An answer to housing affordability
A dinner conversation played out all around Australia stirs debate about whether young people can afford a home.
DAUGHTER: What’s for dinner?
Dad: Roast lamb and vegies. How was your day today?
Daughter: We went to some house inspections. Dad: Find anything you liked? Daughter: Yes, but housing is so expensive and unaffordable.
Dad: Hang on. Being expensive and unaffordable are two different things. I agree that housing is expensive. It costs a lot of money to buy, but I don’t agree that it is unaffordable. Daughter: What? Are you crazy? Dad: Just listen for a minute. When your mum and I bought our first house 30 years ago, I was on a beginning teacher’s salary of $12,000.
Daughter: What? How could you live off that?
Dad: Things were cheaper back then. When we bought our first house, the median house price in Adelaide was $60,000.
Daughter: $60,000 is impossible Dad, even for back then.
Dad: Believe me, it was possible. However, interest rates were 17.5 per cent. It was a high interest rate and on top of that, if you wanted to borrow money, you needed a 25 per cent deposit.
Daughter: But today interest
PETER KOULIZOS rates are only 4.5 per cent.
Dad: Correct. With interest rates at 4.5 per cent, housing is not as unaffordable as you might think. Today, a beginning teacher’s salary is $50,000, the median house price in Adelaide is $400,000 and you can buy a house with a 5 per cent deposit. Daughter: So, what’s your point? Dad: Thirty years ago, the deposit was the equivalent of 15 months’ salary.
Daughter: How did you work that out?
Dad: Well, 25 per cent of $60,000 is $15,000. I earned $12,000 over 12 months so $15,000 was 15 months’ salary. Today, I only need a 5 per cent deposit for a $400,000 house which equals $20,000. This is the equivalent of about five months of today’s salary. Daughter: Go on. Dad: Thirty years ago, the annual interest on the mortgage repayment was $7875 (17.5 per cent of $45,000) which was the equivalent of about eight months’ salary back then. Today, the annual interest payment for a mortgage is $17,000 which is about four months’ salary.
Daughter: Dad, I can see your point, but there’s just too much maths going on. In 30 words or less, can you please tell me why housing is not unaffordable today?
Dad: Thirty years ago, you needed 15 months salary for the deposit and the annual interest was eight months’ salary. Today, you need only five months’ salary for the deposit and the annual interest is four months’ salary. In other words, today you need less of your income to pay for housing.
Daughter: Well why does it seem so hard for me and my friends to buy a house?
Dad: You need to save some money. Daughter: But I do, Dad. Dad: Yeah, to go overseas and out with your friends.
Daughter: Come on Dad, I’ve got money in the bank.
Dad: I’m sure you have. Anyway, enough of that, let’s have some dessert.
Daughter: I can’t stay for dessert. Dad: Where are you off to? Daughter: I’m going out with my friends as we’re planning our next trip to Bali. Dad: You don’t say.
— Property lecturer and author Peter Koulizos runs thepropertyprofessor.com.au
Opposing opinions on money spark questions over housing affordability.