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The Forum > Article Comments > An affordability time bomb? > Comments

An affordability time bomb? : Comments

By Ross Elliott, published 21/6/2011

How will an avoidable decline in home ownership change our society?

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this author should consider the possibility that there are some things that he also doesn't "get".

Including the fact that we obviously can't cope with population increasing forever. So if zero population growth is really as economically distastrous as he suggests (and I'm confident it doesn't have to be) then working out the economic system to suit zero population growth is mandatory
Posted by jeremy, Tuesday, 21 June 2011 9:51:58 AM
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Leave the question mark off; Elliot rightly points out a problem. The only trouble is his solution, but not surprising given his background. The lack of affordability is due to the high immigration rate. The illusion remains that immigrants are poor and crowd into cheap houses. Today most come in well heeled. Go to an auction in the ring around the inner suburbs and watch who is bidding. A friend of mine attended an auction where the Chinese auctioneer spoke in Chinese to the two competing Chinese bidders.
The professionals have invaded the central suburbs, so those on median incomes have to go out to far flung subdivisions. Apart from the mortgage the costs of car transport (there is no public transport) makes the proposition untenable. If population growth was slowed, public transport would catch up.
Mining is producing the wealth; it employs 2% of the workforce. Properly taxed it will provide Government with a base to pay for services. Mining also leads to a high $A; we are increasingly importing labour intensive goods and services so labour will be available for care, which is not import competeing.
Posted by Outrider, Tuesday, 21 June 2011 10:29:43 AM
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Outrider and Jeremy

The article presents pretty clear and compelling evidence that the problem is caused by supply, not demand.
Posted by Rhian, Tuesday, 21 June 2011 3:04:51 PM
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Maybe Supply and Demand have nothing to do with the problem. In the US there was massive oversupply in many areas and the prices were propped up by easy credit. The prices dropped when the money supply was throttled back and the easy credit became restricted.

In Australia, the problem is compounded by tax policy. If you try and save to buy a house, you are penalized with high marginal tax rates and inflation. It is usually better to borrow as much as you can, especially in an appreciating market. People were able to borrow too much which encouraged them to pay too much for their houses which caused price inflation.

House price inflation is also not a new phenomenon. It has been with us all through the last century except for a gap during the Great Depression and World War 2. The day after the Japanese subs shelled Sydney was probably the best time to buy a waterfront property.
Posted by Wattle, Tuesday, 21 June 2011 3:29:13 PM
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Ross Elliott needs to ask why governments are imposing all of these charges. According to a letter to the editor of the Economist by Labor MP Kelvin Thomson, each new immigrant requires $200,000 to $400,000 in infrastructure, mostly from the public purse. New migrant families, like the rest of us, need houses, roads, schools, hospitals, sewer systems, power plants, etc., etc., and they need them immediately. However, judging from the UK experience, it is likely to be more than 20 years before they have contributed enough to pay for their share of them.

http://ideas.repec.org/p/pra/mprapa/6869.html

How does government get the money? It can't force the migrants to pay up front and then give them a tax credit because very few could afford it. It can't borrow the money because it would then have to slow down immigration to allow the loans to be repaid. All that is left is to raise taxes to just below the level that would provoke a revolt or to let infrastructure and public services deteriorate. So yes, the immediate problem is supply, but a lot of the constraints on supply are ultimately due to demand. According to Infrastructure Australia, we now have an infrastructure backlog of $770 billion.

If low population growth is such a problem, how can European countries such as Switzerland, Norway, Finland, and Germany with bigger aging problems than us and very low or no population growth rank so high on both the UN Human Development Index and the World Economic Forum Global Competitiveness Index? See also Mark O'Connor's blog for a response to the issues raised by Bernard Salt

http://markoconnor-australianpoet.blogspot.com/

and his article on OLO that appeared last Thursday.
Posted by Divergence, Tuesday, 21 June 2011 3:47:21 PM
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This article would have been so much better if the author had explained why owning one's house is a good thing. If the author could show research proving this is good for society, then it naturally leads to what to do about affordability. Otherwise, it comes across as special pleading.
Posted by DJB, Tuesday, 21 June 2011 4:10:35 PM
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DJB
Affordability is not just about home ownership. If the price of houses goes up, sooner or later rents will go up too, because landlords want to make a reasonable return on their investments. There can be quite a long lags, and the process is distorted by negative gearing, but in the long run rental values as a percentage of house prices tend to return to equilibrium.
Posted by Rhian, Tuesday, 21 June 2011 5:30:03 PM
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"the cost per square metre jumped from $111 to $350 – a 300% increase".

215% actually, a substantial difference.

"grew from $800 to $1200 – a 50% increase".

