in Australia as well).
This places Australians in a position where financial security and a certain standard of living will never again be guaranteed!

Financial security and standard of living into the future will never again be guaranteed by current Governments

What a disgrace!

The Government’s response to house prices

The Honorable John Alexander MP - taken from: http://www.anc.org.au/news/Media-Releases/Australian-MP-slams-Azerbaijan-on-Human-Rights-and-Karabakh-in-Federal-ParliamentAs a result of high house prices, the Government commissioned a team to review housing affordability in Australia. The commission was chaired by MP John Alexander.

Following the report, Alexander commented in the local paper, suggesting something along the lines of

‘if you are a first home buyer in Sydney, don’t expect to ever be able to afford a home’

[I was unable to confirm the newspaper that I have paraphrased this from, but I believe that it was from the Northern District Times]

Another comment in the media by Minister John Alexander shows the distorted focus of our Government. (This statement was in response to the Labor Party’s (currently in opposition) desire to reduce negative gearing and capital gains tax concessions to investors):

Mr Alexander said Labor’s policy would reduce the number of investors bidding for property, and hurt those looking to sell.

“We must not hurt the many thousands of mums and dads who work hard to pay their mortgage in the hope of building up equity,” [Northern District Times 30th March 2016]

That’s all well and good John, but what about future generations who will never have the opportunity to build equity in their own home, have housing or financial security.

This statement by Alexander clearly shows that the government is focused on the now, and not the well being of future generations. Which is probably why Governments keep ending up in a mess.

Our experience

Investors - taken from: http://stockcharts.com/articles/journal/2014/08/a-game-of-21--21-investors--21-rules.html

During our attempt to buy a home over the last six months we saw many different issues relating to house prices.

  • Some were related to investors with significant amounts of cash,
  • Some were related to Chinese investors with what appeared to be significant amounts of cash [likely Chinese, but Asian at least – the Chinese are buying up Sydney and Melbourne in particular]. They would essentially look at the property on the day, and buy it without ever seeing it before. They would be happy paying $150k more than it was worth, because they are looking at the property from a land banking perspective.
  • Some were related to emotional buyers who were just desperate to own a home, often competing with investors. [The word desperate here is important to note!]

Market forces

Predominantly Governments have indicated that the high cost of housing is due to supply and demand. During periods of high supply, housing is cheaper because there are more houses and less competitors per house. Competitors can walk away and look at the next house.

When supply is low and demand is high, the prices are higher as there are more competitors per house. Buyers are more desperate (note this word), as there aren’t many houses for them to move on to.Supply and demand - taken from: https://infograph.venngage.com/p/94064/supply-and-demand

This is a typical “market” response that doesn’t look at the real issues. In my opinion, this type of response is a way of ignoring the real causes of housing costs, and it reduces our capacity to address the problem.

As housing is a market driven system, each time a home in the suburb fetches a high price, it sets a precedent for similar homes being sold in the area. Sellers expect a “comparable sale” price – higher price – and generally get it because buyers are desperate in this current market!

While I noted above that supply and demand have a big play on house prices, it is a bit more complicated than that.

There are investors in the market in record numbers, who have the backing of banks with interest only loans. If they have capital in other properties, the banks are more likely to lend them large sums of money. The chances that an owner occupier could compete with them, and succeed, is limited. Should they try to compete and drive up the price, a precedent will be set and similar properties will be marketed at the newly set high levels – we saw this continuously.

Interest rates are at record lows. What this means is that banks are lending massive amounts of money to buyers for properties that are well over-valued. This allows buyers to spend more, competing for limited stock as emotional buyers. The interest rate and lending issue will be discussed at a later stage.

In Australia (and probably around the world), we have an ageing population. Older people are wanting to stay in their own home and aren’t downsizing. Sometimes family members come to stay with them so that the older person can stay living in their own home.

Sometimes the older person has carers that come to help them during the week; they can seek meal deliveries or other help around their home. The older person can remain independent and stay were they are living for longer.

For those who would want a smaller home, the cost of selling and buying a home is prohibitive and they can’t afford it, nor manage with the massive changes that are involved. Hence they don’t sell until they are forced to by health or family reasons.

Often in these homes there are bedrooms that are not being used; we call these empty nesters.

These are just some of the other issues beyond normal supply and demand based house prices.

