Australian Housing Market Most Unaffordable in the World

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Will Aussies turn to property in a share market slump? If they do, it will be hard to find anything cheap in the Australian housing market. “Australia (with New Zealand) has the most unaffordable housing [market] in the surveyed nations,” economist Wendell Cox concluded in a recent report on global housing markets.

The collapse of the housing market in the States as exposed the vulnerable balance sheets of many Americans. They are debt rich and asset poor. You can talk favorable demographics all you like. But the fundamental question for any housing decision is whether a borrower can make his mortgage payment. That’s getting to be an expensive proposition here in Australia.

There hasn’t been a house price crash here, like the ones unfolding in America and Britain. But affordability in the Australian housing market is clearly a problem. Of 227 cities surveyed, Cox found 18 Australian cities in the top 50 of “least affordable” in the world. “There are no affordable [housing] markets in Australia and there are no moderately unaffordable markets. Twenty-five of the 28 markets are rated severely unaffordable.”

“All of the large capital cities (Sydney, Perth, Melbourne, Brisbane and Adelaide) are rated severely unaffordable. The best ratings are seriously unaffordable in three smaller markets, Maitland (NSW), Ballarat and Bendigo (both in Victoria).”

If the Reserve Bank puts up rates again… watch out.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. The price of property and land in Australia has gone beyond a joke. We have one of the lowest population densities in the world but also one of the highest rates of urbanisation in the world.
    A huge crash must be imminent.

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  2. Property crash is guaranteed for our hole in the ground economy ….

    I bet its already started, notice we havnt got any ” news ” from the Realestate lobbyists for a few weeks, record clearance rates and record Price claims seem to have vanished from the media.

    All this borrowed money being vaporised from equity markets certainly wont be going into Realestate, obviously, because its vaporised, much of it borrowed.

    Best advice ive been given in the last few years is , Get Out Of Debt Now !

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  3. If Aussies turn to property during this slump, it will only show how many of them are terrible investors – buying at peak (or worse, just after), only to sell at a steal after the market breaks.

    Which it will.

    Why would anyone think that “it’s different here” – as opposed to anywhere else in the world where the deflating credit bubble is hammering ridiculously overpriced housing markets?

    Australia hasn’t had a sudden population explosion in the last 10 years. There hasn’t been a doubling/tripling run-up in wage inflation.

    The debt-is-wealth scam here is as doomed as anywhere else, despite people’s apparent willingness to sign up as house-poor debt-slaves for the rest of their lives – the cheap easy credit is just no longer available.

    It may take a few months more – maybe. But let’s hope average Aussie homedebtor (errr, “homeowner”) wakes up to some common sense before losing even their super to this fiasco.

    As to where to place what savings are left? Not sure anywhere is very “safe” in these uncertain times, but for now I’d say long precious metals, and short most of the sharemarket.

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  4. Australia has the most expensive real estate in the _world_? It makes for a nice headline but the numbers do not back it up. The world does not consist of just Australia, Canada, Ireland, New Zealand, the UK and USA. Where was Japan, Singapore, Spain, Russia (check out Moscow sometime)?

    Australia occupies just 5 positions in the top 20, with the USA at 8. USA has the top 5 most expensive cities too.

    Australian real estate is expensive, but let’s not get ahead of ourselves.

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  5. The report is well worth the read. Australia is ridiculously expensive, but the report makes no mention of European economies (at least not those girt by sea) let alone Asian economies (hello Japan).

    What this report does illustrate is that we’re not the only ones with ridiculously expensive houses.

    Although we “should” see a mean reversion (over time), I curious by the day whther or not fundamentals may have changed. (In any case, I ain’t buying)

    If they have changed, then Australia is only “very” overvalued instead of “ridiculously” overvalued. I wonder where Australia would be on this report without negative gearing (which the report fails to mention, since is takes a supply-side bias).

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  6. On another note, rate rises in NZ to date have had little impact on the NZ affordability problem. Makes you wonder how many rate rises it will take before we kick our greedy housing habit on this side of the tasman.

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  7. I need to start proof-reading my posts. Sorry!

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  8. The real estate crash will come here in Australia. Who will all of the baby boomers sell to when they want to cash up or downsize? Gen X and Gen Y will never be able to save a deposit and most have no or intrest in owning property. That equals not much demand and plenty of supply in just a few short years.

