Was it easier for our parents to buy a home?

Since the meteoric rise of property in Australia over the last 20 years, today’s youth couldn’t be blamed for thinking that they are doing it tougher than their parents when it comes to buying a home. With the number of first home buyers plummeting over the last 2 years, Baby Boomers have, to a certain extent, been blamed for the crisis. Favourable tax incentives have encouraged Baby Boomers to build extensive wealth on the back of property which many believe has helped push prices outside the reach of their children.

Whilst approximately 1 in 5 (22%) Australians are Baby Boomers, they own over 50% of the nation’s private wealth.

So, is it true that our parents had it easier?

One thing for sure is that property was a lot cheaper then. Here are the median house prices across Australia’s capital cities in 1976:

 Sydney  Canberra  Melbourne  Adelaide  Hobart  Perth  Brisbane
 $36,800  $35,100  $32,900  $29,800  $31,575  $33,000  $26,275

Although in today’s dollars these prices seem cheap, it’s important to keep things in perspective. The average wage in the mid-seventies was around $6,000, according to the Australian Bureau of Statistics, so the median Melbourne house price was almost five and a half times the value of the average annual income.

Four decades on, both house prices and wages are considerably higher, although they haven’t grown at the same pace. Melbourne’s median house price is now 20 times higher than it was in 1975; if wages had matched that pace, the average wage would now be $120,000.

There are of course two of the big reasons behind this:

  1. There are more 2 income families (both partners working) today than there were 40 years ago increasing disposable household income.
  2. Interest rates have virtually halved substantially increasing affordability. The standard variable interest rate in 1976 was 9.88%, meaning you needed to pay twice as much interest to service the same dollar value of loan

House prices today, according to CoreLogic RP Data:

 Sydney  Canberra  Melbourne  Adelaide  Hobart  Perth  Brisbane
 $881,800  $628,800  $640,000  $450,000  $360,500  $521,400  $505,000

So, how does home affordability look now on current incomes?

As at November 2015, the average wage in Australia was $78,000 according to the ABS. So to purchase a house in Melbourne you would have to commit just over 8 times your annual income. Our parents committed 5 ½ times their average income. Can we then conclude that it is more difficult to enter the property market now? On the surface, YES it is. But given many households are made up of double incomes these days it could well be the same. If we consider the effect of interest rates over those two distinct eras, then it is quite a different picture as illustrated in the table below:

Date House Price Interest Rate Loan Repayment % of Income

 Date  House Price  Interest Rate  Loan Repayment % of income
Melbourne 1976  $32,900  9.88%  $296.00  59%
Melbourne 2016  $640,000  4.50%  $3,557.00  55%

Overall it would seem that it is no more difficult to enter the property market now than it was in our parents’ days.

What is your opinion?

2017-08-26T19:26:20+10:00