Is Property in Australia Affordable?
There’s a lot of hype around the Australian Property Market and whether or not we are in a price bubble. Now the reality is, when we see low interest rates, what it means is it increases our ability to afford property. We got to understand the psychology behind buying property in Australia, just as in buying properties in most countries where we see it as the Great Australian Dream or the Great American Dream.
Now affordability or the story goes back to 1940s and early 1960s. We’ve finished off the Second World War and Australia is quite the prosperous nation. All of our workers came back and basically we are quite active in terms of building out Australia. That was when the first story of Australians owning their own home and having their quarter acre block and whatever they may be and driving their Holden cars. Now in the late 1950s and early 1960s, what we actually saw is a trend occurring and that trend was the relationship with property values and incomes.
Why does that relationship exist?
Well, take it from your point of view, if you are sitting down and you are thinking about actually trying to go buy a property and you’ve got an idea in your mind in terms of what it’s going to cost you. So you turn to your partner and you say, “Well, I think we can probably afford to have a loan of $400,000 and maybe buy a property worth $450,000”. So you go and sit down with your mortgage broker and the first thing they tell you is that you can probably borrow as much as $550,000. That scares you initially because you’ve done your budget and you’ve been thinking of what you can actually afford. But then the psychology kicks in and the human interest and human nature takes shape. So you go home and you know that the broker said you can borrow up to $550,000 but you’ve set your budget at $450,000. Well you then put your details in realestate.com.au or domain.com.au and you start looking at properties. Guess what, the properties that are advertising in the $450,000 range is actually worth $500,000 – $550,000. So you start to go out to the field and do your research and you start seeing these properties that are just so much better in quality and location and you start to convince yourself that it is probably worth spending that extra to get into that location. In some cases you are right in terms of the long term point of view but you’ve got to be concern about your budget.
Now, coming back to the affordability story, that is actually how property prices grow. We are attach to properties emotionally and 70% of properties are owned for owner occupier purposes so they drive the market and they drive the value story. That’s what affordability is all about. When we measure affordability and determine whether a market is affordable or not, we see properties selling in blue chip locations for a couple of million dollars and we see inner city locations where prices are now a million dollars, well that’s all relative to the household’s income. People who are buying those houses are potentially double income household professionals and they might both be on six figures salary. So when you are looking at a million dollar loan for a couple who maybe on household income of $250,000 it’s all relative isn’t it? When you get a combination, consistency and demand from those people, that’s what push prices higher. And that is why when we move out of the city location into the more greenfield area and the newer suburbs, that’s where the cheaper land is and the cheaper builds are because they are the people who are just starting on their journey and their income might not be that strong.
This is why I don’t buy into the global story or the macro story that Australia is in a property bubble. That’s just simply not true.
The people who are actually being able to afford this are able to get the money and we are not seeing the banks do silly things around lending money at extraordinary level. I suspect this will continue and we are certainly not in a bubble yet but what we are seeing at the moment is a hype. There is a bit of sense of urgency that I’ve got to get in now so what you will see in these cases is properties will overshoot themselves in some area. So the affordability price point might be $750,000 and they would go to $800,000. In a year time or 18 months’ time when things slow down and it becomes a little harder to borrow money, those property prices might come off a little bit. But over the longer term, we will see income continue to rise and we will see values of those properties move forward. So don’t be too concern about the affordability story. It is a story of income and relationship with the emotion of buying property. Now, as property investors or property investment advisors we need to tap into that psyche and we need to make sure we are buying for our clients in areas that deliver long term returns and long term profitability for our clients.
So, is Australia affordable?
It is still relative to the incomes that are being experienced in Australia. Don’t look at international cities and don’t look at comparisons with other cities because I can make comparisons to downtown New York and certain affluent areas and you can buy apartments in those areas for $2 – 4 millions. So is that affordable for the rest of America? No, it’s not especially when you consider the minimum wage is around $7 – $8.50 and the Australian minimum wage is around $16 -$17. So when you are talking about that and Australian’s median house price is around the $500,000 – $600,000 range and the American median house price sits around that $300,000 – $400,000 range, that’s relative to income isn’t it? Just understand that when you are looking to buy properties. It’s a story of understanding the income that are coming in those areas and that’s going to deliver you the outcome.
Thanks for watching.