The future of Australian property prices

[Mrmagoo]

Beginning to think I was a little out of touch with the housing market so thought I'd do a little research. Adopted the persona of a first home buyer and did a little research on domain. Found this cute little 3 bedroom house in Granville NSW: https://www.domain.com.au/16-o-neill-street-granville-nsw-2142-2017032371?topspot=1 I didn't have to look too hard to find this and I'm sure if I was a little more motivated I could find more options.

The house presents well, is clean and very livable. Has 3 bedrooms and is on about 370 square meter. Granville is hardly the bush and is well serviced by public transport for an easy commute into the Sydney CBD if need be. Granville is also a livable area and far from a bad area. HAs some good public schools and the other stuff young families might like. This place would serve a first home buyer with a young family well.

A quick check on propertyvalues.com has the place priced at $800k to $900k. https://www.propertyvalue.com.au/property/16-o'neill-street-granville-nsw-2142/2585466 Now, I here you say it's worth more blah blah but let's stick to the data we have at hand.

So let's see, several years back the ALP more or less came out and said if you earn more that $150,000 per year you're rich. https://www.news.com.au/finance/bus...s/news-story/5fed388c14abfbdd40803cf772c42cf7

Ok, so let's assume I'm not rich and I have a combined pre-tax income of $140,000 with my wife and I've saved up a $40,000 deposit. My wife and I both earn around $70,000 per year so we have a combined after tax income of around $111,406: https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=STC&anchor=STC#STC/report . This ATO tax calculator link show the tax payable on just one of our incomes. This after tax combined income of around $111,406 leaves us with around $9300 per month after tax income.

I'm not very financially literate so I go straight to CBA for a home loan. I apply for an $800,000 loan over 30 years, which at current interest rate comes in at around $3240 per month. https://www.commbank.com.au/digital/home-buying/calculator/home-loan-repayments

So with our income of around $9300 per month we have to pay $3240 per month on the mortgage leaving us with around $6000 per month on all other living expenses. Things might be a little tight but hey, gotta make some sacrifices to get into the market

I agree my back of envelop calculations are pretty high level--but the point I'm trying to make is that on face value you do not need to be wealthy (as defined by the ALP) to get into Sydney real estate. Sure, if you want an inner city terrace in a trendy suburb with 1 or 2 k's of the city you will probably need some serious cash behind you, but to make a blanket statement that houses are expensive everywhere--I'm not so sure. I know I haven't factored in things like stamp duty but I'm sure the bank of mum and dad will come to the rescue there

This is one of the more absurd examples. You've basically just gone - borrow a mill two people can pay it off - with a $9000 a month income. That is not realistic for most people.

 

[Mrmagoo]

Following on from that, @MovingAverage and using your start point on google maps, I looked further out, with good train access.
Penrith is 1hr and 4min out on the fast train, similar distance as living in Mandurah and working in Perth, which many do.
So I looked on Real Estate dot com and saw this on the first page.

https://www.realestate.com.au/property-house-nsw-penrith-136531606

To my mind getting a $800,000 loan is asking for problems, I would buy further out, pay down as quick as possible then flip and move closer. The first house is just saving you rent and giving you the opportunity to buy equity and hopefully get some capital gain IMO.
Rinse, wash, repeat, but I'm just very risk averse.

Yeah, sure, take out a 800k loan then the ALP gets in and slow stuff down. Oopps negative equity. You simply can't buy atm.

 

[Mrmagoo]

Here is what is going to happen in the next few years :
1) another financial crisis
2) people will default
3) prices will fall
4) ????
5) Profit.

Who knows, really what will happen but another financial crisis is 100% on the way.

 

[MovingAverage]

This is one of the more absurd examples. You've basically just gone - borrow a mill two people can pay it off - with a $9000 a month income. That is not realistic for most people.

Ok then do the maths and show me why it can’t be paid off? CBA’s mortgage calculator has a very different opinion to you...$800k over 30 years will be paid off. If you’re arguing that $800k mortgage is too high then that is a different issue—but don’t say it is not possible to buy because it is. I went the extra step on that CBA mortgage app to see if I could get preliminary approval and guess what—I could.