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  9. I’ve read that what’s about to happen won’t be called the next depression. It will be worse. It will be called “The greater depression”

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  10. I agree with Dave. With the ASX still falling and super losing 11% the boomers may panic sell property portfolios. With most of Gen Y unable to absorb the property market at the bottom end, there may be a surplus in 2008.This would likely mean a price correction of property.The best case scenario now,would be that proerty just flat line’s for a few years until things cool down.We were just considering buying, but we’re just going to wait a bit. The poo may hit the fan!We don’t buy the bull about buying now cause it’s just gonna keep going up either.Or the old what about the late 80’s when interest rates were at 17%.Well with property increasing about three fold since then, what’s 17% of $100,000 compared to 8% of $300,000? bout an extra $7000 PA now I’d reckon.Our money’s in bank west at 6.75%. Safer than the ASX at the moment and I know property isn’t going up at that rate.
    Watching with interest:)

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  11. Brad, thanks for prompting me to take a look at the report.

    It’s interesting that the author, Dr Donald Brash, is a former Governor of the Reserve Bank of New Zealand. And also that he points the finger at zoning restrictions and costs rather than interest rate fluctuations and herd behavior of humans (something he had control of for 14 years).

    The fact is, buying a house hasn’t made sense on the basis of a future income stream for years, which ultimately is the basis for most investments. In the long term, capital appreciation only has a basis in the expectation that rental yields will rise in real terms in the future with respect to interest rates. If they didn’t, you’d just put your money in the bank to earn interest, while renting. The rent vs buy equation is really a comparison of rent versus interest rates + rates + maintenance + other stuff. And for a long time, interest rates alone are more than a rent.

    If there was a huge scarcity of housing in Australia, as he claims, then landlords could charge much higher rents. But they aren’t. We hear stupid articles about how rental yields are soaring, but they have yet to even provide for the interest payment necessary to buy the house.

    Instead, there is an army of greater fools out there buying each other’s houses for more and more money while borrowing money for an asset that won’t return the interest at historic low rates let alone moderate or high interest rates.

    When interest rates rise, many people will be forced to sell because they can’t make their payments, prompting a vicious cycle of lowered valuations, banks wanting to sell out to lose the least amount of money early, foreclosing, etc. This in turn deletes any immediate capital appreciation potential that property has, thus forcing the housing market to start pricing houses to give a decent yield in order to sell.

    Eventually sanity will prevail again.

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  12. Let’s hope that you’re right Bob!My girlfriend and I are so pissed off at the way the property market is at the moment. We can’t believe what you get for your money now. I just can’t see the value in some of the houses that we have inspected. In my town the affordable buy in level for a 3 br house seems to be between $250,000 and $280,000. But you know that the 1940’s weatherboard with the lick of paint’s gonna need an extra $50,000 of maintenance in the next few years. Then again you can always buy a townhouse/unit for a little less and expect it to increase in value, even though it sits on hardly any land mass. What’s smart about a ‘smart’block anyway.You know in 25 years that unit’s not gonna look as purty anymore, so buyers will just skip down the road to the next block of brand new units.Australia’s running out of land I guess (yeah right!).

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  13. Melbourne house prices surge 25%

    Cameron Houston and Ben Schneiders
    January 25, 2008

    Page 1 of 2 | Single page
    Latest related coverage

    HOUSE prices in Melbourne surged by a record 25% last year, adding to the miserable outlook for first home buyers and fuelling renewed political debate over housing affordability.

    A report to be released today reveals that Melbourne’s median house price grew faster than in any other Australian city in 2007, jumping by almost $100,000 to $463,488 and closing in on the prices in Sydney and Perth.

    Shrugging off successive rises in interest rates, Melbourne apartment values also soared, with the median price rising by almost 15% to $335,088.

    Renters were not spared either, with the Bureau of Statistics reporting that Melbourne rents jumped 5.4%, the biggest annual rise since 1991

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  14. I’ve read where in Detroit some houses are cheaper than cars now…! USA Houses goin to auction and no one bidding…

    I work in a warehouse in Melbourne with warehouse workers who are paper millionaire land lords..hello??? Joe Blow has bought a house and now is a millionaire….Oh please let a housing crash happen here – why give tax breaks to someone to buy a house they do not live in??

    Please phase out neg gearing…lookin forward to housing nightmare in land of Oz…saving my $$

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  15. Please someone bring back those old wooden huge TVs they use to make in the 70s…take the tube out and voila – shelter or a place called home! These plasmas are useless unless you have some milk crates to prop it on….home prices are a JOKE!!!

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  16. I agree with Dom. Negative Gearing is wrong and has to go. Housing is a basic human right.
    Negative Gearing is favouring investors that take pride in collecting houses. This in turn drives
    prices up and up.

