Housing Affordability is close to everyone’s heart.

First Home Buyers are obviously right in the thick of it, given that they are trying to get into the market.  But parents and families of First Home Buyers (and even parents of soon to be First Home Buyers) are scratching their heads wondering about how their kids are ever going to afford it.

The first thing to make clear is this:  There is no quick fix.  The current “affordability crisis” is simply not going to change in the near future – if anything, it’s going to get quite a bit worse before it gets better.  That’s it!  End of story! 

It all boils down to Supply and Demand.  It nearly always does.  And the simply reality is there is currently a huge (and expanding) level of demand, and a massive shortage of supply.  The numbers tell the story.  In our April Economic Update newsletter we highlighted the need for about 43,000 new dwellings in Queensland last year.  And we pointed out that we’re only building 39,000 – which gives a shortfall of 4,000 dwellings for the year.  And this shortfall in supply has been going on for so long we have an underlying stock deficiency of about 45,000 dwellings.

If that picture isn’t evidence enough, we know the rental vacancy rate is under 1% and rent rises have been in the order of 10% p.a.

The current affordability crisis has developed because house prices have gone up much faster than incomes.  And house prices only go up in response to a Supply and Demand situation. 

Median house prices have been going up over the last 50 to 100 years of Australian history in the order of 10% p.a.  Inflation, and therefore “family income”, has been going up in the order of 3% p.a.  Sure there have been periods where both house price growth and inflation have been outside these figures, but they’re illustrative over the longer period.

So if house prices are going up at 10% p.a. and incomes are going up at 3% p.a., housing affordability reduces every year by the difference – in this case, 7% p.a.

But if that’s true, why haven’t we run into problems before this?

The answer is “it’s been happening in the background and we’ve found new ways to borrow more money so we could afford the more expensive homes”. 

We simply stepped around the problem. 

In the early 1980’s the deregulation of the finance industry allowed more competition which resulted in easier borrowing. 

And the increasing prevalence of both family members working meant higher family incomes, so again we could borrow more.  Then the “first home owners grant” was offered.  The more recent introduction of “honeymoon” lending has been another example of creative lending policies.  The years of double digit inflation before the “recession we had to have…” allowed incomes to claw back some of the lost ground.  Now we’re hearing about banks being “equity partners” with home owners – which simply amounts to other creative solutions enabling people to borrow more money.

But that’s only a part of the puzzle.  In addition to these finance-related issues, we need to be mindful that we’re not really comparing apples with apples. 

Over the last 40 plus years we’ve seen the “median home” grow from a simple 3 bedroom weatherboard house on stumps of about 120m2 to a 250m2 four bedroom double car lockup and ensuited palace (complete with smart wiring and plasma TV).  Obviously this increase in size (and cost) makes a significant negative contribution to the affordability equation. 

And it’s a tricky one to handle.  One could argue that we should discount the cost of newer houses to more effectively compare “apples with apples”.  Perhaps costing median house prices on a per square metre basis would more accurately measure the true affordability mix. 

But then it would be an academic argument - the fact is, the market has moved and the first home buyer of today is unlikely to be overly enthusiastic at the suggestion that they should embrace the 120m2 model as their first home.  At the end of the day, they are the ones who make up the market and part with their hard earned money.

So what are the options?

The reality is that helping people buy the more expensive home with creative finance or government subsidies is only going to fuel more house price growth.  It just adds to the demand side of the equation without impacting the supply side of the equation.  It might win some votes, but it really adds insult to injury at street level.

The only way the affordability crisis is going to be improved is for the supply side of the equation to increase so dramatically that it satisfies demand and halts the house price growth.  Or alternately, for demand to dissipate (dramatically!).

Neither of those scenarios is likely to happen any time soon.  People continue to move to Queensland in droves to help satisfy our skills shortage (which, in turn, increases demand for houses).  And the shortage of skilled labour means we can’t build enough dwellings to meet the demand now, so there is simply no capacity to ramp up the supply of new dwellings.  It’s a “Catch 22” situation.

And even if the politicians could legislate to shift the fundamentals in the right way, it would likely take a decade or more for any meaningful improvement in affordability.

Clearly, this summation is not what first home buyers want to hear, but it‘s very good news for investors.  As long as this supply / demand imbalance exists, it will continue to underpin outstanding capital growth.  And a lot of money will be made by those who understand these simple market forces.

The key question is – how long can it continue?

To put that in perspective, we look to one of the few “worthwhile” international housing affordability studies (produced by Demographia).  The report assesses median house prices compared to local family incomes.   

Brisbane’s affordability was measured at 6.0 – which ranks it the 26th most “unaffordable” city of the 100 studied.  The most unaffordable city was Los Angeles with an index of 11.2.  Sydney came in at 8.5,  London at 6.9,  Auckland at 6.6, Hobart at 6.6,  Adelaide at 6.5, Melbourne at 6.4.  You can view a summary of this report at http://www.demographia.com/

We can draw two conclusions from this report.  First, in general, Australian Capital City housing is quite expensive on the world stage (so the issue is not to be ignored).  But second, there are other cities where houses are almost twice as “unaffordable” and those markets continue to thrive - which would suggest the Brisbane market is unlikely to come to a screeching halt any time soon.  More bad news for first home buyers, but good news for investors and those already in the market!

So “get on the train”. It doesn’t matter what carriage you’re on – just get on the train!

Report From Investment House Team Training
Rock Climbing In Noosa!

Twice each year we down tools for a day and get away from the office to hone our skills and refocus our energies.  Invariably, there is an element of adventure in the program and this August the team visited Noosa (just north of Brisbane) to launch an assault on an indoor rock climbing course.

If you haven’t tried it – you should.  Surveying the coloured hand and foot holds from the floor, say about 12 metres back, it all looks quite simple.  But, with the addition of a few nerves, and at a range of 10cm, that all changes dramatically! 

The team enjoyed varying levels of success.  But everyone had a go, and it was great to see the teamwork and camaraderie coming to the fore. 

After the rock climbing, the team spent several hours reviewing strategic plans and refining the way services will be presented to our clients over the next year.

Special mention must go to Simon Skutenko (construction estimator) and Mitchell Hunt (Research Analyst) who each received the Investment House “Extra Mile Award” for services above and beyond the call of duty. 

And there was some extra excitement on the way home when the team had to negotiate substantially flooded roads coming out of Noosa to get home for the weekend. 

Brisbane Market Update

For over eight months we’ve been alerting you to the fact that the Brisbane property market has been building momentum.  Now this activity is showing up in the statistics.

A report recently released by Residex shows capital growth for Brisbane houses to the year ending July 2007 of 14.87%.  And the increasing momentum is illustrated by the quarterly growth rate of 5.45% (equivalent to 21.8% p.a.).

Units fared slightly lower with 12.26% for the year and 4.53% for the quarter (equivalent to 19.2% p.a.)

Figures at this level are usually found in “boom” times.  Anything over 10% pa should grab your attention!

It will be interesting to see whether the recent interest rate rise causes the market to “pause” before the fundamentals take over again.

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Stay tuned for the next edition, containing our twice yearly Economic Update.

Successful Investing,

Colin Ferguson
Managing Director
Investment House