Say What Wednesdays

Housing market history and lowering property prices sustainably in the future

Welcome to Say What Wednesday! Today’s question is about Labor’s plans to help with housing affordability. To answer that properly, I will spend today going through some underlying factors impacting Australia’s property market, and what affects housing affordability and how it works in the long term.

I will actually answer the question about Labor’s proposed policy on Friday. At the end I’ll run through what is probably one of the only ways to lower property prices sustainably in the future – IMO anyway.

The History of Australia’s Property Market

Yes, a dry topic but stick with me, it’s worthwhile understanding what’s been going with property over the last 20 years or so.

The Big Three

Population size and growth

  • 1901 at Federation, we had a population of about 4 million – High growth from the gold rushes up until then
  • Population now – 25,122,747
    • Growth of 6 ¼ times over 100 years
  • America – from 77 m in about 1900, to 326 m now which is growth of around 4 times

Why has our population grown by so much?

  • Great place to live – High levels of immigration
    • We no longer discriminate – Immigration Restriction Act 1901
      • Dictation test – In a European language or English (Most, of course, were white and so it was referred to as the White Australia Policy)
      • Governments progressively dismantled such policies between 1949 and 1973
      • Since 1973, after the dismantling of the White Australia policy and broadening of Australia’s immigration policies, new groups of migrants have been arriving from all parts of the world
  • Immigration now makes up over 60% of our population growth
    • One of the Highest growth rates in the world, behind Saudi and NZ
    • We are living longer
      • Decline in death rates at all ages – Improved living conditions, sanitation, food, medical improvements
      • 100 years ago, the median age was 22 years and 4% of the population was aged 65 or over.
      • Nowadays, the median age is 37 years, and 14% of the population are aged 65 and over
      • Timing of this is important – something interesting happened in 1994 – which we will come back to at the end of this

Population distribution

  • Today, 85%-90% of Australians live in urban areas, 70+% in the cities
  • 100 years ago, less than 40% of Australia’s population lived in our capital cities
    • Melbourne was our largest city, with just over 500,000 people
    • 1945 – Sydney hit 1.5m to overtake it (growth of 800k in 30 years). Between 1911 and 1945, Sydney’s population grew by over 800,000 people, to almost 1.5 million, basically doubling.

Interest rates

  • Major increase in property price comes back to lending capacity
    • 50s to 70s – 5% or so, very consistent during the gold standard, Brenton woods era
    • 70s to 80s – went to 7, 8, 9, 10%
    • 80s to 90s – 10 -17%
    • 90s to within 2 years dropped back to 10% – going to about 7%
    • 2000s – 7 to 9% (dropped to 5% in 2009) – then back to 7%
    • Last 8 years been dropping – Now rates are below 5%

So why has this caused property price increases? Supply and demand!

  • Supply
    • Urbanisation – The nature of Australian property supply is very centralised
    • Sydney 4.6m, Melb 4.2m, Bris 2.2m, Perth 1.9m, Adelaide 1.2m
    • Gold Coast – 600k, Canberra – 367k, Newcastle – 308k
    • 65% of population live in 5 cities
    • America – big 5 – NY, LA, Chicago, Houston, Phoenix – combined 19.3m – 6% of total population
  • Size of houses are also bigger – demand for bigger houses
    • In fact, the average new house built in 2016/17 was 233.3 square metres, the biggest in four years and more than 11 per cent bigger than 20 years ago.
    • The average house built today is over 30% bigger than 30 years ago (the 1986/87 financial year).
    • Second Behind America in terms of largest homes in the world
  • Demand
    • Immigration
      • Urbanisation – People go where the jobs are
      • Natural increase and net overseas migration contributed 34% and 66% respectively to this total population growth.
      • In the past 10 years – Brisbane’s population increased by 27%, making it the fastest growing of all Australia’s capital cities in the 21stcentury (A lot of interstate migration)
    • Demographics
      • Baby boomers (1946 – 64) – Largest demographic from post WW2 boom
      • In 1994 the last of the boomers turned 30 – The average property prices was fairly flat to upward sloped from 60s to 1994/1995.
      • From that point and over the last 35 years, average prices have doubled – $140k to $280k (inflation adjusted)
      • 1998 to 2018, the average prices went from $310k to $810k – that’s more than 2.5 times in 20 years, and double the growth rate of the previous period.
      • If the growth rate had kept at the previous rate the average price would be $664k rather than being over $800K
    • Low interest rates
      • More loans and low interest rates – mid 90s interest rates were 10% lower than the past few years previously and 3% lower than the long-term average of 10%
      • This fuelled borrowings for investments as well and we saw a rise of investment properties being purchased
      • If people can access more debt, they will

The Outcome – 1994 to 2018

  • Brisbane – Median house price $126k to $524k. Borrowed $101k at 9%, today $419k at 5% (that’s 4 times the amount of debt for half the interest cost)
    • Annual repayments used to be $13k, now it’s closer to $31k
    • This is an increase from 20% to 31% of median incomes being directed towards servicing mortgage debt
  • Even with lower rates, we spend way more on servicing a mortgage

Housing prices the long term view

The Solutions

These are three that I can think of based around the drivers we have already discussed

  1. Lower taxes – If the Gov was committed to truly lowering house prices they would get rid of Stamp Duty
    1. Stamp duty on a median priced property is $35,000 in Sydney and $40,000 in Melbourne.
    2. This works on both ends – when developers buy land to redevelop, they pay stamp duty, so it increases the price to be passed on
    3. GST was meant to replace Stamp duty, but it now increases the cost more than 10% when you add it up
      • Building costs go up by 10%, services for property up 10% – Agent commissions
    4. Both of these taxes are just accelerating the growth when looking at percentages – percentages are compounding

 

  1. Reduce Urbanisation – Need more cities and a greater spread of population
    1. Invest in new business hubs outside of the major cities – People will move to new major cities for work/family
      • District level tax incentives to move – Mobility of workforce leads to mobility of population
    2. Incentives
      • People come to Australia because it is good to live
      • What would make Australians and people coming to Australia move to other cities outside of the big 5?
    3. Remove federal policies on housing – affordability differs city to city, state to state
      • Need more targeted housing policies
        • Bank lending – APRA
        • Allow Local councils to free up more land – remove the Commonwealth restrictions
      • Sydney – $1.2m median house price = 10.8 times median family income
      • Melbourne – $830k median house price = 8.4 times median family income
      • Brisbane, Adelaide, Perth range at ratios of 5.4 to 4.8

With this as a background we’ll next look at the policy proposals in place …which was the question for this week 😊

Just a reminder that we’re offering 50% off the course for podcast listeners – use the code faf01

We’re we get the numbers? http://www.worldometers.info/world-population/australia-population/

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