Australia’s younger generation will be homeless without their (grand) parents’ assistance.
According to CoreLogic, the median dwelling price for Australia is $760,000; the median dwelling price in the eight capital cities (6 States and 2 Territories) is $836,000, ranging from Sydney ($1.122 million) to Darwin ($522,000), whilst the median dwelling price for Australia’s regional towns is $605,000.
Assuming a first home buyer needs a 20 per cent deposit on the median dwelling in Sydney, for example, they would have to put down $224,440. If we add a further estimated $56,000 for stamp duty, solicitor’s fees, banking fees, insurance and moving costs, the total cost will exceed $280,000.
Once settled, the new home buyer would owe the bank the balancing 80 per cent or $898,000. At an assumed interest rate of 6.67 per cent per annum, the interest payable would be $60,000 per annum (excluding repayment of principal).
If we assume our Sydney-based median family is earning a combined $220,000 per annum, or $165,000 per annum after tax, due to income splitting, then 36 per cent of after-tax earnings goes to the mortgage and our theoretical couple are financially stretched, and this will likely get worse if there is any reduction in family earnings and/ or added expenses from children.
One can quickly see how things unravel from higher interest rates or rising unemployment, particularly for those owners who have relatively little equity.
In contrast, when I analyse data from the U.S.-based realtor.com, the median “single-family home” in the U.S. sells for U.S.$210,000, about a 57 per cent discount on the Australian median dwelling (on a currency adjusted basis). For the priciest states (Florida and Hawaii), the median price jumps to U.S.$580,000 (AU$900,000), a 20 per cent discount to the Sydney median dwelling, on a currency-adjusted basis.
Many factors conspire to make Australia’s house prices out of reach for the younger generation. Significant factors include:
- allowing solid population growth, largely via net migration,
- allowing the tax-free status of the family home combined with the high rate of income tax (as well as the ridiculous cost of stamp duty) and
- having a weak competition watchdog that allows for an oligopolistic structure within the building materials sector (and several others).
Tax reform, smart country aspirations, affordable tertiary education, social housing, decentralisation, high-quality education, hospitals and transport, and decarbonisation are all on various governments’ agendas. However, until quality housing becomes affordable for the average young Australian, most politicians will continue to kid themselves.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Affordable housing by Thomas Sowell
there is a severe housing price crisis in particular places where land use restrictions and other severely restrictive building regulations have driven housing prices up beyond what most people can readily afford. Historically, the government has not been the solution to the problem of “affordable housing” but a major part of the problem, especially when its restrictions drive the price of housing well above the cost of constructing new housing.
Prior to the advent of large-scale government involvement in the housing market, people tended to pay a smaller proportion of their incomes for housing,
Liberals love to have the government do nice things — without the slightest regard for the costs or the consequences. Greenery is nice. Open space is nice. It is nice to have buildings that are not too tall. There are all sorts of nice requirements you can put on builders before granting them permits to build.
in California the San Mateo County Planning Commission has spent five years deciding what can and cannot be done with the site of an old racetrack that is no longer economically viable.
That is more time than it took to build the Empire State Building, the Golden Gate Bridge or the Manhattan Project that produced the first atomic bomb.
Such delays are not uncommon in the more politically correct parts of California. Permission to build an apartment complex near San Francisco has taken even longer.
The Effect of Zoning on Housing Prices
Ross Kendall and Peter Tulip
A Reserve Bank of Australia working paper found that, “as of 2016, zoning raised detached house prices 73% above marginal costs in Sydney, 69% in Melbourne, 42% in Brisbane and 54% in Perth.”
https://www.rba.gov.au/publications/rdp/2018/pdf/rdp2018-03.pdf