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The Forum > Article Comments > Why housing is unaffordable > Comments

Why housing is unaffordable : Comments

By Richard Giles, published 17/11/2009

Whether renting or buying, it is getting dearer to get a roof over our heads. House prices are growing faster than incomes.

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grputland "As the email from me was passed around, someone may have jumped to the conclusion that the graph had something to do with the LVRG. This may explain why the article attributes the graph to "Kavanagh (2009)" with a link to the LVRG website. Sorry - it wasn't us; it was the RBA!"

Thankyou for the clarification but

that in no way instills me with any sense of confidence.

When anyone can publish a graph which,

by it ignoring the effect of interest rate fluctuations on "housing affordability", the graph has demonstrated complete ignorance of the largest single cost factor involved in property holding

to make it absolutely clear .... I mean the "interest cost" aka "the cost of borrowing".

to Illustrate..

in the 1980's interest rates were around 12% (+/-)

in the 2000's the interest rates have been around 6% (+/-)

in 1980's the borrowing cost on a $100,000 house would have been

$12,000 pa

in 2000's the borrowing costs on a $200,000 house would be $12,000

if interest rates had remained at the same level as 1980's, around 12%-ish, the house prices would not have increased, as illustrated in the graph line "Real house prices"

"Real House Prices" would have been closer to all the other lines running along the bottom of the graph and basically in line with "real average household income", as anyone with any insight what so ever, would expect.

Whoever produced that graph has less of a secure grasp on matters monetary than a grade three primary school student and if that was the RBA, they should hang their head in shame and look to review the minimum entry qualifications for their research staff.

So for anyone still in doubt (RBA included) lets make it clear, "Housing affordability" is driven by the mortgages income calculators and for full doc loans (the majority) they remain at around 30% of post tax income (adjusted for dependents and other borrowing costs).

Thus should interest rates go up, an individuals calculated borrowing capacity falls and house prices fall accordingly.
Posted by Col Rouge, Friday, 20 November 2009 4:53:41 PM
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As col says, banks will allow you about 30% of your wage for servicing a mortgage. Now it's what you do with the remaining 70% that will determine whether or not you can afford a house.

Also, many my age bought their first home having to have at least a third deposit and with interest rates around 15% or higher.

However, we did not have mobiles, we did not eat out as much, in fact, socialising was more a case of a back yard barbie and a video or two.

We didn't buy 'ready prepared meals' and we saved.

So, in essence, we did it tougher than you do now, as you don't even have to save a deposit. Let alone 30% + we are also taxpayers who contributed to the 7, 14 or even 21K that was gifted to you yet you still didn't take the plunge.

SO STOP WHINGING!
Posted by rehctub, Friday, 20 November 2009 6:52:15 PM
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Col Rouge: I'm not sure it's my job to defend the RBA's work except to give it due attribution, but...

There's also the small problem that if you want to own a home, you have to pay off not only the interest but also the principal. The same speech (http://www.rba.gov.au/Speeches/2008/sp_so_270308.html) indeed discusses some measures of affordability involving interest + principal.
Posted by grputland, Friday, 20 November 2009 11:20:43 PM
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Grputland “There's also the small problem that if you want to own a home, you have to pay off not only the interest but also the principal”

I would have thought someone of your apparent education would have realized that whilst the major component of a mortgage payment is, particularly in the early years, the interest, another component is the repayment of principle.

I did not, for reasons of word limits, explain that detail in my earlier post because I thought that most people contributing to this post would realize that fact.

So to expand on what I previously said, the 30% (or so) a bank will lend you, after allowing a 2% margin for interest rates fluctuation, also includes the repayment of principle.

Like I said previously, had the graph been adjusted for the shift in interest rates, the price of housing line would have followed closer the "real average household income" line,

"real average household income" (capacity to pay), is the second major driver of house prices (after interest rate) because it is a denominator of the affordability calculators. The higher the "real average household income", the more upward price pressure is applied to all house prices.

When a recession hits, incomes fall, house prices fall…

Krudds problem now is he has artificially fuelled house prices with a spending spree but the economy is not really “bursting at the seams” therefore people will defer taking on additional debt

But the “double whammy”

following the inept decision to have a “dimulous package”, interest rates are doomed to rise, depressing the property market still further.

Not good for getting re-elected

So if you have a secure job and want a house, I suggest you hold back and grab yourself a mortgagee “snatch-back”. That is what my daughter is waiting for.. she has one house (bought it aged 21) but is looking for more.

Myself, I just plunged in and bought a second one recently and then got married so now we (wife & I) have 3 houses. Long term we will do ok and time selling them to avoid CGT
Posted by Col Rouge, Saturday, 21 November 2009 8:08:28 AM
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"Sometimes, the honesty displayed here is breathtaking."

How true, Pericles, and here is an example:

"So your real income has risen three times as fast as the real cost of your rent. How's that for a good deal?"

Hmmm, but have rents risen or fallen in real terms? Could you provide links to data showing how rents have changed in real terms since say 1950? There is evidence that rents have been rising of late:

http://www.brisbanetimes.com.au/national/housing-rental-balloon-leaves-more-in-need-20091117-ikew.html

"The Australian Institute of Health and Welfare says house prices have increased at twice the rate of inflation since 1996 and rentals are almost $100 a week higher than if they had gone up in step with inflation since 1996."

Some posters also seem to think people waste far too much on gadgets these days. It is hardly surprising though, when you consider the huge improvements in quality and reductions in price.

http://gizmodo.com/5313690/why-you-cant-complain-about-the-price-of-todays-gadgets

"So your MacBook cost $1500—boo hoo. Thirty years ago, when the average salary was under $18,000, you'd have paid $2638 for an Apple II with 48K of RAM ($7770 in today's dollars)."
Posted by Fester, Saturday, 21 November 2009 9:05:53 AM
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