The Home Gap Widens

THE dip in Sydney home prices in recent months will have to be sustained for several years, if the huge housing affordability gap which opened up in 1988 is to be narrowed significantly.

This is highlighted by the accompanying graph prepared by St George Financial Planning Services.

The graph plots the median Sydney home price (including both houses and home units) and average male weekly earnings. In both cases the changes have been adjusted for inflation. This has been done by setting a base of 100 as at 1980-1981 and plotting real home prices and wages as an index against this base level.

The graph shows that Sydney home prices have fallen in real terms during two periods over the past 20 years - in the mid-1970s and early 1980s.

During both periods real wages held firm, in the process boosting the ability of families to afford to buy a home.

This time around, while we may be witnessing the start of another period of falling real home prices in Sydney, this is being parallelled by a fall in real wages. Even worse, the graph takes no account of income tax.

According to Mr Andrew Sinclair, economist (financial planning) for the St George Building Society, the average income tax rate paid by people earning the average male wage in the late 1960s was 17.1 per cent.

By 1980 this percentage had risen to 23.1 per cent, and it is now running at 24.6 per cent, excluding the 1.25 per cent Medicare levy. As well, tax rebates for dependents have been cut in real terms.

As has been well documented, one reason why the decline in real, after-tax wages in the past few years didn't prevent the latest surge in home prices is the increasing number of double-income families.

This has not only compensated for falling real wages, it has also helped to nullify the impact of relatively high interest rates.

Mr Sinclair points out that the highest level mortgage rates rose to before the 1980s was 11.5 per cent, a figure recorded in 1975. Back in the late 1960s, some mortgage rates were below 6 per cent.

Significantly, the affordability gap as plotted in the accompanying graph takes no account of changing interest rates.

Calculations carried out by the NSW Department of Planning, and reported in Money earlier this year, show that at end of 1988 it required savings equal to almost 430 weeks of average weekly earnings to pay for the deposit on the median priced home, if the required loan was repaid over 25 years with each repayment equal to 30 per cent of after-tax, average male weekly earnings.

This compares with only 170 weeks in 1984 and about 240 weeks at the peak of the previous Sydney price boom in 1981.

Once again, these figures take no account of the way the increasing number of double-income families and initiatives such as low start home loans, which allow people to borrow more, have enabled many people to bridge the affordability gap.

The real issue for intending home buyers, and one which was canvassed in Money several months ago, is whether the huge drop in affordability as measured in terms of average male earnings is an aberration which soon will be corrected?

If it is, then the two lines on the accompanying graph should converge over the next few years. Such convergence would restore the balance of the past. At the same time, the expected drop in mortgage rates next year will also boost affordability.

The trouble for home buyers is that there is a risk any drop in rates will boost effective demand, thereby pushing up house and home unit prices once again.

Mr Sinclair of St George says this is a real possibility, especially due to the fact the boom in housing construction is slowing down, well before it has had time to wipe out Sydney's housing shortage, estimated at about 50,000 houses.

This, when combined with the relatively high number of financially well-off migrants arriving in Australia at present (in Sydney in particular), means that the likelihood of a major, long-term improvement in housing affordability is not high.

"While there may be significant improvements in affordability over the next year, long-run increases in the price of housing will limit the extent to which affordability can return to levels of previous years," Mr Sinclair warns.

"From the purely economic point of view, home buyers probably could wait a bit longer but with the next Federal election looming, and so the possibility of lower rates early next year, it wouldn't be prudent to wait until 1990," he added.