    I am a baby boomer and own my house outright but I can never see my kids entering the
    housing market. I left home at 18 because I could. My kids are still at home with me and
    dont look like leaving any time soon. Makes me sad.

    My first house cost me about 2 years salary and now houses cost about 7 years salary. Crazy.
    In my parents day a blue collar factory worker with a stay at home wife could pay off a mortgage
    and still enjoy the annual camping holiday.

    In the U.S.houses cost around 3 – 4 years salary and are going down in price.
    Lets hope that happens here. Apparently real estate is crashing in Ireland and Spain faster than in the U.S.
    Hopefully this trend will spread globally.

    Maybe I am nuts but when you consider the earth is 4.55 billion years old and we are here
    on this planet for 70+ years, just a millisecond in the big picture, why spend most
    of your lifetime paying such high prices to purchase a tiny little peice of it.

    Drop Negative Gearing, put up interest rates and kill the investors off in one go.

    Then my kids can move out.

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  17. There will be a property slump here eventually but not yet!

    Rents are currently rising which help sustain property values and there may be further rent rises due to a tight rental market.

    A falling sharemarket will cause a short spike in property demand as most amatuer investors don’t like to hold cash reserves and prefer tangible assets.

    Rising interest rates will subside due to a falling sharemarket.

    Unlike the US our domestic lending policies have been no where near as aggressive. So no real estate crash for now.

    It will come unstuck when our economy goes into recession (probably in 18 months) and it will since our sharemarket is falling. Job losses and reduced earnings will reduce capacity to pay debt and at that point will property crash.

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  18. What everyone seems to be forgetting is that all these baby boomers who are currently asset rich in property are nearing retirement. Most will be holding on to aquired property to supplement income in retirement through rent. This means that demand for rentals will remain tight and if investors are in no hurry to sell, the market will not crash. What is probable is some stabilization short term, and all those gen x’s and y’s who are whinging about affordability will inherit all this property as the baby boomers begin to pass. Then they will be subdiving houses like there’s no tommorrow , making heaps of money and wondering what the next generation is worried about. Dont pannick people we are a far wealthier nation than we have ever been, even with record mortage repayments we still manage to create record levels of spending. There are alot of people in this country with stacks of money.

    Proff Christopher
    January 27, 2008
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  19. I think house prices in Australia will crash soon because:

    * Housing affordability is at record lows in Australia
    http://www.demographia.com/dhi.pdf
    * Interest rates have risen significantly and are about to rise again
    http://www.news.com.au/business/money/stor…ml?from=mostpop
    * Easy credit is drying up
    http://www.lendingcentral.com.au/SiteConte…88/Default.aspx
    * Petrol prices are heading up
    http://blogs.domain.com.au/2008/01/home_ow…_been_ki_1.html
    * Rental yields are low relative to house prices making property investment riskier
    http://www.moneymanager.com.au/cgi-bin/com…8390222703.html
    * The market sentiment is turning as locals look overseas and realize house prices worldwide have started dropping (UK,NZ,Ireland – not just the US)
    http://nz.news.yahoo.com/080116/3/3m21.html
    http://www.guardian.co.uk/money/2007/nov/3…es.houseprices1
    http://www.rte.ie/news/2008/0121/housing.html?rss
    * World financial markets are unsettled
    http://www.marketwatch.com/news/story/unse…3BA8D2596074%7D
    * Baby boomers are about to start retiring and will slow down purchasing investment properties and will start withdrawing equity
    http://blogs.wsj.com/developments/2008/01/…housing-market/
    * Peak debt is being reached in terms of how much debt new entrants to the market can service based on current incomes
    http://www.smh.com.au/news/australian-capi…3351260524.html
    * Every previous housing boom has been followed by a bust and this has been the biggest boom ever
    http://www.anz.com/nz/about/media/library/pf/pf20070521.pdf (see table at top of page 8)
    * Australians have one of the highest levels of personal debt relative to income in the world
    http://www.abc.net.au/worldtoday/content/2007/s2055693.htm

    One last thought to ponder:
    If there is such a shortage of houses then where does everyone live now?

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  20. If Kevin Rudd really wanted to leave his mark on Australian political life he would phase out neg gearing over 3-5 years….it is a rort and people are taking the piss…Pollies come and go but who really is remembered as doing something gutsy that helped alot of people?

    In the 70’s – average wage $10,000 – average home $30,000.
    That was affordable. You might have even bought a small beach house for you and the kids for summertime.

    Yes there are rich people in Australia – but there always have been and always will be – however most people’s standard of living is dropping everyday -re: cost of everything!