Got it right that time. Does it matter? I think so - if the author can't get simple arithmetic right why would one take notice of the rest of the article?
Posted by L.B.Loveday, Tuesday, 21 June 2011 5:57:03 PM
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215% is correct. My error, and a rushed one at that, I do apologise.
Still, 215% to 50% is a bit of a difference.
Posted by Ross Elliott, Wednesday, 22 June 2011 8:05:28 AM
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The author should realise that 'we' are not here to service the economy, it is the economy that should service us. Promoting growth for growth's sake is in the former camp. A measured approach to population is needed to ensure that we can all maintain a decent standard of living without sacrifing the environment in which we live. The author's seeming attitude of entitlement is one of the major problems in this debate.
Posted by Phil Matimein, Wednesday, 22 June 2011 12:53:24 PM
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<A measured approach to population is needed to ensure that we can all maintain a decent standard of living without sacrifing the environment in which we live.>

Is this the subtle version of the "population growth brings prosperity" mantra? Where is the evidence for this? I've been looking for a reason for years, and all I ever see are hollow mantras, scaremongering and abuse given in support of population growth.

Housing could be very affordable, but with a secretive and often corrupt development process, and government laden with huge infrastructure charges for a growing population, affordability is a difficult proposition.

Does it matter? Yes, because as all the pop growth zealots are always saying, we are headed for an ageing crisis and need to save for retirement. The irony is that the zealots' solution of high immigration both loads up government with debt and reduces the populations' ability to save. The difference in savings over the course of a loan can easily amount to several hundred thousand dollars. So the great "solution" actually makes a problem more likely.

Some solution.
Posted by Fester, Wednesday, 22 June 2011 7:37:03 PM
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House prices go up, house prices go down…. The laws of supply and demand

Most houses are purchased with mortgage finance and banks have specific rules of finance which, for the vast majority of purchasers is a mortgage at 80% of the purchase price subject to an ability based on the borrowers earning record or
in a minority of cases, the normal capacity constraints are waived for an additional interest premium or
in another class of minority of cases, the capital lending is increased above 80% of the property the mortgage is secured against.

Now those rules have not changed except recently, to get slightly tougher for the minority cases.

In the early 1990s the average price of houses fell significantly, as Keatings socialist incompetence pushed the economy into “the Recession we had to have”

More people chasing same supply of houses = increased demand = price increases

Fewer people with jobs and the same supply of housing = fewer qualifying for mortgages = less demand = prices fall

What is a huge great lie is “Affordability”

Because “affordability” is no different to what it has been for many years….

Prices go up and down, adjusting to keep “finance cost at approximately 30% (generally ranging between 27% - 33%) of gross family income, adjusted for expected cost of subsistence and other commitments (Credit Card Debtpayments etc) and thus affordability remains relatively constant.

Now if you are telling me "affordability" is under pressure because we have a few greens and running-scared socialists in government, hell bent on increasing the energy costs used both by households and in the production of a house, then I suggest you address the question direct and don’t blame "housing affordability" on the house itself.

Another point, if people decide not to save and to spend more on superficial vacations, expensive cars and the like, then that reflects an individuals’ inability to save for their own benefit aka a lack of personal responsibility or they have personal expectations above and beyond their personal capacity and again, nothing to do with "housing affordabiltiy"
Posted by Col Rouge, Wednesday, 22 June 2011 9:08:07 PM
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Col,

Surely, the test of whether something is becoming less affordable is whether a person on the median wage would be required to work more hours to pay for it. This is a bit out of date, but Figure 1 shows what has happened in Sydney with house prices in relation to the average wage since 1991.

http://www.fbe.unsw.edu.au/cityfutures/publications/presentations/ncoss.pdf

Rents have since gone up, increasing by 30% over the last 5 years in the Sydney area, according to a recent report by Adele Horin in the Sydney Morning Herald.

This fact sheet covers the Australia wide situation.

http://www.findem.com.au/factsheets/housingfactsheet.pdf

These increases would include old workingmen's cottages, not just MacMansions.
Posted by Divergence, Thursday, 23 June 2011 12:29:28 PM
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Divergence... whilst I agree with the view of median incomes, I would suggest your median income should be based on a couple, not a single person.

The other point is... if median priced houses are not being purchased by "median income earning couples", who is buying them?

I know in some suburbs there has, supposedly, been alot of foreign investment which may well push up prices beyond that affordible by the median income couple. This foreign ownership may become a problem if it remains a long term trend, otherwise there will be a deflationary adjustment when the foreign investor finds somewhere else for his funds. If foreign investors continue to flock to our shores then I would observe, "affordability" is made less viable for external events which a government should address (like limiting property ownership to australians with permanent residency visas / citizenship... which touches close to the issues on another thread justed started re Mike Pope "Selling off the farm?"

cheers
Posted by Col Rouge, Thursday, 23 June 2011 3:42:28 PM
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<I would suggest your median income should be based on a couple, not a single person.>

In other words you are blaming working women for the decline in housing affordability. What reasoning underpins this claim, Col? Has the fact that both partners are often earning an income affect the price of other commodities? Has the price of a television gone up because there is more money available to buy one? In fact, the price of many consumer items has declined. Wouldn't this be in conflict with your reasoning, Col.