 

[MovingAverage]

@MovingAverage

Great analysis !!!

I’ve been watching this discussion for a while now and there are lots of well made points. I’m going to add my 2 cents worth ……. And I’m a (younger) Boomer …..

1. Comments by politicians on levels of wealth are, and should be, ignored.
2. ‘Expensive’ is a relative and subjective term.
Objectively I have done a little bit more research to add to yours.

80% of couples earn less than your combined pre-tax income of $140,000. So I think in your analysis you are a bit high. (https://mccrindle.com.au/insights/blog/australias-income-and-wealth-distribution/). I believe (can’t remember the source) 40% earn less than $40,000.

The Average Gross combined income in Australia is about $116,584, giving a combined after tax monthly take home of $7,948, which is 15% lower than your number of $9,300.

Loan repayments on your example of $800,000 for 30 years is at a rate of 2.69%. Although this is may be the ‘advertised’ banks now generally stress test a couple of percentage points higher in order to get a loan, eg. 4.69%. Although your 2.69% is ‘advertised’ you will likely have to be able to service a loan on 4.69% in order to actually get the loan, $4,144 per month.

Yes wages are different across the country, as are prices, but your $800,000 house loan for an ‘average’ couple will only be provided by the lender is they can pay $4,144 pm on an income of $7,948 pm, which is 52% of disposable income. If we stick with the 2.69% we are $3.240 of $7,948 which is 40% of disposable income.

I hate to admit is, as a Boomer, up to 4-5 years ago I thought the Millennial’s were just whinging. I looked in to this a lot closer over the years and it is just simply shown by the numbers. I don’t envy the younger generation(s). This generation are by far worse off than I was in the 1990’s when I and Ms.Gunnerguy bought our first house.

1993 – Home loan was 33% of our combined after tax monthly disposable income. Two bedroom house in the suburbs. My commute was 1 hour each way to the CBD.
2021 –The average Australian combined after tax disposable income used on a loan is 40% of disposable income (or 52% if stress tested). Granville is a 45 minute commute I believe by public transport.

So, many variables, and subjective components, but yes I hate to admit it, I spent 33% of my take home pay on a loan, but nowadays you need 40%, if not higher if you are an average income earner.

In short 33% in 1990, and about >40% in 2021, but always difficult to do apples to apples, and as a Boomer I admit its well harder today.
The reasons/solution .... thats for another post.

Gunnerguy.
(Analysis freak)

You raise some good points, and I too do not envy the younger generation today and I acknowledge it isn’t easy. But one thing that makes my bloody boil is the blanket statement that housing is out of reach for all now, because it is not—yes you’ll have a sizeable mortgage and yes things will
Probably be right for some time, but I remain convinced it’s doable. I think what has changed is people’s standards and expectations. Yes for some sections of society housing is genuinely out of reach. When I was typing out my crude example I had in mind a young couple...the guy working in a trade and the girl working as a teacher. You don’t have to look too far to see a tradie such as an electrician can earn $90k plus and a teacher around $70k. So I think my use of a combined income of $140k per year is not unrealistic. Sure there are people that earn less but I’m not suggesting housing is affordable for everyone—it never has been. Anyway, appreciate you detailed analysis and you raised some great points.

 

[MovingAverage]

Here is what is going to happen in the next few years :

3) prices will fall

Been hearing that for 40 years. Keep calling it long enough and it might just come true

 

[Humid]

Ok then do the maths and show me why it can’t be paid off? CBA’s mortgage calculator has a very different opinion to you...$800k over 30 years will be paid off. If you’re arguing that $800k mortgage is too high then that is a different issue—but don’t say it is not possible to buy because it is. I went the extra step on that CBA mortgage app to see if I could get preliminary approval and guess what—I could.

Children can seriously reduce your income.....got any?

 

[MovingAverage]

Children can seriously reduce your income.....got any?

Two.

The reason I selected Granville in my original post is that I expected someone would raise that as "I still can't afford to buy a house because"--so thank you. The house I picked is located within the catchment area of a public school that appears to get reviews. Have a look. Education fees can be one of the biggest expenses for a young family so should be manageable via a public school. Unless of course you have plans to send your kids to high end private school like Knox, SCEGGS, Shore etc etc

 

[sptrawler]

Children can seriously reduce your income.....got any?

