Is Australian property ever going to get cheaper?

By | July 29, 2016

Is Australian property ever going to get cheaper - dividends down under blogAuthor: Mr DDU.

I’m sure you know (but let me tell you anyway), house prices in major cities around the world have risen to all time highs. A lot of commentators are calling these prices unaffordable (We agree!), with many cities having house price to income ratios of more than 10 (eg average wage is $65,000 and average house price is $650,000 (not factual numbers)).

We have longingly thought about the idea of buying a house for ourselves, but it’s just too unaffordable at the moment. Even if we weren’t saving to have a baby through IVF I still don’t think we would be considering buying a house. We definitely want to buy a house, we are going to buy a house at some point. It’s going to be hard to justify spending so much money on something that doesn’t produce any money for us. Owning our own home is important, contributing to our Financial Independence / Retire Early fund is also important.

Renting makes sense for us, and does for a lot of Australians. Luckily rent prices have not gone up as quickly as house prices, so although landlords are getting a poor yield, at least people (like us) can afford somewhere to live. But how have house prices gotten so expensive?

There’s no one underlying reason, but there are several factors, some of them are:

 

Decreasing interest rates

In the 1980s, interest rates were at least 15% in many countries (which is crazy considering today’s ultra low rates). The interest rate has been steadily declining ever since. Most people have a certain amount they can afford to pay for their entire mortgage payment (paying for the house + interest). When the interest portion of the payment decreases, it means more can be put towards the mortgage/house. If interest rates start to rise again, theoretically house prices (particularly bond prices) would start decreasing.

More lending credit, less controls
A lot of banks became very slack on their lending leading up to 2008. They were lending out bigger loans (sometimes more than 100% of the value of the property) and to people who couldn’t necessarily afford the loan. These practices have added a lot of fuel to the property boom.

Housing demand not being met
Many city populations are continuing to grow, but the supply of building homes hasn’t been keeping pace. Anyone can tell you about the supply & demand relationship, so I bet you can guess how this has effected house prices.

Property increasingly being used as an investment

The older generations have used property investing to their advantage, turning a lot of the property market into a rental market. Which is nice for people who want to rent,  but it’s harder for people who want to buy a home to live in, when they’re competing against a richer investor who can reduce their taxes if they make losses on their property. In Australia the Govt have no plans of changing the current set up, so this will stay for at least another 4 years. Good for anyone and everyone who has invested in property, you’ve done very well, we’d probably have done the same if we were 25 years older. Not so great for us millennials who have to compete with this.

The Asian influence

A huge amount of money has flowed from Asia (and away from their inflated property/share markets) into supposedly safer havens of Australian, New Zealand, American, Candian and British property. Some are just happy to have bought anything, parking their money in a place away from their country’s authority. How can locals compete against all of this foreign money? Do banks and Govts want this money coming into the country?

 

That last point has Westpac New Zealand worried

Westpac is Australia’s second largest banking group who have a subsidiary in New Zealand. It’s this subsidiary that have taken the extraordinary step of banning all new loans to foreigners. Westpac are concerned whether these foreigners are going to pay back the loan, what is stopping them going back to their home country and the loan becoming unrecoverable?

 

Under the policy:

  • Westpac will no longer lend to non-resident borrowers with overseas income
  • borrowers on temporary resident visas will only be accepted if they have both a New Zealand address and New Zealand-based income;
  • the maximum allowable Loan-to-Value Ratio (LVR) for New Zealand citizens and permanent residents with overseas income is 70 percent (down from 85 percent)

 

ANZ, Australia’s third largest bank, has also tightened its rules in New Zealand, but not as much. Some of the new rules:

  • A maximum LVR of 70 percent
  • Facilities are restricted to owner-occupied properties
  • Boarder income not permitted
  • No interest only lending will be available
  • Applies to standard residential property only, and will not be available for the purchase of bare land or construction
  • Loans are only available to individuals
  • Refinancing is available, but no additional lending is permitted
  • ANZ will honour existing pre-approvals

 

Australian banks have also been doing the same. Commonwealth (Australia’s largest bank) won’t accept foreign self-employed income and require 70% LVR. ANZ won’t lend to people with only foreign income and have also changed their LVR to 70%. NAB has changed their LVR to 70% for foreigners too. So only cashed up foreigners now stand a chance of buying with the major banks.