    That is why the kids can’t afford to leave home – they have no chance!

    Read recently where homes in melbourne now more expensive than new york city??? Hellooooooo? What the f*@k!

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  21. Australians oughtn’t complain. According to this study it is apparent that the U.S. has the most unaffordable housing market if you exclude the areas most Americans refuse to live in (the south, Texas, and rural Midwest). Housing prices in the Notheast, eastern seabord, and California dominate the “unaffordable” list. If you move to Los Angeles and expect to buy a house within a 45 minute each way commute to the Westside’s offices, you will be looking at houses in the 1-2,000,000 range. In that study the median Los Angeles homeowner pays ****87%**** of his income towards his mortgage. If I had better information on how Americans could get high-paying jobs in and move to Australia, I would move there in a second.

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  22. Of course their will be a housing price correction.
    As sure as night follows day.
    Of course rentals will go up, but so will interest rates.
    Of course wages will go up within the next 2 years,but then as wages go up the resource boom will peak and fall due to USofA and china ,india in fact worldwide recession.
    House prices should by then 2009-10 be (in NSW) back to the levels they were in early 2003. that is say 35%below what they are now.

    The trouble is that when that happens the rent returns will be back to at least 8.75-10% returns so the landlords will be out sniffing around again .

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  23. I agree. Australian houses are amongst the most expensive in the world, and it is partially due to government policy. Even after a credit crunch, prices will return to even more unaffordable highs. What we need is a sustained political pressure to make better government policy. Help do something about housing affordability and visit http://www.australian-voters-for-affordable-housing.org for more details.

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  24. Unfortunately low interest rates allowed buyers to afford ridiculously overvalued prices. Compounding this, the false equity derived has been borrowed against for the second new car, plasma T.V. and overseas holidays thereby blowing consumer spending out of the water. Whilst painful the only option the Reserve Bank has is to raise interest rates (maybe by a further 2%). This will bring housing prices down to fairer value and reduce consumer spending by the use of phantom equity in the home.

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  25. Our market here in Canada particular the west Alberta/BC has remained strong as our banks didnt give away silly money under terms to persons who could never ever pay it back. But we face similar affordability issues espcially Vancouver even tho like Oz we have ample space its all about “denisification” into the urban centers helping to drive prices round and round as always happens when a desired commodity is limited in availability. Its become like Hong Kong pre-China where the speculation and flip was what real estate was for and not raising a family and putting in roots.
    Who can afford to do that!
    One comment from here was the sizties generation could afford to leave home at 18 and a few years scraping.. buy a house. My kid at 21 is still here cause they sure cant pay rent AND save the down needed to get into the market.

    Even tho my ease of retirement is house based…. a correction is needed and HAS to come. Wtach for first time buyers staying out… thats the beginning of the bubble end.

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  26. As a recent migrant from London, UK (been resident in Australia for the past 2 years) I never imagined that the cost of living here in Sydeny would surpass that of London! And believe me, it most definately has… house prices, rents, food, telecommunications, electronics, banking.. you pay over the odds for almost everything (exception is fuel – but thats rising too based on the global price). You’re being hammered on all fronts.

    I would be interested to know the statistic on the number of immigrants vs the amount of housing being built every year or land being made available for housing? Where can we find the truthful figure?

    Surely people like me must be fueling the housing shortage? And yet I contribute to the Australian economy (I’m still employed and paid out of my London Office), its not like theres not enough land? Right? Its a joke!

    Surely the answer is better transport – not buses, but high speed trains to outter regions? The main issue is the bottleneck it takes to get from places as far out as Gosford to Sydney CBD (1.5 hours each way, or think of it as 2 additional work days wasted travelling to work and back each week). High speed trains! Come on – its 2008!

    But I fear that even if these did exist, that just like the telecoms and food, those businesses responsible for running/owning the service would merely treat their captive audience with contempt. Greater competition is needed in all areas of Australian economy, food, banking.. telecoms, etc.

    The Australian lifestyle that is so admired by the rest of the world is being eroded away – tis a shame!

    Now I know why so many Aussies work in London! They cant afford to live here!

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  27. There are several other situations of course that drive prices up, don’t forget about the general lack of transparency in the Australian real estate market relative to the US. The fact that auctions are an outdated, ripoff method, intended to drive the price high onthe spot (and anyone who participates in one in order to buy an affordable house is foolish to say the least). Then on top of that, like here int he US, you get no mortgage interest tax deduction for your primary residence. What’s up with that?

    Reply

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