My understanding of simple supply and demand dynamics is like this: If you increase demand, supply reduces. This results in higher prices, resulting in an increase in profit. This then leads to an increase in supply, which tends to reduce prices. The variables are cost, supply, and demand. How could increasing the money available for a commodity change the supply/demand/price equilibrium?
Posted by Fester, Thursday, 23 June 2011 7:42:32 PM
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Fester "In other words you are blaming working women for the decline in housing affordability."

is that is the twist you want to put on it.... (twist being the operative word)

No Fester, I blame no one for anything.

"Affordability" is not a blight on humanity, it is a measure, nothing more and nothing less.

It is also a fact that say 50 years ago, "family income" relied almost exclusively on a husband's earnings and a home-keeping mother.

These days we have far more "working mothers" with careers which exist beyond child rearing and with goals which outstrip the aspirations of their mothers.... that is their choice and I neither "blame" them for exercising such a choice nor criticise them for making their life choices to suit their personal aspirations.

Indeed, I commend them for aspiring to do all they can to secure their own future, regardless of how negatively you seem to interpret my observations of their actions.

If you want to consider another factor Fester, "affordability" may also be a function of divorce, where both parents are accountable for their children and one has to pay maintenance.

I did that... paid child support to my ex... and I managed to afford to buy a house at the same time but I bought in 1995 following the price collapse, a product of the idiot, Keating, "The recession we had to have" bastardry.

At that time house prices had fallen as interest rates went through the roof.. so I bought on the cusp of interest rates starting to fall again ..... the exact best time for anyone to buy.

The same rules apply today.
Posted by Col Rouge, Thursday, 23 June 2011 11:49:19 PM
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Fester, for the benefit of your education

Your Wrote "If you increase demand, supply reduces. This results in higher prices, resulting in an increase in profit."

If that is what you think, than you have no grasp of economics and should shut up before you embarrass yourself further.

The point with "supply and demand", be it for houses or pork bellys is supply and demand are independent of one another.

the point at which they intersect, where a transaction takes place, is where

the buyers offered price is sufficient for the seller or

the sellers demanded price meets the budget of the buyer.

Whatever "profit" occurs has nothing to do with it.

and any seller who demands a price higher than the market will bear will find he does not sell much.
Posted by Col Rouge, Friday, 24 June 2011 12:00:27 AM
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<Whatever "profit" occurs has nothing to do with it.>

Not so, Col. Consider the price of a dozen eggs: If the profit margin is very small, there is very little incentive to produce more product, and vice versa. And if the selling price is below the price of production for an appreciable period, supply will likely cease. This might be why any intended business venture will include an estimate of the profitability of the enterprise in its due diligence.

On the question of house prices, if the cost of building a new home were substantially below the median house price for that location, do you not think that there might be more houses built as a consequence of the profit to be made? Isn't that what capitalism is all about, Col? Or maybe you think the builders would ditch their tools and instead start an unprofitable egg venture?

Eggs to you, Col.
Posted by Fester, Friday, 24 June 2011 6:26:28 PM
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Funny how the population growth advocates vape whenever the subjects of house prices and infrastructure are mentioned, and no wonder. Take the example of two 25 year old couples, one in a stable population scenario, Couple A, the other in a pop growth zealot utopia, Couple B. They have each saved $70000, and have $2000 a month to put toward a loan. Couple A pay 150,000 for their home. Because of population growth, Couple B pay $350,000 for an identical home. In each case I will assume an identical interest rate, though in reality Couple A would pay a lower rate of interest due to the adverse effect population growth has on the balance of trade.

So how do they fare?

After four years, Couple A have pad off the loan and have saved about $3000. Couple B have a mortgage of ~$257,000. So Couple A now put their savings into a superannuation account, and earn %5 on their capital. Couple B will do the same when their loan is paid off. After 25 years, Couple A have $885,000 in superannuation, and Couple B have paid off the mortgage, and have $43,500 in super. After 40 years, Couple A have saved $2,370,000, or about $1,750,000 more than Couple B.

So who has the preferable retirement?

Couple B now live in a country with poor infrastructure and services, significant environmental degradation, large debt, and little money for pensions. Couple A inhabit a country with excellent infrastructure and services, and no debt. Further, it has used its surplus to further the education and training of the population.

I know which Australia I would rather live in.
Posted by Fester, Monday, 27 June 2011 6:51:16 PM
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