I think all of these changes are prudent, safe and the right thing to do for each bank. There is a lot of uncertainty about which direction the economy is going over the next few years. This is the time to be shoring up the lending and getting some security. If a decent number of buyers are taken out of the market, maybe this will create a price drop, who knows? As much as we’d like cheaper house prices for ourselves, having a recession isn’t good for us,isn’t good for our investments or Australia as a whole.

Australian banks have always performed well – even throughout 2008-2009 they continued to make billions of profit. These moves are quite defensive, but if another crisis hits they will be better prepared because of them, though they’re still vulnerable to a recession of course. We will be following any more developments closely.

 

Final Thoughts

The change in the mindset of banks towards home loan lending might be another tick towards the idea that the housing market is slowing. Either way, it will be interesting to see if the changes affects things.

Property prices are highly inflated due to all the above reasons and until the affordability ratios improve (compared to people’s incomes) we don’t stand a chance of buying for many years. In our opinion if the price growth of the housing market slowed or even slightly decreased, we wouldn’t consider that bad for us personally. It might even present us with a good opportunity in a few years. It could be a good thing for a lot of millennials. Though it may not be so good for older generations who may be heavily invested in property, if we were in the other bracket that would be adversely affected from the property market declining then we’d have a serious look at our asset diversification. The boom can’t last forever and we’d always want to be prepared for that.

 

Is property affordable where you live? Is your government trying to make property more affordable, particularly for first time buyers?

 

Thanks for reading this article about our financial journey Down Under.

Onwards and upwards!

22 thoughts on “Is Australian property ever going to get cheaper?

  1. The Green Swan

    Interesting to hear the measures taken by the banks, sounds pretty conservative and those loan to value ratios would be tough to meet for a new homeowner.

    Have you considered building a new home? I wonder if that would be cheaper. Otherwise your approach on waiting for the right time and the home being more affordable is a good approach, no reason to stretch at this point.

    Reply
    1. Dividends Down Under Post author

      (Mrs DDU here, highjacking Mr DDU’s post comments).

      The cost of land is the main factor around here, plus we do live in an urban area and have to for Mr DDU’s work/access for him to use public transport, we already live 2 hours round trip from his work. Our city is so built up right up out passed areas that don’t have any access to public transport, so to find an empty block of land (which would still be pricey) would be in the middle of “nowhere” without any transport links, considering our decision to only have one car access to public transport is important to us. The “best of both worlds” decision would probably to be to find a liveable but run-down place that we could do up and extend over time (do the kitchen one year, bathroom another type of thing).

      Ultimately right now we aren’t trying to buy anyway, really would like to get IVF babies done and dusted first.

      Mrs DDU

      Reply
  2. Mr. Purpose

    I’ve only been mildly keeping up with the housing market in the US. I currently own near Portland, OR. A place that has been recently going through a boom for the past year. I haven’t seen the banks try to stop it and the only solution suggested has been to implement rent price controls. Not exactly the best idea on the board. :/ I like the idea of locking out too much foreign money, but I think the real solution needs to be that companies need to start telecommuting where possible, buying suburb offices, or building better public transit. Here in the US there is a ton of viable land, and it’s ridiculous to be clamoring for city condos or having >2 hour commute per day.

    I think there are a number of millennials like myself who are starting to make those trade-offs. The trade-off where we don’t want the commute our parents had.

    Reply
    1. Dividends Down Under Post author

      Hey Mr Purpose,

      I agree with you, many cities are just focussing on the centre – with all the infrastructure built there. If companies built things in the suburbs, it would be a lot better for city planning, commuting, house prices across the city. There could be so much potential but the people in charge aren’t taken advantage.

