Real Estate Affordability | Wages Not Keeping Up

House prices have grown more than twice as fast as wages over the past decade – making it harder to save a deposit and harder to pay off a loan. By Mark Armstrong and Fiona Marsden for the API Magazine February 2007 edition.

Housing affordability across Australia seems to worsen each year – yet real estate house prices in several Australian cities haven’t moved substantially since 2003. We crunched some numbers to find out why.

According to the Real Estate Institute of Australia, the national median house price in 1996 was $161,312. By 2001 it was $248,993 and by 2006, it had climbed to a whopping $407,538 – an average annual increase of almost 10 per cent.

A look at wage growth statistics tells a different story. Figures from the Australian Bureau of Statistics show that average annual earnings were $35,251 in 1996. By 2001, they were $43,555 and in 2006 they had risen to $54,668.

That’s an average annual increase of around 4.5 per cent – less than half the growth in real estate prices for the same period. Small wonder affordability is getting worse, even in major cities like Sydney and Melbourne where the last property boom finished in 2003.

The real estate affordability squeeze is hitting first homebuyers on two fronts. First, they have to put aside a higher proportion of their earnings to save a deposit. In 1996, someone on average weekly earnings needed to put aside 9 per cent of their income to save a 10 per cent deposit for a median priced home over a five-year period. By 2006, they had to put aside 15 per cent. Second, even if they do manage to enter the real estate market, homebuyers have to put a higher percentage of their earnings into loan repayments. In 1996, someone buying a median priced home had to devote 34 per cent of average earnings towards their real estate mortgage. In 2006, this figure has jumped to 47 per cent.

Moreover, these figures refer to the official cash rate set by the Reserve Bank. The retail rate set by lenders is generally 1 to 2 per cent higher, so the actual percentage of earnings going towards loan repayments would be much greater.

In this context, the prevailing real estate interest rate also plays a role. In 1996 when homeowners spent 34 per cent of average earnings on a median priced home, the cash rate was 7.5 per cent. In 2001, when the cash rate had fallen to 5 per cent, the percentage figure dropped to 29 per cent. Interestingly in November 2006 when the cash rate was 6.35 per cent, real estate homeowners had to devote a higher percentage of their earnings towards loan repayments than they did in 1996 when the cash rate was higher. Clearly, the slow increases in wages relative to house prices is now the most significant factor in determining real estate affordability in Australia.

In this environment, real estate markets that are out of sync with the national norm will start to experience major corrections in 2007. Perth and Darwin, where house prices have increased far more quickly than other cities in the past few years, will be in for along period of adjustment if the mining sector starts to come off the boil as industry pundits predict.

At the other end of the scale, newly real estate developed outer suburban areas that rely mainly on young homebuyers for their chief source of demand will also suffer the fallout from plummeting affordability. If would-be first homebuyers can’t save a deposit quicly enough to keep pace with prices, they’ll stay away and values in real estate will fall. With eight increases since 2002, we believe the current interest rate cycle is nearing the end and the Reserve Bank will reduce rates in 2007. If it doesn’t, a growing number of young Australians will have to downscale their home ownership dreams – or face the prospect of permanent tenancy.

Mark Armstrong is a director of Property Planning Australia(www.propertyplanning.com.au) Fiona Marsden is an experienced property writer.

From Little Things Big Prices Grow – Part 2 of this Real Estate Pricing and Trends Article

The big-ticket items that add value to real estate are well known: being beside water, spectacular views and proximity to the beach all attract price premiums. But there are many less obvious features that can be the difference between a sale and no real estate sale, and between an average real estate price and a great property price. By Terry Ryder for API Magazine January 2007.

Owning a house or an apartment with an 8 in the address could add tens of thousands to the value if the real estate buyer happens to believe in numerology.

It may sound a bit of a stretch but in some real estate markets, such as the inner eastern suburbs of Melbourne where Asian buyers are a large part of the market, numbers are taken very seriously.

It’s just one of the many real estate factors that add value in the eyes of buyers. Some place more importance on proximity to good schools than they do on a view of the water. Others won’t buy an apartment unless the building is pet friendly. Many will pay a price premium to be close to a lifestyle precinct. As the impact of drought and water restrictions spreads, having a water tank is becoming a feature of rising importance.

Brisbane research analyst Michael Matusik says real estate home buyers are increasingly prepared to pay a premium to access the features that matter to them.

“Premiums, to date, have been highest for more lifestyle oriented things such as water views and being near quality restaurants and the like,” he says. “But looking into the future we expect that while these lifestyle drivers will still attract healthy premiums, the biggest movers will be the hard assets, in particular public transport nodes and regional shopping centres.

“Why do such things add a premium? Because they’re in demand and in short supply.”

Schools Dictate Real Estate Property Choice

The school belt through Melbourne’s inner eastern suburbs is a major reason why this is the prime residential precinct of the city, encompassing desired locations such as Toorak. And there’s now data that quantifies the added value of being close to good schools.

Australian National University (ANU) research has found parents are willing to pay “substantially more” for homes near better-performing schools. ANU economist Andrew Leigh and Harvard University graduate Ian Davidoff found house prices reflected the average performance of the local school.

They suggest real estate buyers are willing to pay 3.5 per cent extra for a home near a good public school. The findings are based on research covering real estate in 600 homes in Canberra which found a link between real estate prices and the performance of the local public schools in years 11 and 12. They used a school’s average UAI score (known as a TER or ENTER score in other states and territories) as a performance measure.

