Do we really want houses to be more affordable? – Michael Yardney

There is a lot of talk in the media about housing affordability and how a whole generation of Australians will no longer be able to realise the great Australian dream  of owning their own home.  I’m sure you’ve heard how investors, negative gearing, foreign investment and the whole host of other factors are to blame.   To make housing more affordable we would have to see house prices fall. So… we really want houses to be more affordable?  Now that’s an interesting question and I put that to Michael Yardney.  
Kevin:  I can tell you that the topic that I’ll be talking to you about in this segment is really going to draw a lot of comment, I can assure you, because one thing that everyone talks about is how unaffordable housing is in Australia. We’re going to pose a different question: the great Australian dream, owning your own home; is it really all that important?
Now, I’m sure you’ve heard how investors, negative gearing, foreign investment, and a whole host of other factors are all to blame for making housing so unaffordable. But today, I’m going to turn this around a bit. I want to take a different view and look, do we really want houses to be more affordable? What are the consequences if house prices do fall? To get a view on this, Michael Yardney joins me from Metropole Property Strategists.
Michael, have you thought about…? You obviously have. Give me your view on that. Do we really want houses to be more affordable?
Michael:  Kevin, I’ve a father of six kids in my blended family and nine grandchildren, so I fully understand how difficult it is for young people to get into the property market, and I’ve had those issues many years ago when I first got into the market, as well. So, I understand the concern.
On the other hand, if you break it down, there are two groups of people who seem to want house prices to fall. Because to make properties more affordable, it means that property values are going to have to go down. Because if you suddenly increase everybody’s wages so that they can pay more, that’s just going to keep pushing property values up.
So, the two groups who in my mind are wanting property values to fall are either first-home buyers wanting to get into the market or Australians who want to get into property investment but they feel they’re priced out of the market.
But Kevin, if you think about it, both of these groups only want prices to fall for a short while. They don’t want prices to keep falling once they bought a property. They want it to fall for a short while, get in the market, and then make a killing like everyone else has. Because nobody really wants prices to keep falling continuously.
Kevin:  I’m going to actually add a third group into that. I’m doing this without notice and I don’t expect you to comment on it, but I do believe there’s a third group, and they’re just a bunch of whingers who will never buy a property anyways and they just want to get down on everyone who does own property.
Michael:  Well, there’s no doubt that there is an element of jealousy out there. You’re right, Kevin.
Kevin:  I just had to get that off my chest, Michael.
If I could just ask you another question, what do you think could make house prices fall?
Michael:  Well, we’re not talking about the correction that everyone knows is going to happen, because house prices are going to moderate and stagnate and in some areas, drop – I don’t know – 5% or 7%. But when you talk about affordability, you need property values to drop considerably, and that would mean that people can’t hold on to their homes and they have to sell them, and there’s no one wanting to buy them, so property prices want to drop considerably. Because a tiny drop isn’t going to create a big change in affordability.
So, for that significant drop to occur, Kevin, it’s either going to be a recession or a depression where people can’t hold onto their mortgages because they haven’t got jobs or because interest rates are very high or because finance is too tight so they have to give away their homes.
And in certain segments, it’s going to be where there’s just too much supply compared to the demand, and those forces of the supply and demand market are going to make property prices drop, Kevin.
Kevin:  You mentioned earlier about the two groups who only want property prices to drop for a short period of time, just so that they can get into the market. That’s simply not going to happen. Any drop in prices is going to be more long term.
What do you think would be the consequences if that happened?
Michael:  All you have to do is look overseas. See what’s happened in the United States when property prices crashed, or in parts of Europe where still there are problems. First of all, we would be having a terrible economic time. There’d be job losses and mortgage defaults.
Interestingly, Kevin, this won’t affect the rich, well-heeled property moguls who people are blaming for the property price rises. It’ll affect ordinary Australians, working class Australians. They’ll be out of their jobs, they’re going to lose their homes because they’re going to default on their loans, and that has terrible social consequences and personal consequences on their family. So, it’s not going to be a good idea.
I think some of these people will be displaced, they’re going to move out of their homes, because even though mortgages are affordable, they’re not going to have the jobs. And where are they going to live?
I think the other thing people haven’t considered is when this happens – you just have to look at what happened in the United States – just because prices are cheap doesn’t mean the banks are suddenly going to lend you money that you can get in. Because if those consequences occur where the market crashes, property values drop, the banks are suddenly going to be much more cautious about who they lend money to.
And ordinary Australians like you and me, and everyone who has money in their superannuation fund, their funds are going to decrease in value because most super funds, most industry funds, are invested in banks and in real estate and in property trusts.
And then the average household wealth that we have tied up in our family home is also going to be decimated, and a lot of us are counting on that for our older years, our golden years, or to pass on to our kids. So, the consequences would be horrific, Kevin.
Kevin:  Yes, they would be, and we have to therefore hope that that doesn’t eventuate.
So, Michael, for those who are struggling to get into the market or appear to be struggling, what do you think the answer is? What should they be doing?
Michael:  I think for many first-home owners, they’re going to have to adjust their expectation – their expectation as to the location where they could live or the size of the property they could live in or the location where their property is going to be. Maybe they should be buying an apartment rather than a house, and others are going to need to rentvest – in other words, rent where they want to live but can’t afford to, and put their money in the property market somewhere.
One of my concerns there is as affordability increases, some people are being pushed out of the good markets and buying properties in what I’d call secondary locations, which aren’t going to have the good capital growth, or they’re going to move to the outer suburbs where the traffic is just too difficult, it’s going to be long commutes in and out from work. So, there are lots of consequences to this we have to consider.
Kevin:  Yes, and that’s another reason why I have difficulty sometimes with these government schemes that try and push people into more affordable housing, things like First Home Owners Grant, and they restrict it to new builds, so therefore you’re restricting someone to an area that may not have infrastructure, it’s probably not going to have good growth.
So, all of these things, this trimming around the edges that you and I have spoken about is not necessarily a good thing for making houses more affordable.
Michael:  I guess it goes right back to your question initially: do we want houses to be more affordable? There are 9 million houses in Australia. 70% of Australians own their own home. It’s only a really small group, maybe about 5% who are currently being locked out of the market. Do 70% of Australians have to suffer for those 5%?
Kevin:  Yes, exactly. Great talking to you, Michael. Michael Yardney from Metropole Property Strategists.
Thanks for your time, Michael.
Michael:  My pleasure, Kevin.

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