Publications director Nate discusses the potential drop of inner-city apartment prices in this week’s edition of The Take.
Most people will acknowledge that houses in Australia are, unfortunately, far too expensive for the average young person to afford. Certainly there are outliers of young people managing to buy their first home without any assistance, and many media outlets will have the occasional success story of how someone working a regular job now has 12 investment properties. But for every one of these people, there are hundreds of others for whom the dream of owning their own home is far from their reach.
In 1975, the average wage was just over $7,600, while the average full time wage today sits around $60,000. The average house price in 1975 was $28,000, almost 4 times the average earnings for that time period. Fast forward to today, where average Australian house price is now hovering around $720,000, as much as ten times the average earnings. The explosive growth of housing prices has far outpaced wage growth, leaving the average house un-affordable for even those in reasonably paying jobs.
To add salt to the millennial wounds, columnist Bernard Salt insists it is the spending habits of millennials and other young home buyers that prevents them from owning homes, and not an issue with the wider economy or issues with housing prices far outpacing wage growth over the last 40 or more years. While he isn’t completely wrong, in that many people could certainly cut back discretionary spending and look at living within their means, the broader issues with the Australian housing market have a much deeper impact on the affordability of houses, including some of the more controversial tax ruling surrounding property investment, such as negative gearing.
Regardless of multitude of causes for high housing costs, there may be some good news, at least for those who are happy to live in an apartment. The Reserve Bank of Australia has recently warned that the increasing construction of apartment complexes in inner cities, particularly Brisbane, Melbourne and Sydney, is likely to lead to price drops across the board for inner city apartments.
The sudden surge in apartment completions is a simple case of supply and demand, and even someone with a rudimentary understanding of economics can generally see that the more units available will usually mean lower prices, with Australian cities trending towards an oversupply of apartments in the next few years, to the point where the number of apartments will most likely outweigh the number of interested buyers.
Banks and other stakeholders in the property industry view this as a major concern for the overall economy, as it is entirely possible that the oversupply could tip the scales, depress apartment prices, and by nature, house prices as a whole, which would then cause a decent hit to the overall economy. In addition to the RBA warning, some major banks, including ANZ, are beginning to require much larger deposits for houses and apartments in certain at risk suburbs, for example inner-city Brisbane. In areas expecting surplus apartments to be completed in the coming years, some banks are requiring up to a 30% deposit for a mortgage.
This could put some first home buyers, who have the long term cash flow to manage the mortgage, at a disadvantage because they don’t have enough cash saved up to fund the initial deposit. This could mean that, while interest rates continue to be low, and apartment prices are likely to drop, young buyers will still need to find a way to save up enough money for a deposit if they intend on entering the market in any suburbs within reasonable distance of a city.
The largest risk for banks is that a large amount of loans taken out for inner city apartments are by investors, rather than occupiers, and many are paying interest only loans or balancing the scales through negative gearing and other tax benefits. If the value of these apartments were to drop, or the scales were to tip, many investors will find themselves in financial trouble and banks are now seeing these investors as risky when they loan out money.
To top it all off, it seem Chinese demand for Australian housing is also starting to peak, with increased regulation affecting foreign demand and buying power.
This certainly seems very bad news for many, and another economic downturn at a time when the global economy is already quite fragile would be less than ideal, however a careful tip in favour of the buyer when it comes to houses would be welcome relief for many young adults seeking to enter the property market.