“A five-point increase in a school’s average UAI score is associated with a 3.5 per cent increase in house real estate prices,” Davidoff says. “At the median sale price, this translates into an increase of around $13,500.”

The ANU report records results of similar research overseas, including results of US studies that indicate buyers in real estate will sometimes pay a premium of 10 per cent or more to live near the best schools.

Buyers agent Patrick Bright of EPS Property Search says Sydney parents who want their kids to get into certain schools need to live in the school zone to get priority. Clients often ask for specific real estate locations because they want access to a school which a good name – and sometimes that means paying more.

“We may have a great home that suites all the buyers’ needs but if it’s not in the required school zone they won’t buy it,” Bright says. “They’ll compromise on the real estate property to make sure they’re in the desired zone.”

Matusik says his qualitative research with family groups has found that proximity to a good school is often a bigger priority than ocean or city views.

His research also finds that Brisbane homes within a 500 metre radius of a public secondary school grow 3 per cent more in value each year than the city average (an average of 13.1 per cent price growth in real estate per year, compared to the city’s 10.3 per cent average over the past five years).

The premium was much greater for real estate close to private secondary schools – they’ve grown 18.7 per cent a year over five years.

Pet-Friendly Apartments and Real Estate

Australia is the largest pet-owning nation (per capita) in the world. We’ve got 4 million pet dogs and 2.4 million pet cats. The Australian Companion Animal Council says 60 per cent of households have a dog or cat – and of those that don’t, more than half would like one. According to Petnet research, 91 per cent of pet owners feel “very close” to their pets and treat them as family members.

All this creates a problem in the property real estate industry because many apartment buildings have a no-pets rule. In doing so, they seriously limit their market for buyers.

Anna Jones of Ray White in Surfers Paradise says: “unless a building is pet-friendly, pet owners and want-to-be pet owners won’t even look. When I advertise units in pet-friendly strata schemes, as many as 50 per cent of all my enquiries are from pet owners.”

High-rise apartments sell more quickly and for higher prices if the building is pet-friendly. Tim Holmes of PRDnationwide says high-rise buildings with a “no pets” policy are excluding 60 to 80 per cent of the potential real estate buyer market.

Holmes says many real estate developers are now including pet-friendly features to ensure their buildings are attractive to a growing market share in the real estate industry. A roomy balcony where a dog can get some fresh air as much as a selling point as a swimming pool, a tennis court or a gym.

“Even though the pet-friendly features may not be used by residents, it’s now imperative they form part of the package if real estate developers want to attract affluent buyers for whom pet-ownership is a must,” Holmes says.

PRDnationwide compared re-sales over five years in high-rise condominium buildings which allowed pets and others which didn’t. One real estate building with a no-pets policy recorded 12 resales of apartments at an average price of $535,000 and average capital growth of 15 per cent. A nearby project which allows pets recorded eight re-sales at an average sale price of $1,044,000 and average capital growth in real estate of 20 per cent.

In other cases, a non pet-friendly building recorded 48 re-sales at an average price of $306,000 and average capital growth of property of 4 per cent. A nearby pet-friendly building recorded 52 re-sales at an average $740,000 and an annual real estate capital growth of 14 per cent.

“These snapshots are typical of what we’re finding in the current real estate market as buyers are prepared to pay a premium for real estate which will allow them to keep small pets,” says Holmes. “It’s not isolated to one area but a trend in the marketplace.”

In Sydney pet friendly buildings are scarce and it’s a key frustration for home buyers who have pets. “Many people who want an apartment end up in a terrace or a townhouse because they can’t have their pet in the real estate apartments,” says Bright. “We have clients who would be happy to live in an apartment but they simply can’t put a cattle dog into an apartment – so they’re getting a terrace with a small backyard, which is stretching their budget.”

Peter Kelaher of PK Property Research says he often declines to take on clients who specify pet-friendly apartment buildings because they’re so difficult to find in Sydney.

Do the numbers stack up? - Numerology in Real Estate Decisions

Melbourne agent Robert Ding says 40 to 50 per cent of his buyers in the inner eastern suburbs come from Asian backgrounds. And they buy real estate property by the numbers. An 8 or 3 in the street address or apartment number can make a big difference in making a sale and getting price premiums.

Ding, of Jellis Craig in Balwyn, says real estate buyers with Chinese and other Asian origins take numerology very seriously – and 8s and 3s have positive attributes while 4s and 10s are turn-offs.

This is particularly so for people from Hong Kong, China and Taiwan.

“It all comes down to superstition but for Asian people these are highly regarded factors when buying real estate property,” says Ding, who was born in Taiwan. “The number 8 means prosperity, wealth and good luck. The number 3 means mountain – that one day you will be standing on the peak of the mountain. A 3 is not as powerful as an 8 – but many home buyers would prefer a view of the mountain than a view of water.”

The numbers 4 and 10 are associated with death and homes with those numbers wouldn’t attract superstitious Asian buyers. Bright finds the biggest priority for Asian buyers in real estate in Sydney is avoiding a 4 in the street address or apartment number.

“Most commonly they stipulate ‘no number 4’ because means death,” he says. “They get excited if there’s an 8 in the home address because it means good luck. It’s not a ‘have to factor but they do get excited when it happens.”

More to come in Part 3 of Think Small and Win Big!