Wednesday, February 21, 2007
What's Your House Worth When Nobody Can Afford It?
Following up yesterday's post on the property market situation, I just came across this by Robin Bowerman in Albury-Wodonga's Border Mail - Pain in property cycle:
It's no wonder investors are feeling dubious about property at the moment when not only are buyers scarce (see yesterday's post), but rents are "unusually low".
THE great Australian dream is turning into a nightmare for people looking for their first home.
In economic terms, first home buyers are caught in something of a perfect storm — house prices continue to rise while rents also are rising while competition to find rental properties is fierce thanks to low vacancy rates in major cities.
The Housing Industry Association and Commonwealth Bank track housing affordability each quarter and it is now at its lowest level since the survey began in 1984.
What that means in terms of household disposable income is that the minimum repayments on a new mortgage will take more than 30 per cent of a household’s disposable income.
So at a time when all the economic indicators are pointing in the right direction — unemployment is at record lows, consumer sentiment and business investment is strong — we are confronting a crisis in affordable housing.
You can bet that some time during the debate someone will question the Australian need to own a home and trot out figures showing that you would be better off renting.
This is a case when hard numbers and lifestyle collide.
The reality is we do not have the long-term rental or lease culture that many European countries do.
Several years ago an economist colleague decided to put theory into practice — undeductible debt is bad, he declared, borrowing to invest and getting the tax deduction was good.
He and his wife were renting and investing the money they would have spent on the mortgage payments.
It was working well enough when a couple of things changed — they decided to start a family and just before the baby was due their landlord decided suddenly to sell the house they were renting.
The practical need for shelter overtook the economic rationalists view of renting versus buying.
To this day he will still argue the merits of renting over buying — from the comfort of his own lounge room — but firmly believes the big issue preventing more people from being life-long renters is the absence of the long-term mentality towards renting by tenants and landlords.
When people discuss share investing the impact of economic and market cycles is never far away.
The nature of property is that the cycles are a lot less visible and measurable because of the illiquid nature of the investment.
But the property market does move in cycles.
To give that broad context consider the figures provided by the Reserve Bank this month.
Average capital city house prices have risen 175 per cent since the mid-1990s which has pushed the ratio of house price to household income well above long-term averages.
But in the rental market over the same period rents as measured by the Australian Bureau of Statistics have gone up about 35 per cent.
Other measures by state Real Estate Institutes puts the rental rise about 60 per cent.
Either way, rents are unusually low compared with the cost of buying.
Look at it another way, the yield on rental properties is low so now that the prospect of capital growth in the property has softened in most cities it follows that investor interest in buying rental properties is subdued.
So the cycle turns: lower interest from investors slows the supply of rental properties so vacancy rates have fallen to record lows so rents are rising due to demand.
That in time will boost yields which in time will make property more attractive to investors.