Thursday, August 6, 2015

Is Property More Affordable Today Than 30 Years Ago?

This is a continuation (that I have written) of a conversation written by fellow Adelaidean Peter Koulizos, see here for the prologue.
 
[Son enters room]
 
Son: Hey dad, I just heard you spinning a whole lot of nonsense to sis about housing affordability.
 
Dad: What do you mean son? I was just telling her how it was back in my day.
 
Son: Well you know finance and history aren’t her strong points…
 
Dad: Speak nicely of your sister please.
 
Son: Ok, as I was saying, you claimed that it took mum and you longer to save a deposit, because a 25 per cent deposit was required to buy, but isn’t it true that some building societies loaned up to 95 per cent, meaning similar loan to value ratios were available even 30 years ago?
 
Dad: Well, yes, but the interest rates were often higher than the major banks...
 
Son: But isn’t it also typical today for the lenders offering the easiest credit conditions to have higher interest rates?
 
Dad: You have me there son.
 
Son: And isn’t it true that in the early to mid-1980s that the First Home Owners Scheme was far more generous paying up to $7000 in benefits, equalling more than 10% of the purchase price you mentioned?
 
Dad: That is true. Your mum and I took full advantage of that and the First Home Owners Grant isn’t nearly as generous today.
 
Son: You did pay 17% interest rates for a short period of time, but isn’t it true that the higher level of inflation at the time reduced the real value of the loan rather quickly with wages rising faster than they are today?
 
Dad: Yes, but it was tough for the first few years…
 
Son: Didn’t you brag to me one time that you paid off your first home in less than 10 years because interest rates fell in the years after you purchased allowing you to pay off the mortgage much faster? Do you think that it will be made so easy for sis who would be borrowing at historically low interest rates with rate rises more likely in the future?
 
Dad: I hadn’t considered that.
 
Son: You mentioned her trip to Bali, but you know she got those tickets for only $300 return and the accommodation, food and entertainment over there is far cheaper than in Australia. In real terms wouldn’t her week in Bali be cheaper than the long weekend holiday you told us you took to the Gold Coast in the early 1980s while saving for your first home?
 
Dad: You are probably right.
 
Son: It’s also the case that a median house in Adelaide today will be on a far smaller block than you got in 1985. In fact if I recall correctly you said your first home was on a subdivisible block once the council changed the zoning, do you think sis will be able to do that with the typical 375sqm blocks of today?
 
Dad: No, I suppose not.
 
Son: Look, I know you think you had it tough with the mortgage and for the first couple of years that may have been the case, but if sis takes a larger mortgage today, to buy a smaller block, in a lower wage growth environment, with the possibility that interest rates may rise making it difficult to make the repayments in the future, isn’t she taking a greater amount of risk?
 
Dad: If you look at it that way...
 
Son: And shouldn't being able to afford something take into account the level of risk associated with doing so?
 
Dad: I’ve had enough of this, I am going to watch some TV in the lounge.
 
Son: Weren’t you going to have some dessert?
 
Dad: I’m going to put it aside until your sister returns from her friends place so we can sit down and eat it together while I explain that I wasn’t as right as I thought.
 
Son: You don’t say.
 
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