      Mr DDU

      Reply
  3. The Jolly Ledger

    The housing market in Colorado is also booming. In my little town, it is richer urban dwellers that are buying second homes and driving locals out of the market. Small town wages just can’t keep up. Unfortunately, our rental market has increased too, often making it impossible for people to rent (many share a space or sublet a room). I own my homes but I have recently thought that if I was going to do it all again, I would have bought a duplex or other multi-family home. Something that was income generating as well as provided us a place to live. My FIRE plans would be way more flexible now if I had done that then.

    Reply
    1. Dividends Down Under Post author

      Hey Jolly Ledger,

      It’s sad that in so many areas the people who have lived there all their lives are being priced out. I hope we can afford a house in our area when it comes to buy.

      It’s easy to say what we could have done in hindsight, if only time machines existed! We must try to predict what will be better in the future for us – no easy task.

      Mr DDU

      Reply
  4. Vicki@Make Smarter Decisions

    Our housing prices are VERY reasonable compared to what you are dealing with (and your numbers make me think of big US cities as well). We own a 1600 SF house with 3 beds/2 baths (and an inground pool – as you saw today!) and sunroom – backed up to a big beautiful park. We could probably sell it now for about $160,000 and I paid $130,000 for it 11 years ago. We also live a mile from a beautiful lake and we have ski hills down the road. We also own a house about an hour from here (a rental) that cost $82,000 – it was a 4 bed/3 bath house about 2 blocks from a college – on a nice and quiet street. It has definitely increased how quickly we could get to FI. We also own a small 8 unit apartment complex and we paid $400,000 – and it has 8 nice 2 bed/1 bath units and generates a nice profit.

    Reply
    1. Dividends Down Under Post author

      Hey Vicki,

      Sounds like you have a very nice home and it’s in a great location. I’m pleased for you that you’ve managed to build yourself a nice property portfolio, and we may have done something similar if we were born a couple of decades earlier. It’s hard to say where we should invest now, it’s not clear at all – I hope what we’re doing works.

      Mr DDU

      Reply
  5. Dividend Hustler

    Property value is always going to increase and it’s the cities that gain the most. It’s tough for sure but we can always move somewhere cheaper like the suburbs.
    Renting makes sense and hopefully 1 day, when you’re ready… Homeownership will be a dream for you and your family. No rush.
    Thanks for the post and Let’s keep at it. Don’t stop! Cheers bro.

    Reply
    1. Dividends Down Under Post author

      Hey Tyler,

      Property does seem to be on a long growth runway with no sign of stopping (except in 2008/2009) – we will definitely buy but it’s hard to know when. We are already in the outer suburbs of our city, we couldn’t go much further out without still being able to access well-paying jobs.

      Mr DDU

      Reply
  6. Jeff

    Property here in Canada is at an all-time high as well.
    I guess it really depends on where its been bought. If I a house is being bought in a small town, it would be considerably cheaper and could also be a good investment property depending on the location.

    Reply
    1. Dividends Down Under Post author

      Hey Jeff,

      I agree, there is still cheaper properties out there in more regional areas. But as we’re trying to stick to being a 1 car household then we need to remain within our city’s metro (so I can access well-paying jobs) so we’ll just have to hope that when we are going to buy that we can afford where we want to (frugally) choose to live.

      Mr DDU

      Reply
  7. Calvin Hague

    I live in Australia but I don’t own a house. I could afford to buy one without getting a mortgage, but I wouldn’t because that would mean I’d have to sell all my managed funds, ETFs, AREITs, etc. I currently live in my mother’s house. I suppose I am lucky because my mother leaves me alone to do my own thing. There is a social stigma you get from people when they learn you live with parents, but I strongly advocate it because it can save a significant amount of money. There is a myth out there that living with your parents reduces your independence and makes you dependent, but this is not necessarily true. Independence and freedom comes from passive income, and passive income can come from dividends, and dividends come from stocks, and to buy stocks you need money and to get money you can save money, and to save money you can live with your parents, and so logically living with your parents can increase your freedom and independence.

