Blog How housing crisis affects Aussie home buyers

How housing crisis affects Aussie home buyers

01 October 2015
How housing crisis affects Aussie home buyers

You'd be hard-pressed to find a news story about Australia's housing market that doesn't refer to the sector as a bubble that's waiting to burst. This sentiment has likely stirred apprehension among people looking to take out mortgages.

According to the Australian Bureau of Statistics (ABS), Sydney's residential property prices rose 13.1 per cent between March 2014 and March of this year. Over the same time period, dwelling values in Melbourne, Brisbane and Adelaide also increased.

Australia's housing affordability issue isn't a recent discussion topic. Lindsay David and Philip Soos, co-owners of LF Economics, developed a report detailing the root of the problem, asserting that home prices have exceeded inflation, income, rents and gross domestic product (GDP) since 1996.

To understand how Australians can navigate the residential affordability crisis, first home buyers need to understand the causes behind the housing bubble.

Why are Australian homes so expensive?

Housing affordability ultimately comes down to the 'bubble' economists, journalists and other analysts have been discussing lately.

Mr Soos and Mr David referred to late economist Hyman Minsky's definition of a housing bubble: when the profits from an asset (in this case, a house) cannot compensate the owner for the expenses associated with that asset. This situation causes investors (i.e. homeowners) to rely on the predicted value of their properties in order to build equity.

Renowned economist, author and Senior Fellow at the Hoover Institute, Stanford University, Dr Thomas Sowell maintained that one city, state or territory may have greater affordable housing woes than other areas. However, once their bubbles pop, the effects of that depreciation is felt across a wider economy.

The problem is, there's no guarantee that a home worth $500,000 will be valued at $650,000 seven years from now. Financial analysts can make well-founded hypotheses, but they're not clairvoyant.

Michael Yardney, director of Metropole Property Strategists and publisher of Property Update, detailed a sequence of events that can create property bubbles:

  • An event transpires that fosters buyer demand, such as low home loan interest rates that make the prospect of purchasing a home seem more attractive to the populace.
  • As with any other commodity, low supply met with high demand leads to price hikes.
  • Then, another factor is introduced to stifle demand, such as rising interest rates, which causes valuations to fall.

To revisit the example of the $500,000 property once more, that home may be valued at $400,000 due to price decreases.

One should note that this is a very basic explanation of a housing bubble. Other factors such as accelerating mortgage debt, taxation policies and population changes also contribute to the issue. However, each of these elements is ultimately connected to speculative home valuations, demand and supply.

How are first home buyers responding to the crisis?

How are first home buyers responding to the crisis? Exactly as some economists would expect them to. Financial advisory firm BDO surveyed 5,000 18-29 year olds living in Australia, many of whom fall under the category of first home buyers. A large number of survey respondents expressed the need to purchase homes now instead of later. Three-fourths said they were willing to incur debt to procure mortgages and 72 per cent believed that buying a home is a better investment than renting.

There are a couple of perceptions that are prompting this behaviour. The first is that many first home buyers believe that property prices will continue to rise. Better to pay a mortgage for a house that costs $300,000 instead of waiting 5 years and paying $420,000 for the same property.

Low home interest rates are also fostering buying activity. As noted by Mr Yardney, such figures tempt first home buyers to take advantage of modest mortgage rates. For some, the sentiment may be, "I pretty much only have to pay for the value of my home".

Statistics collated by Australians For Affordable Housing showed that, between January 1996 and January 2010, the mean loan size for first home buyers rose 147 per cent, while their incomes have risen only 57 per cent.

How does the crisis affect low- to middle-income Australians?

Anglicare Australia's Rental Affordability Snap Shot delivered information pertaining to more than 65,600 properties over the weekend of April 11, 2015. The following statistics provided insights into Australia's lower, working and middle class:

  • Single people living on minimum wage would be able to pay for 3.3 per cent of the listed properties, assuming they're caring for two children.
  • Those benefiting from Parenting Payment programmes could access 17 or 12 rentals out of more than 51,300.
  • Australians living on Youth Allowance or Newstart would be able to access fewer than 10 properties out of 14,000 regional listings.

Anglicare's summary suggested a number of strategies to allay this situation, such as redirecting negative gearing to expand the supply of affordable housing and increasing social housing availability.

How can home buyers navigate the bubble?

The first step in purchasing a property in the midst of a housing bubble is to educate yourself. Speak with trusted financial advisors and reputable home loan lenders to gain a comprehensive picture of the mortgage market. In addition, analyse housing trends in desirable markets.

Remember that Sydney's affordability issues don't apply to every Australian market - Darwin's average home price actually decreased 0.4 per cent between March 2014 and March 2015, according to the ABS.

From there, assess the financing options. Would you be better off with a fixed mortgage rate or an adjustable plan? Should the mortgage​ last 15 or 30 years? Your best friend's plan may not apply to you - your situation is fundamentally different, so look after your own interests.

In addition, it may be wiser to save up for a large down payment. There are a number of saving and investment strategies that can assist you in building up funding for the interests.

If you're currently looking for a home loan lender who can give you an expert advice and assess your financial situation, we can help you. Click here to find out if you pre-qualify for a home loan with us.