The 'affordability dilemma' and some tips for getting into the market
The standard definition of 'mortgage stress' is where a household is paying more than one third of the household income towards servicing a mortgage. Under this definition, the only states or territories not suffering mortgage stress are the ACT, Northern Territory and Tasmania. So, if affordability is not getting any better, what can the average Australian do to get their foot in the real estate 'door'?.
The latest figures from the REIA show housing affordability is at its worst since the survey began 27 years ago. Nationally, it takes just under 37 per cent of the average family income to service a mortgage. It is difficult to see how affordability will improve in the foreseeable future; for this to happen there will need to be a considerable fall in real estate prices, a drop in interest rates or a significant rise in family incomes. No combination of these factors appears to be on the cards in the foreseeable future.
Historically, the most important factor affecting home loan affordability has been interest rates. The importance of this link can be seen in the first fifteen years of the graph to the right - as interest rates go up, affordability become worse and vice versa. The importance of the link between interest rate movements and affordability, however, has diminished since 2001 when rate movements became much more controlled and house prices started to rise at a faster pace than wages, eroding the ability of families to service a mortgage.
To help those people facing a housing affordability hurdle, we have put together some tips that may assist with buying into the marketplace:
1. Purchase in an area that suits your budget. You may need to swallow your
pride and you won't find your dream home, but if you purchase strategically
you will start to build equity in your property which you can then use to
eventually upgrade. These suburbs will typically be located some distance
from the CBD (although there are some surprises), so it is important to buy 
in areas that are well serviced by transport infrastructure such as arterial
road networks and public transport. Also, look for a retail element such as
a large shopping complex within convenient driving distance.
A quick analysis of each capital city reveals a wide variety of suburbs where median house prices are under $350,000 and median unit prices are under $300,000. Interestingly, Australia's most unaffordable City, Sydney, has 143 suburbs where the median house price is less than $350,000. The vast majority of these suburbs have recorded double digit growth per annum when averaged over five years.
A complete list of these suburbs is available for each capital city free to all myrpdata members. Click here to view the lists.
2. Buy in Adelaide! Adelaide is the most affordable capital city in Australia and it is also the number one growth area in the nation with house prices increasing at the rate of 21.7 per cent per annum. Over half of Adelaide's suburbs have median house prices under $350,000 and you can virtually take your pick of any suburb for an affordable unit.
3. Team up. There is a growing trend towards family members and close friends pooling their financial resources to purchase a property. The combined synergy of multiple incomes could propel your team into the market. A word of advice, however, make sure the agreement is a legal one that includes an out clause for each party, a designated hold period and first right to purchase options. See a solicitor for advice on this one.
4. Get attached. Attached dwellings such as units and apartments, or semi-attached homes such as townhouses and terrace houses, typically have lower prices than their 'detached' counterparts within the same area. Higher density living is becoming more and more popular, not just because of the easier price points, but also because they are low maintenance and are often located close to shopping and transport nodes.
5. Follow the ripple. If you can't quite afford to buy into your suburb of choice, investigate the neighbouring suburbs for price differentials. Often suburbs that are next to popular areas are easier to buy into. The added benefit is that price growth will often 'ripple' outwards, so you can piggyback off the popularity of the nearby suburb.
6. Look for a renovator. For obvious reasons, homes in need of renovation are more affordable. A new kitchen, coat of paint, clean up the yard, some landscaping, or simply rip up the carpet or polish the floors. Any renovation activity is going to add value to the home and enable you to build equity or sell for a profit.
7. Buy a renter. Buying into the investment market means you don't have to be as fussy about the location as you don't have to live there! This doesn't mean that location isn't important though - look for areas that appeal to renters. This generally means being close to working nodes, universities or transport hubs; these are areas where there is a captive rental population. Before buying a rental property make sure you thoroughly investigate the potential rental income of the home, additional fees such as rates, body corporate, sinking funds etc, and the rental vacancy rate in the area you are considering. Finally, buying into the investment market means you are probably renting yourself in addition to paying a mortgage, so do the sums and make sure that financially this situation works for you!
8. Don't stretch yourself too thinly. The availability of easy finance including 110 per cent loans can be quite tempting. Save for a deposit and ensure you leave a 'buffer zone' for future interest rate movements or other financial pressures.
Spotlight on Melbourne
The broader Melbourne market has increased in value by 17.6 per cent over the year ending September to bring the median house value up to $425,000 and the median unit value up to $343,000. This is the third highest growth rate of any capital city, after Adelaide and Brisbane. Our leading indicators; the average time on market and the level of vendor discounting in the market, shows the Melbourne market is gathering pace. The time it takes to sell a home in Melbourne is diminishing. Houses and units are averaging just 30 days to sell, a significant reduction from the same time last year. The level of vendor discounting has fallen to just 4.3 per cent for houses and 4.03 per cent for units, meaning there is very little negotiation taking place on sales. Based on these figures, it appears the balance of power has switched from buyer to seller.
Like any broad region, the Melbourne market is comprised of a series of sub-markets and micro-markets. The areas recording the most significant growth are inner city locations; particularly the Inner Melbourne region and Boroondara City where house values have increased by more than 30 per cent over the year. Growth is also spreading south along the Bay with Frankston City now the fifth fastest growing area in terms of house price increases.
The growth occurring within the inner and coastal areas is a trend that can also be seen in Sydney, Brisbane and Adelaide. These areas are currently the most popular with buyers, however, as the property cycle continues we expect growth to gradually ripple outwards as more buyers find the inner city and coastal markets moving out of their affordability range.
RP Data, in conjunction with Rismark International, compile Australia's most comprehensive suite of property market indices on a monthly basis. The historical indices set is available for download from the RP Data Indices page (click here).
Australia's most comprehensive Real Estate Information
RP Data is currently tracking 105,425 properties for sale in the market across the nation. Over the last week we added 17,305 new properties to the 'On the Market' database and a further 88,120 properties were relisted. With a median national dwelling value of $445,750, we estimate that there is approximately $1.22 billion worth of commission available in the Australian residential real estate market.
RP Data is tracking every property for sale around the nation including the advertising history, marketing agent and contact details. Used in association with RP Data's mapping interface and comprehensive database of property attributes, you can become the most strategic agency in your trade area. See RP Data's 'On the Market' web site to sign up or gather more information.
