Will Increasing House Prices Stop Immigration?

Guest blogger Graham Currie has over 30 years experience in the financial planning industry.

A combination of a rapid increase in population and a severe shortfall in the supply of housing is the main driver of recent surges in the price of houses. We are now at the point where housing affordability is a major problem. First home buyers are being priced out of the market and even existing home buyers are being forced to borrow more and more to upgrade to a bigger and better home.

A major part of the population growth comes from high immigration numbers, but will they keep coming if the cost of buying or renting housing becomes prohibitive?

At what point does it become impossible for migrants to afford to come to Australia? 
Perhaps that depends on their country of origin and the living conditions there.

Governments seem to want a reasonable level of population growth to satisfy labour shortages and help fund financial support for an even ageing population, but many are starting to question the wisdom of a 62% increase by 2050 to 35 million people.

Over the last 40 years population growth has helped us grow our economy and even avoid a recession during the Global Financial crisis. 

Recent developments have seen the Government adopt a harder line by more than halving the list of valued occupations and “would stop anyone subverting migration rules by studying low value education courses in Australia”.

BIS Shrapnel says annual net overseas migration will fall from 299,000 in 2009 to 240,000 in 2010, 175,000 in 2011 and 145,000 in 2012.

A combination of Government policy and the economic reality of living in Australia may start to ease some on the pressures on housing affordability.

Graham Currie

Principal - Eliza Property Analysis

graham@elizapropertyanalysis.com.au

www.elizapropertyanalysis.com.au

How Long Can House Prices Keep Going Up?

Guest blogger Graham Currie has over 30 years experience in the financial planning industry.

Industry commentators often predict that house prices double every 7 to 10 years, and that’s in normal times, let alone some of the huge rises we have seen lately.

This means a compound growth of 7% to 10% a year, however average earnings are only likely to grow by 4% to 5% on the back of an inflation rate that the Reserve Bank is determined to keep in the 2% to 3% range.

In Ten Years

A 10% compound rise over 10 years will see a $500,000 home worth $1,178,974, an increase of 2.36 times, yet 5% earnings growth will mean an increase of only 1.55 times. In real terms houses will be 50% dearer than they are now. Those borrowing and paying 30% of their income on mortgage payments will see that rise to 46%. That’s real mortgage stress.

Even an 8% rise will see homes 28% dearer in real terms and mortgage payments at 39% of income.

In Twenty Years

Projected over 20 years the results look unrealistic. The $500,000 home is worth $3,057,955, or 6.11 times today’s value but incomes will only have risen by 2.53 times. In real terms houses will be worth 2.4 times more. Mortgage payments will have hit 74% of earnings.

After 27 years the ridiculous happens and mortgage payments exceed earnings.

Even at an 8% increase over 20 years will see homes cost 1.7 times more and mortgage payments will reach 52% of earnings.

Historically

From a low base of around 3 times earnings to buy a home some decades ago we have increased this to around 7 times, funded by an increase in two income families and a massive increase in debt, not just on housing but on credit cards and personal loans. 1.7 million investors favoured by negative gearing tax concessions have also driven up prices. 

Is there room left to keep increasing these debt levels or are we now approaching debt stress where we can’t afford to service any higher borrowings? Will lending institutions let us keep borrowing at higher levels?

Higher interest rates in the future will only compound these affordability problems.

What Does The Future Hold?

First home buyers are already struggling to enter the market.

Is a bubble being created that could burst one day soon?

Many commentators who are worried about our high house prices seem to think that our growing population and existing shortage of housing and new home building will protect us from any drastic correction in house prices.

Something has to eventually give!

If house prices continue to rise at a rate greater than earnings growth then there will have to be a basic change to house and land sizes, location, cheaper construction methods or more people housed in apartment type housing.

Or we will continue with similar housing, but with price rises limited to 4% to 5% each year in line with earnings? Perhaps we will see a combination of both.

Longer term mortgages don’t reduce payments by a lot and parents and grandparents who are in valuable homes will probably need that equity to fund their own longer life spans and medical costs rather than help their children into houses.

Graham Currie

Principal - Eliza Property Analysis

graham@elizapropertyanalysis.com.au

www.elizapropertyanalysis.com.au

New Property & Mortgage Blog

As this is my first blog post, I feel I should start by introducing myself briefly and letting you know what you can expect from my blog in the coming weeks and months.

Who am I?

My name is Jamieson Currie and my company, Eliza Property Analysis, provides independent information and analysis on residential property. Specifically, for anyone thinking about selling their home and buying another, we provide extensive financial analysis of their situation, enabling clients to make a well informed decision on the best time to buy/sell.

In addition to this service, we also sponsor the eMortgageCalculator.com.au website. Launching in May, this site provides tips on saving time and money when paying off a mortgage, and will include a very comprehensive mortgage repayment calculator available for download. But enough about me...

The Blog for Owner Occupiers

The focus of this blog will be all things residential property and mortgages. Specifically, the focus will be owner occupiers and the issues faced with mortgages, interest rates, equity as retirement savings, deciding the best time to buy and sell, and other such concerns.

The topics that we will cover in the coming weeks include affordability (what can / should be done), mortgage repayment strategies, and the importance that the timing of a sale or purchase will have on your long term finances.

Residential Property and The Australian Dream

The housing market is consistently making news, often with alarming headlines from the perspective of those paying a mortgage. In the last few years the coverage has included topics such as
•    record growth
•    GFC could burst the bubble
•    Australian housing market fares better than US and Europe
•    Supply v Demand
•    foreign investment
•    ¼ acre blocks v apartment living
•    land banking
•    green belts
•    more price increases
•    immigration policy
•    first home buyers grants
•    interest rates
and as long as people strive for the “Australian dream” the list will go on.

The reality of what Baby Boomers and most of Gen X know as the Australian dream is changing for many Australians, especially for first home buyers. The idea that it is a basic human right for all Australians to be able to own a 3-4 bedroom home on some land in the suburb of their choice is being challenged by the view that economics is a rational dictator of who should buy (or who should rent), when and where, if at all.

I will be discussing all the issues that impact the housing market, many of which will be very high profile in this election year, and I look forward to your comments.