That is very true and is something that has changed over the years, which has caused a lot of the house price disparity between the boomers and todays young people.
In the 1970's there wasn't a lot of female participation in the workforce, other than in retail, so most married women were home makers.
This in a lot of ways kept a lid on house prices, as the loan affordability was worked out on one wage and a 25% deposit required, so really the pool of potential buyers were limited by wages and how many children in the family. There was no childcare, so mothers had to really stay home, in most instances.
Then with the advent of childcare services and women being able to join the workforce, it wasn't long before the amount of money available to purchase a house increased, which then lead to competition for the properties and so the upward spiral starts.

 

[Mrmagoo]

Ok then do the maths and show me why it can’t be paid off? CBA’s mortgage calculator has a very different opinion to you...$800k over 30 years will be paid off. If you’re arguing that $800k mortgage is too high then that is a different issue—but don’t say it is not possible to buy because it is. I went the extra step on that CBA mortgage app to see if I could get preliminary approval and guess what—I could.

Because you are clutching at straws big time. You're assuming a very high household income and a very expensive loan very far from the city. Are you going to buy back those mortgages off young ppl when it goes south ?

 

[Mrmagoo]

That is very true and is something that has changed over the years, which has caused a lot of the house price disparity between the boomers and todays young people.
In the 1970's there wasn't a lot of female participation in the workforce, other than in retail, so most married women were home makers.
This in a lot of ways kept a lid on house prices, as the loan affordability was worked out on one wage and a 25% deposit required, so really the pool of potential buyers were limited by wages and how many children in the family. There was no childcare, so mothers had to really stay home, in most instances.
Then with the advent of childcare services and women being able to join the workforce, it wasn't long before the amount of money available to purchase a house increased, which then lead to competition for the properties and so the upward spiral starts.

Firstly the 70s don't matter they were so long ago its pointless. What matters is the period between then. In the 70s most of the boomers would of been kids so it doesn't matter. Boomers would have been late 30s to early 40s in the 90s. Houses were cheap as and if you were a bit of a person who got left behind you essentially got the easiest loans possible by the early 2000s when the youngest of the boomers were in their 40s. Boomers had one hell of an easy ride as a generation. Then watched their assets go into the millions in their 50s and 60s. I do have sympathy for low income boomers who get lumped in there as they didn't have the same opportunities but gen y low income people have it far worse.

 

[Humid]

Two.

The reason I selected Granville in my original post is that I expected someone would raise that as "I still can't afford to buy a house because"--so thank you. The house I picked is located within the catchment area of a public school that appears to get reviews. Have a look. Education fees can be one of the biggest expenses for a young family so should be manageable via a public school. Unless of course you have plans to send your kids to high end private school like Knox, SCEGGS, Shore etc etc

Not talking about schooling more about the who raises the kids

 

[Mrmagoo]

Children can seriously reduce your income.....got any?

Its not just children, but the assumption that everyone clears a grand a week. Lots of people don't. That means by definition many, many households wouldn't have 9 grand a month income and that is to buy in a basic, simple outer suburb.

 

[MovingAverage]

Because you are clutching at straws big time. You're assuming a very high household income and a very expensive loan very far from the city. Are you going to buy back those mortgages off young ppl when it goes south ?

Explain to me why I'm clutching at straws or why the numbers I put up are ridiculous? Seriously, how is a teacher on $70k and a tradie on $90k a high household income. Sure there are people that earn less and I'm not suggesting everyone can afford a house--but the hypothetical I put forward is not unrealistic. If you don't like a $800k mortgage then move further out as someone else noted--you can't have you cake an eat it. Buying a house has never been easy nor without risk. To me it sounds like you're definition of affordable housing is that every single working person should be able to buy a house regardless of income?

I don't get your point about me buying back mortgages--can you expand on that further?

 

[sptrawler]

Buying a house has never been easy nor without risk. To me it sounds like you're definition of affordable housing is that every single working person should be able to buy a house regardless of income?

I don't get your point about me buying back mortgages--can you expand on that further?