Stamp duty

As mentioned, stamp duty is prohibitively expensive. State Government’s charge stamp duty on house purchases, at it varies with cost of house. The more expensive the house, the more stamp duty you pay.

As an example, a house purchased at $1,000,000 will have a stamp duty bill of around $40,490. A house purchased at $1,500,000 will incur a stamp duty bill of  around $67,990 (there are some other expenses that are not included as well). As you can see, stamp duty is not a flat rate, nor a flat percentage, but changes with increasing value of the property. This is a significant problem in this inflated market and stops people selling.

One of the issues with stamp duty is that charges have not changed (percentage wise) as house prices have increased. What this means is that as the median house price has risen, the stamp duty has also risen, but out of proportion to the median house price. The Government is unlikely to lower stamp duty as they are making record earnings from it.

Sadly though, if the Government were to reduce stamp duty, buyers would then have more money to pay for a house (at least in their own mind) and spend more on the house, and less on stamp duty.

This is exactly what happened with the first home buyers grant. So lowering stamp duty isn’t the answer, particularly as there are many buyers who can get a big loan (at least at present).

Interest rates

I will cover this in more detail in a coming blog, but…

Sadly, just after we sold our home, interest rates were lowered by the central bank. Immediately after this we noticed house prices go up by about 10%! For us, that meant that we were now competing with people who were lent more money, or thought they could afford, bigger loans.

 

We weren’t prepared to have a big loan, and we are smart enough to understand that;

  1. we have to pay it back with interest
  2. should interest rates rise we would have to pay back more
  3. should there be a change in the financial market, job losses etc., we could get into financial trouble (and many people are currently, or soon will be)

 

The outcome was that some buyers (investors in particular), were prepared to pay larger amounts for the houses that were selling for $100k – $150k less just a month earlier.

Now the central bank (the RBA) have indicated that they are concerned that raising interest rates will cause significant numbers of people to default on their loans – perhaps they should have thought about this earlier.

As an aside, apparently 1 in 5 mortgagees are in financial stress. A slight increase in interest rates, a dip in the economy, job losses, Government changes, could cause them to default. Sounds a bit scary!

I will talk about his more later.

Desperate buyers

Bid - from: http://www.nordonews.com/2016_08_01_archive.html

This kind of speaks for itself.

The housing market is very tight. There are relatively few houses on the market which has resulted in more competition and higher prices. Desperate buyers have been prepared to pay greater than 10% more than they should for housing at auction.

Desperate buyers have been watching the market increase by 20% per year, and know that if they don’t pay the price being asked at auction, they won’t even get into the market.

They believe that if they don’t get into the housing market now, next year the house prices will be 20% higher again. Their cash will effectively be devalued and they might have to buy a smaller home, a unit, or buy into a different area or town (that has fewer jobs).

Desperate buyers who pay big sums of money for houses, ultimately push up the prices in surrounding streets, set a precedent, and inadvertently push prices up.

Desperate buyers are desperate. They make rash emotional decisions and often get themselves in trouble. Unfortunately there are significant problems in paying too much for a property, and I will look at that in at later blog.

I will talk about these issues more in coming weeks, but for now I need to get back to packing boxes!

Bye for now,

Greg.


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#sydney #housing #auspol #affordability #ausproperty #homeowners #crisis #affordablehousing

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About Blog of Greg

I consider myself a thinker and I like to discuss everything in life with those around me. Mostly I am serious, sometimes I am funny, and occasionally I am rude. I like to wear my heart on my sleeve and say what I feel, or think! It is important to me to be honest about how I feel and why! I detest pretense, big egos and self importance. I believe that I am no more important than you, and similarly that you are no more important than me! [apparently I should reflect on this more often] This blog is a way of engaging people in different aspects of life; its goal is to present a different view of life and contribute to a broadening of our awareness. While this blog is essentially my opinion, I also understand that there are other opinions out there. Though I encourage discussion, I may “delete” comments that I find are unhelpful, argumentative, or offensive towards myself or another person. Often I write about politics – apparently that is an interest of mine – but I also like to write about other more personal things that affect us in our day to day lives. Along with this blog, I also write to politicians and newspapers; I often present a commentary on my blog about following comments or decisions. That way everyone understands what they have said – and sometimes of course how big a buffoon they are:) Please feel free to comment on my posts, as I would like to hear what you have to say. After all…. Your opinion is just as valid as mine!
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