When will the Aussie Property Bubble burst?
Real estate is an obsession I share with my father and, I am reliably informed, one which my lovely late grandfather also shared. As the teenage son of a single mother during the Depression but who owned her own home, my grandfather’s mantra was always, “If you own your house, no one can take it away from you,” and in a lot of ways he was right. I should add that when my grandfather said, “own your home” he didn’t mean you and the bank because we all know how that can end up.
In Australia, we have a weird phenomena happening at the moment in our real estate market which is a massive, huge real estate bubble. I say weird because with the tyranny of COVID 19 still looming about the planet and Australia’s fondness for lockdowns, economic theory tells us that people should be approaching big purchases, like houses, with caution. I say weird because after decades of keeping the apparent property bubble to Sydney and Melbourne, people are moving across the state borders into other capitals and even regional areas and purchasing properties ‘sight unseen’. I say weird because this behaviour is accelerating prices to previously unheard of levels and the banks are merrily loaning the money to people who will probably never, ever be able to pay their homes ‘off’.
I say weird because I know, like any other amateur economists, that bubbles like this are always destined to burst despite what the actual economists might say.
Australia’s average salary in 2021 was $89, 122 per year, or $1712 per week, which sounds pretty good really except the median prices of homes in Sydney is $1, 309, 195 (Domain, 2021). So, you’d have to be pretty committed to not having lattes or smashed avocado if you were wanting to own those places outright so ‘no one could take it away from you’.
‘Go regional’ I hear you say.
Well, thanks to COVID 19 and people’s growing dislike of lockdowns and having to actually stay in the teeny weeny apartments that were all they could afford in the city lights of Sydney, a lot have moved to the peace, quiet and, more importantly, space of regional areas. However, thanks to the droves of people doing this the median dwelling price in Newcastle and Lake Macquarie is now $690 000 and if you want to go to Illawarra it is now up to $800 000 (Domain 2021).
Go interstate! Go to Queensland! Where we can work remotely and enjoy sunshine, I hear you chant.
As a Queenslander, I thank you for your interest; however, I got to say I’m not overly happy about so many outsiders coming up to see us because you not only drive up our property prices with Brisbane median house prices now $632 999 and the Gold Coast up to $749 950, but all of you hyped up city dwellers from the South tend to whinge about how we are too laid back.
We aren’t that laid back now, because we can’t afford to buy a house.
So, people across the nation are mortgaging themselves to the absolute hilt, in a time of economic uncertainty which makes me uneasy. Back in the day (the 1970s and before) apparently, to get a home loan they would calculate your yearly wage by 2.5 and that would be the amount you could borrow; if there were two people getting the loan, tough (love), the bank just based their calculations upon one wage. So, based upon that equation with today’s median wage, you would borrow $222 805.
There might be a pretty smick caravan you could buy with that amount today.
Today, according to the borrowing power calculators that float across the internet, someone on the annual media wage of $89 122 could happily borrow $777 000 (BOQ, 2021). Which means from a monthly wage of $7426 (before tax) you would be paying $4274 on your mortgage; on the old system, you’d be paying $1228 a month. (BOQ, 2021)
Woot! Smashed avocado all over the joint in the 1970s!
If only they’d known the joys of avocado.
It sounds innocent, loaning enough so that people can meet the market and buy a home; however, we have forgotten that consumer sovereignty reigns in the price mechanism and if people don’t buy (demand) the homes at the prices they are at, then the prices would drop. But, we are so intent on homes accruing value, we are so intent on not ‘losing’ money on short term property purchases so we can climb the property ladder that we just keep encouraging people to borrow more and more money on their mortgages.
What have we done? No wonder our young people suffer anxiety and depression. Sure, they can get a mortgage but paying a home off, so that ‘no one can take it away’ is more out of reach than ever.
Economists are constantly debating whether Australia is experiencing a property bubble because there has been unfettered growth for over 20 years; however, I have bad news for the boomers. The insecurity that our young people now experience around their future means that fewer and fewer actually want to buy a dwelling, put down roots…. And ‘breed’.
Australia’s birth rate is 12.4 babies per 1000 people (Macrotrends, 2021) which is massively down from the 1970s birth rate of 19.6 babies per 1000 people which says a lot for the stricter lending practices. And, thanks to COVID 19 and our self-imposed isolation, we aren’t welcoming migrants either so they won’t be buying houses either.
And that’s when the bubble will burst.