Not only should every working person be able to buy a house, but should be able to buy a house close to the centre of Sydney, if that was the case I would be buying one there as an investment. ?
People in the 1990's bought CBA shares for $5, I was busy paying off a house at the time, but now I am retired and have some spare cash CBA are $100, that just isn't fair. ?

 

[sptrawler]

Firstly the 70s don't matter they were so long ago its pointless. What matters is the period between then. In the 70s most of the boomers would of been kids so it doesn't matter. Boomers would have been late 30s to early 40s in the 90s. Houses were cheap as and if you were a bit of a person who got left behind you essentially got the easiest loans possible by the early 2000s when the youngest of the boomers were in their 40s. Boomers had one hell of an easy ride as a generation. Then watched their assets go into the millions in their 50s and 60s. I do have sympathy for low income boomers who get lumped in there as they didn't have the same opportunities but gen y low income people have it far worse.

Mate the baby boomers were born between 1946 and 1964, I was born in 1955, so right in the middle.
By 1981 (25 years old) I had three kids and a wife who stayed home to raise them, most boomers had their children early and didn't travel the world or buy new cars. Our first overseas trip was 2004, I was 50, most young people today, have taken multiple trips O/S by the time they are 25.
I couldn't afford to buy a house, I actually took the kids and the missus to the NW of W.A to a god forsaken hole, to save enough to buy a 30year old piece of crap that was transported and restumped on a cheap block out of the city.

That option is still available today and guess what those with a bit of drive and gumption are still doing it, there are plenty of young people getting high paying fifo jobs, saving and starting from scratch, rather than just hoping they can find batteries for their magic wand.

All Houses For Sale | Nylund House Transporters

Home Is Where We Move It

www.nylund.com.au

Personally I think you should open your horizons, Sydney/Melbourne is obviously out of reach, make a plan B.
People say there is jobs outside Sydney, for my skills, well change your skill set or get a job that doesn't require a lot of skills but pays well e.g haulpac driver.

 

[againsthegrain]

Not only should every working person be able to buy a house, but should be able to buy a house close to the centre of Sydney, if that was the case I would be buying one there as an investment. ?
People in the 1990's bought CBA shares for $5, I was busy paying off a house at the time, but now I am retired and have some spare cash CBA are $100, that just isn't fair. ?

That is not a good comparison, shares are for investing. Houses are for basic shelter, family survival etc

People are not upset they missed on the gains, they are upset they can't have the Aussie dream

 

[Mrmagoo]

Been hearing that for 40 years. Keep calling it long enough and it might just come true

View attachment 126052

But it has happened, twice, in 2007 lots of people lost their homes. In 2017 we had a crash which nearly ended up with lots of people under water if it wasn't for covid and the stimulus. In QLD and WA were under water for a long, long time. And at these points in time, debt was a lot less and wages relatively a lot higher.

 

[MovingAverage]

Not only should every working person be able to buy a house, but should be able to buy a house close to the centre of Sydney, if that was the case I would be buying one there as an investment. ?
People in the 1990's bought CBA shares for $5, I was busy paying off a house at the time, but now I am retired and have some spare cash CBA are $100, that just isn't fair. ?

And I was a poor old student back in Sept 1985 and didn't have any cash to buy investments before then. All those lucky people holding investments prior to Sep 1985 don't have to pay CGT. Boo Hoo...it's not fair that when I started to come into some cash in the early 90s I then had to pay sizable chunks of cash in CGT while all those freeloaders buying pre 1985 don't have to pay CGT

 

[Mrmagoo]

By 1981 (25 years old) I had three kids and a wife who stayed home to raise them, most boomers had their children early and didn't travel the world or buy new cars. Our first overseas trip was 2004, I was 50, most young people today, have taken multiple trips O/S by the time they are 25.
I couldn't afford to buy a house, I actually took the kids and the missus to the NW of W.A to a god forsaken hole, to save enough to buy a 30year old piece of crap that was transported and restumped on a cheap block out of the city.

None of this matters. Housing was very cheap. If you were unable to secure gainful employment I'm sorry to hear that but that is on you. A very basic job would be enough to afford a house in a very decent location back then.