    Reply
    1. Dividends Down Under Post author

      Hey Calvin, thanks for commenting! We really appreciate you coming to our blog and having a read.

      I agree that it’s very difficult to know when to buy, or where to put our money. Particularly when all the compounding knowledge is in our heads – we know that earning money from our investments is better financially – why commit all those funds to a non-earning asset?

      If living at home works for you and your Mum then all the power to you – it sounds like you’re really killing your financial goals. Some people don’t take advantage of that, but it’s good you are. Of course, for us being married there is a lot to be said for being independent (even if it isn’t the best financial outcome), we enjoy it a lot.

      Mr DDU

      Reply
  8. amber tree

    Looks like property everywhere is an asset class that attracts a lot of interest and money.
    It is interesting to see that the LVR can be max 70pct. In Belgium you could in the past go to 110pct. now, you get a better rate when it is 80pct.
    Our rental investments plan are a low priority for now. I guess we are lucky having bought in 2008. Keep in mind, In Belgium, the housing prices stayed flat, there was not a bubble that exploded and allowed us to pick up a house for cheap.

    Reply
    1. Dividends Down Under Post author

      The 70% LVR is for foreigners, I believe I could turn up at the bank and get 80% LVR or even 90% maybe.

      You are fortunate that Belgium didn’t have a crash, Australia didn’t have a proper price crash but we probably are in a bit of a bubble. Maybe in the next few years it will become less of a bubble.

      Mr DDU

      Reply
  9. Amanda @ centsiblyrich

    Really interesting to read about the real estate market in Australia with the foreign investors. We live in the US (in the midwest) and housing is pretty affordable here. We do live near a city with a higher cost of living than the rest of the state, so our local housing market is higher. They can’t build the houses fast enough to keep up with demand, which has driven our housing prices up 10-15% over the past year – good for us now, since we are staying put, but bad for buyers.

    It sounds like you are better off renting for the time being, but hopefully things change in your housing market soon so you can buy a home!

    Reply
    1. Dividends Down Under Post author

      It will be hard to decide exactly when to move as the best time would be a recession..when all the stocks, REITs and investment properties will be on sale too!

      10-15% is a BIG jump. Is the population in your area also jumping? Well it’s good you consider it affordable still, but eventually it won’t be – at least for people starting off.

      Mr DDU

      Reply
  10. J @ Hey It's Just Money!

    And then the RBA decided on a rate cut. Sometimes I question myself if I still really want to own a house or I’m only working towards that goal because everyine else is. It’s just too expensive!

    Anyway, I found out recently from a Chinese friend that they are only allowed to own a house in China for 70 years. They have to hand it back to the government after that. Them buying properties overseas finally made sense to me. (But it doesn’t change my view that we should be given priority over foreign investors.)

    Reply
    1. Dividends Down Under Post author

      That completely makes sense to me too! Although I think a lot of them would find it difficult to become permanent residents here? Maybe they’re only here for just under half the year.

      We do want to buy a home, but we’re going to take the investing route to get there. Houses are the one place where we’re competing against people’s excessive spending and huge bank lending – hard to beat with a frugal outlook.

      Mr DDU

      Reply
  11. Pingback: Australia’s dropping interest rates: pros and cons – Dividends Down Under

  12. ADI

    Hi! Have you given any thought to “reinvesting” rather than buying? Basically using the difference between the mortgage payments you would have and the actual rent you pay, and investing the difference?

    I’ve always thought that Australian house prices were crazy basically because everyone is told from birth that owning your own house is the “Australian Dream”! The other thing that makes me think house prices might have a way to go is that households are increasingly two income households, making historical affordability numbers a bit dubious.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *