Is owning a home becoming a distant dream in Australia? In this article, we dig deep into why housing has become so unaffordable. From the widening gap between incomes and property prices to the effect of inflation on household budgets, find out why buying property feels like a race against time. Learn why investing wisely and staying informed could be your best defence in this challenging market.
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Do you remember as a kid when you thought someone had a house worth a million dollars or that they became a millionaire? You're like, "Whoa, they're like *real* rich rich!"
Now, it's almost like every house is a million dollars, and anything less than that, you've pretty much got a bargain—or you bought a garage in Sydney.
So why has this completely changed, and why is affordability with housing such a concern every decade, and especially now when our incomes haven't really increased in real terms?
In this article, I want to cover off some key data points as well as share what my thoughts are around where the housing market is at the moment and what I think will happen over the next 24 months.
If you're interested in what my thoughts are, definitely keep reading.
When it comes to elections, you always have some politician go, "Look, we're going to have to address affordability." Yet every time we go across this argument, they do nothing about it.
So, let's try and figure out why a million dollars 20 years ago is not worth a million today, and why you're probably going to need to retire on, like, $50 million in 30 years' time to even feel like you can survive.
Now, that number I just completely made up, but that's what it's sort of starting to feel like.
What you thought was wealthy 10 years ago, or even 5 years ago, just feels like you're barely surviving now.
So, this graph here showcases real household disposable income per capita versus real housing prices. And this is a very good insight as to why you need to attach your dollars to assets like real estate because of this.
In the blue, we have real household disposable income per capita, and then in the orange colour, we've got real national housing prices. Now, it doesn't take a genius to know what's going on here.
Up until about 2012, it looks like they were fairly equal; it was like they were running very closely together, and that's what you want to be seeing.
However, since then, we started seeing a lot more liquidity from the central banks across the world, and what you can see from the period of 2013 to 2018 is prices just ran so high, and that's why we needed some sort of correction.
And then what we see in 2020 is, yes, our real income was increasing, but then assets took off, and what we saw was real incomes actually dropping.
Now we can see such a large disparity between our real household income versus real housing prices, and it's a lot to do with inflation as well, because every dollar is worth a lot less. So despite you making more, if inflation, say, is going up by 10% and you're getting an increase by 5%, you're actually falling back by 5%.
But here is the trick: when it comes to real estate and you own debt, and then you have inflation kick in, there's a couple of things.
People get annoyed by high inflation because it means high-interest rates, yes, but if you have debt, you've taken debt in today's dollars, and if inflation increases by, say, 10%, the debt is effectively reduced in terms of purchasing power by 10% because that dollar has inflated by, say, 10%.
The purchasing power actually reduces by 10%, so it's gone from a dollar actually buying you a dollar to a dollar only buying you 90 cents worth of real groceries and real items. And because of that, your debt, which, say, is a million, is now effectively the purchasing power of $900,000.
Although people with debt really hate interest rates, if you can survive high-interest rate periods, you will actually go into a period where interest rates start dropping, asset prices start increasing because there's increased liquidity and increased demand, but now those dollars are worth so much less, and you took out debt on yesterday's dollars, not today's dollars.
I love it.
You're looking at data here from 2000, and it was around this time the government actually got involved and started introducing things like first-time buyer grants and things like that.
So, when you get looped in and you think, "Oh my God, this government is so nice to me, look how they're helping me buy my first home," the reality is any time the government gets involved, they really f up the markets. And what we can see clearly here is that this is the point at which everything changed.
The real estate market has taken off, and it continues to put in higher highs and higher lows, where income has effectively gone sideways.
Our house debt servicing costs have also increased, and sometime in 2023, we recorded an all-time high, which now is obviously even surpassing that, and we see a lot more of our payments going towards interest versus a lot of the payment that should have been going toward our debt. And that’s also reduced.
What's also absolutely crazy is if you break down your budget today, if you think about your budget today and say, "Okay, I can only allocate 50% towards basic necessities," of which 30% is usually what was going towards shelter.
So, you know, rent or your mortgage repayments—that ratio has completely been broken. A lot of people are now spending more than 60% to 80% of their income just to house themselves. It's absurd if you think about it. But this is where I go back and peel the layer. I say, okay, I get it; this situation sucks. If you don’t own assets, you feel like you're making more if you’ve changed jobs or got a promotion, but really, it hasn’t changed your life.
What I do advocate for, though, is during times like this, or even over the last 3 to 4 years when a lot of people were just sitting on TikTok aimlessly scrolling—that was the time to go out there and build side hustles, figure out what you could do in terms of extra skills, and learn them.
Even today, like, I know people are out and about, and we can do a bunch of things, but these are the times that we want to go out there and educate ourselves.
We need to understand how finance works, how real wealth works, how taxes work.
So, when it comes to the question of affordability in real estate in Australia—well, here’s the graph, and it looks pretty sad.
Affordability of households over time: affordable share of home sales by household income. You’re looking at the median number here, and what you can see is that in and around 1997, you were at 50%.
Now, the median is closer to about 10% to 15%. And what this means is, spending 25% of your gross household income on repayments, you can see this completely fall off—especially when interest rates rise.
You saw a similar thing happen just in the lead-up to the GFC, and you see this number completely drop off a cliff, similar to what’s happening right now.
Obviously, with interest rates cutting, you'll start seeing some relief in people’s budgets when it comes to the interest rate repayments they make. But also, the flow-on effect could mean that we have a little bit more supply as people are able to borrow and buy more properties. Then they can go and say, okay, we can create more supply, the builders are happy, and people wanting to take on the debt can take on the debt to complete the houses. That starts relieving that pressure valve on the rental crisis. But this isn’t something you just go in, flick a switch, and hope for the best.
Even if the RBA came out and said, "We’re going to cut rates by 200 basis points," by the time that flows into the whole system, for it to flow into construction and for people to actually go and get finance, it takes time.
But what *doesn’t* take time is for the people sitting on the sidelines, pre-approved. Those who can buy now are in a very unique position because if you're someone that can borrow now when most people can’t—guess what happens when most people can?
This is the reality of why buying now, rather than waiting, is the key to making wealth and keeping that wealth long term. I break down exactly why this is a great time to be buying despite everyone telling you it’s the worst time to buy.
Forget about these mad headlines saying there's a recession, everything’s going to self-destruct, or that houses are going to go up by 100% in the next 3 days.
Focus in the middle—that’s where you want to be. Once you get your head right in this game, you can make so much wealth. But what keeps us away from actually doing it is distractions.
Most people are more worried about what Taylor Swift is doing, what the royal family is doing, rather than saying, "Okay, I get it, finances are dry, and taxes are definitely dry, but let me figure out how I can optimise my taxes.
If I save an extra $10 today, I can save $70 by the end of the week; if I invest that, what does that look like?" Slowly, you start building up the foundation for what your wealth strategy should look like.
If you need any help at all when it comes to real estate investing and you’re like, "I've sat on the sidelines way too long," definitely reach out to our team.
You can book a free discovery call so I can help you get started on the right page when it comes to real estate investing.
I hope you guys have enjoyed this one. I'll catch you guys in the next one. Thanks, guys!
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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