The Housing Affordability Problem
The Real Problem: Land Affordability
Lets do some comparison of house and land prices. The comparisons will be done in Adelaide, mostly in 2004, because that's where and when I have the numbers for; numbers are similar in other Australian markets (for 2004).
| Item | 1973 price | 1973 price in 2004 $ | 2004 price | Real price increase | Real price % increase |
|---|---|---|---|---|---|
| Building a 135 square metre (15 square) house | $12,000 | $78,000 | $90,000 | $12,000 | 15% |
| 700 square metre block | $2,000 | $13,000 | $140,000 | $127,000 | 976% |
| A new house in the outer suburbs | $14,000 | $95,000 | $250,000 | $155,000 | 163% |
It can be seen from this that the real culprit is land price increase. The top two lines are particularly telling; a house has increased 15% (and this may be due to houses being better), but land has increased nearly 1000%1.
Housing Affordability Decrease
Another useful comparison:
- 1973 wage:house price ratio (Adelaide): 2.5:1
- 2004 wage:house price ratio (Adelaide): 6.2:1
This may make it seem that it would take more than twice as long to pay off your house. But it's worse than that. In 1973, it was possible to pay off a house in 30 years using 16% of your wages. To pay off a 2004 house, it will take 60 years at 30% of your wages. To pay it off in 40 years (assuming that the average person buys a house at 25 and stops working at 65) will take 33% of your wages. With tax taking another 33%, That means you only have 33% of your wages to feed, clothe, educate, and entertain your entire family. If this ratio were to return to the 1973 level (which is not at all unreasonable) then you would suddenly be able to spend an extra 15% of your wages, rather than putting it into the mortgage (or higher rent which pays someone else's mortgage).
Conclusion
I would suggest that a reasonable wage:housing ration lies between 2:1 and 3:1. What we need is governmental change to bring this about.
No doubt at this point, you will want to see the solutions. I would suggest solutions on three different fronts:
Sources
Sources for this article include:
- Houston - We have a problem, a 2006 article in Quadrant Magazine
- The Reserve Bank of Australia Inflation Calculator
- 1.
Just in case the numbers above are biased, I would love to see the following comparisons for Melbourne and Sydney:- House prices 1977/2007
- Land prices 1977/2007
- House and Land prices 1977/2007
- House prices 1977/2007