How affordable is property?

Blogger: Lachlan Walker, Place Advisory

Affordability is relative. When it comes to property, how much money you earn, where you want to live, the type of dwelling you are searching for and why you are choosing to buy, are just some of the personal factors that dictate what you can afford.  However, there are also many external market influences that are constantly changing and interacting to alter the price of property in our marketplace. Today we will be discussing some of these elements, and their influence on our current market.

Interest Rates
Currently, interest rates are at an all-time low! According to the RBA the average standard variable rate for a mortgage is 5.95%, with some banks still offering buyer fixed rates under 5%.  In the short term this is a positive sign for housing affordability.  Borrowed money is cheap and people are taking advantage of this, allowing those who previously could not afford to enter the market to now compete. However, this may be a double edged sword longer term.  The low interest rate environment has eased repayment hurdles, effectively increasing local buying power and inevitably increasing local buying power and inevitably increasing demand and prices. With housing demand currently at its highest level since 2009, high auction clearance rates and a lower average time on the market, we are subsequently seeing the price of property rise. According to RP Data, Brisbane homes prices have risen 6.60% over the past twelve months while Sydney and Melbourne have seen a 15.84% and 10.31% increase respectively. Therefore, while low interest rates are positive in terms of short term affordability, this may contribute to price growth longer term, having the opposite effect.

Rental Market
As the main alternative to owning a home, the rental market and its relative cost has a significant impact on affordability.  The Brisbane rental market is currently experiencing a softening following roughly five years of rapid growth.  Although rental growth is slowing (and contracting in some areas), rents are still high across the city and vacancy rates remain low compared with long term trends. To put things in to perspective, the median price for a 2 bedroom apartment in Inner Brisbane for the March 2014 quarter was $415,000 (Source: Place Advisory). Therefore, with the current standard variable mortgage rate sitting at 5.95% (and in most cases the open market will achieve better than this today), the loan amount plus stamp duty/ loan costs and excluding the 10% deposit, will amount to a total of $391,445. Subsequently, the repayments needed to own the apartment are $630 per week. On the other hand, according to Place Advisory’s data, the price to rent a new two bedroom apartment in Inner Brisbane is $550- $600 per week as an average. Due to the relatively low price difference between renting and owning, and the fact that you have 100% control over your own asset, the rental market is currently having a positive effect on property affordability.

Population Growth & Dwelling Approvals
Earlier this year, the ABS released population data on a capital city level, revealing that Greater Brisbane experienced a population growth of 45,100 people over the twelve month period ending June 2013.  Over the same period, there was a total of 13,368 new dwellings approved in the area (6,456 houses and 6,912 apartments) [ABS].  This means that there was only a single dwelling approved for every 3.4 new Brisbane residents.  With 2011 Census data showing that there is 2.7 people per dwelling on average, it is evident that a shortfall is present, particularly when you keep in mind that not all dwellings that are approved will be delivered.  This is going to have a negative impact on affordability in the short term as demand for housing outgrows supply.  

Investors
Finally, the investor market also has a significant influence on housing affordability. The residential recovery in Brisbane can be largely attributed to investors who have flocked -mainly to the Inner City- in droves.  This is mirrored in the recently released ABS loan data which shows that investor lending is currently at levels not seen since 2003. According to this data, over the month of April, 2014, 39.4% of all lending was to investors, compared to a long term percentage of 29.9%. Investor decisions can dramatically drive the prices of certain suburbs. High investor demand upwardly influences prices in the short term.  However, investor purchases increase rental supply and, in the medium term falling rental yields and increasing dwelling values across the Inner City, could cause investor demand to ease, although this is not expected in the near term.  

At the end of the day, Brisbane is being recognised as the most affordable capital city on the East Coast. Due to its position in the property cycle and the price growth recognised in both Melbourne and Sydney in recent years, Brisbane is 26% cheaper than Melbourne and 45% cheaper than Sydney, creating the fuel required to drive the interstate enquiry recognised of late.

About Lachlan Walker

Lachlan Walker is head of the Place Advisory division at Place Projects, Brisbane’s premiere project marketing company. Lachlan is recognised as one of Queensland’s preeminent residential property market experts, specialising in South East Queensland residential property.

His role is to provide product specific advice to clients by gathering and applying internal and external market intelligence which is translated into meaningful market reports. He is widely published and is continually called upon to provide commentary on the residential market by various media and property journalists nationally. 
Lachlan has extensive experience in property market research and has provided professional consultancy and advisory services to leading property clients including the likes of Leighton Properties, Lend Lease, Watpac, FKP, Brisbane Housing Company and Consolidated Properties.