Housing Affordability Weakens as Investors Swoop in

Housing Affordability Weakens as Investors Swoop in

Prospective home buyers dealt some cruel blows over the last couple of years.

For starters, the Reserve Bank lifted interest rates – three times – seriously affecting the amount first home buyers were able to borrow, and pushing some of them out of the market completely. Most bank interest rates today circle 7 to 8 per cent – an increase of about 1 per cent on last year.

Secondly, house and apartment prices in Melbourne resurged, after a relatively quiet three years of only minimal value growth. According to the Real Estate Institute of Victoria, Melbourne’s median house value is now $391,000 – an all time high – and almost $20,000 more than it was at January last year.

REIV chief executive Enzo Raimondo warned buyers that with the real estate market as buoyant as it is at present, property prices are only expected to keep on rising in 2007.

But third and perhaps most alarmingly, an increase in the number of people who can’t buy a home, has forced them to stay in rented accommodation. This has resulted in a shortage of rental properties, and an increase in rents across almost all Melbourne suburbs.

Woodards chief executive officer John Piccolo told Domain last year that 88% of the properties his company let in 2006, recorded rental increases. Hocking Stuart executives agreed, saying vacancy levels on its rent roll fell to less than 1 per cent – a fact supported by the REIV which also says rental vacancy is tight, particularly in the inner city.

It gets worse.

The quinella of rising rents, and low vacancy has also resulted in an increase in the number of investors entering the market, muscling out prospective first home buyers, many who already needed to stretch themselves to get to entry level.

This is bad news for prospective home buyers, as higher rents make it harder to save a deposit. And you will need a higher deposit to buy into the housing market which analysts unanimously agree is improving.

It comes as no surprise to some that rents have shown signs of major improvement this year, after they stayed relatively stagnate for the early part of the decade. The Reserve Bank of Australia recently said that home prices in Australian capital cities increased 175 per cent over the past ten years, while rents only increased 35 per cent.

Up until recently, this situation suited renters who found it relatively affordable to rent homes and apartments, particularly in the inner city. A mortgage on an apartment valued at around $220,000 would cost around $18000 a year; renting the property would cost around $11000 per year at assuming today’s average returns.

But unless renters used that time to save a deposit, they risk being stung later this year, according to agents. They money they spend in increased rent, is paid at the expense of a deposit, which would allow them to buy something similar.

Most real estate groups, including the Housing Industry Association, say not enough is being done to help first home buyers achieve the great Australian dream. It said that housing is now more unaffordable than at any time since it started collecting figures in 1983.

The Australian Housing and Urban Research Institute warned housing affordability is becoming a bigger problem for first home buyers, as well as those who are paying off a mortgage.

According to AHURI, since 1999 there has been a marked increase in the number of households which are in ‘housing stress’ – ie, the amount they need to pay for their mortgage is more than 30 per cent of the household’s overall income.

In 2003, it said that almost 1.2 million households nationally were experiencing housing stress, up more than 200,000 on the rate ten years earlier. Times were toughest for couples who decided to have children and drop to a single-income household. The number of households where mortgage repayments take more than 50 per cent of the household income, is more than 400,000 and also on the rise.

Despite this, Victorians are continuing to invest in real estate like never before.

According to Victoria’s Valuer General, residential sales in 2005 (the most current figures available) show that Victorians invested $42 billion into residential real estate. This compares to $13 billion recorded ten years earlier.

Additionally, values in the suburbs once considered ‘entry level’ have shot up since the last cycle.

In 2001, Dandenong North was Melbourne’s most affordable suburb, with a median house value of $140,000. Five years later, the median price for the suburb is $271,000. In Frankston, the average house price was $149,000 – today it’s $251,750.

Deer Park in Melbourne’s west is now the city’s most affordable suburb, with a median price of $195,000 – almost 40 per cent higher than the most affordable suburb the same time five years ago ($140,000).

“We still have a high number of first home buyers coming into Deer Park, but the market has also been penetrated by investors,” said Stockdale & Leggo Deer Park sales executive Kane Sherwell. “Investors are attracted to the high returns they get for property in the west, compared to other offerings in Melbourne and interstate.”

“Once the big increases in rent comes in about 6 months, I expect to see more first home buyers come into the market,” said Mr Kerwell.

But what about those who can neither afford to buy a new home, or stay in rented accommodation?

“The first home buyer market seems to be struggling still and higher interest rates in 2006 didn’t help the situation,” said Glenn Evans, HIA Victorian regional director. “There are clearly still a number of aspiring first home buyers out there who are struggling to realise their dream of home ownership.”

“We are finding there are two problems,” said Jim Davison, assistant director research at AHURI. “The first is that people can’t get into the market and are having to wait longer to get into home ownership.”

“The second is that people who are saving to get into home ownership are occupying low rent stock, meaning that those people on very low incomes have to pay more for their housing,” said Mr Davison “It’s a cascading effect down the line.”


How do I Buy My First Property?

Bring your lunch from home.
Join friends for coffee, instead of dinner.
Sell an expensive car you have a personal loan for.
Pay off your credit card debts and lower the limit.
And think twice every time you open your wallet or purse.

These are some of the first things financial advisers recommend you do, to help save for a deposit.

Rising real estate prices and rising rents, coupled with an army of local and interstate investors hunting around your area for a property to add to their own portfolio, is making it harder for Melburnians to get into the housing market.

Banks say first home buyers need to consider their income level and living expenses when deciding what they can afford. As most mortgages run for 30 years, it is important to take into account future considerations such as marriage, children, planned holidays, renovations, extensions and property maintenance – and to be realistic about how much it will cost.

As a general rule of thumb, it’s worth calculating what mortgage repayments would be if interest rates were two per cent higher than current rates, to see if you can still afford the payments. If you can’t, then you should take the attitude that you can’t afford the home, and look elsewhere.

Ascertaining what it is you can afford can save you the heartache of a bank foreclosing your castle, as is increasingly happening in Melbourne and other capital cities.

Agents say getting a pest and building inspection on a property you are interested in, is money well spent – potentially saving tens of thousands, possibly hundreds of thousands in the long term. It is hard to sell a home when it has faults, and it is suspicious for a home to be sold soon after it was purchased.

Once you buy a home, there are plenty of things you can do to add value, and equity. It is common practice now to refinance a home loan, so as to access the equity for things like a car or renovations which you may need later on. In most cases when you borrow using the equity in your loan, the interest rate you pay is less than the bank personal loan rate.

Finally, financial advisers recommend putting on as much as your disposable income which is not being used, onto your mortgage. Banks charge interest daily, so reducing the amount you owe, even for day, means you’ll be repaying less interest and more of the principal on that day.

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Marc Pallisco

A former property analyst and print journalist, Marc is the publisher of realestatesource.com.au.