The Sydney Morning Herald has an article about pre-fabricated houses from Ikea and suggests that they could solve the housing price problems. The article states that in the UK the pre-fab houses would be more than 25% cheaper than regular houses in the UK.
Let’s assume for the sake of discussion that the introduction of Ikea pre-fabricated houses in the Australian market (which they currently don’t plan to do) will reduce house prices by 25%. This won’t solve the problem. According to the Australian Bureau of Statistics in 2006 the median income for males was $600-799 and for females was $250-399. A couple who are both at the high-end of that scale would gross $1200 per week, this would possibly allow them to pay $1600 per month towards a mortgage, if they were in the middle of that scale then they would gross $1000 per week which might allow paying $1000 per month towards a mortgage. With current interest rates that would make any mortgage greater than $200K unreasonably difficult for a couple at the high end of the median income range to repay and a mortgage greater than $120K would be unreasonably difficult for a couple in the middle of the range.
The ABS median house prices show that the cheapest places to buy houses in 2005 were Adelaide, Hobart, and Darwin with median prices of $208K, $209K, and $216K respectively. So a couple who are both at the high end of the median income range can only afford to buy a house in the three cheapest cities in Australia (which are also not densly populated). The two largest cities are Sydney and Melbourne which had median house prices of $363K and $300K respectively, they would not be affordable to a couple who are anywhere near the median income – not even with a 25% reduction in price!
I believe that people on a median income should be able to afford a median prices house – the majority of Australian families should be able to afford the majority of houses!
The above analysis only covers families wanting to purchase a house with two incomes. The “traditional” Australian idea of having the man earn the majority of all the money that is required while his wife looks after the children (which is a bad thing for other reasons) is obviously dead. A man who earns 50% more than the median income will have trouble paying for a house while supporting children if his wife doesn’t also work. It is generally accepted that anyone who doesn’t purchase a house before having children will never own a house. It seems strange that the major political parties talk about wanting to support families and to support “the Aussie battler”, but won’t do anything serious about house prices (which is the most significant issue for such people). Giving a first home owners grant of $7000 (which is less than 3% of the required money).
One possible way of alleviating this problem would be to remove Negative Gearing (or at least modifying it to encourage construction rather than buying existing properties). Then the price of properties that are rented out would reflect the rent value instead of being significantly over-priced.
Another possibility would be to make public transport more efficient and with a wider scope. The desirability of a location is to a large extent determined by how much time/money/effort is required to get to the centre of the nearest city for work. Making the mass public transport support larger numbers of people (by larger and more frequent trains, trams, and buses), have shorter journeys (by a more frequent service to reduce waiting and express and connecting services where possible), and more routes (by building new train or tram lines every time a new major road is built) would significantly increase the desirability of properties that are further from the centre of cities. That would decrease the market pressure on prices of properties that are a currently 30 minutes or one hour travel from the centre. It would also be a significant benefit if people who currently spend 30 minutes commuting could spend only 20.
If public transport was improved and negative gearing was abolished then I expect that there would be increased demand for new houses that are further away from city centres, and that pre-fabricated houses would make a significant difference in the price. But while the majority of the value of a house is contained in the land that it rests on I can’t see that making a difference.
Perhaps it is just the case that it has been government policy in a number of countries first to get a majority of voters to become homeowners and then in the past 5-10 years, especially the past 5, to engineer a massive rise in home prices.
This process buys solid conservative votes, and when lots of homeowners become wealthy without moving a finger, by sitting pretty in their property, they are happy, and don’t look too closely at distant and irrelevant things like wars in foreign lands or near and irrelevant things like what happens to the useless suckers who have no property.
I think you’re assuming quite low levels of spending on housing, though I’m not sure whether you’re using pre- or post-tax income. Also, you don’t seem to be taking any deposit into account. To buy a median-priced home you’ll probably need to pay a substantial deposit, but then those who’ve been paying off a mortgage for some years should be able to do so when trading up. I don’t think it’s realistic to expect that first-time buyers on median income can afford them.
Blissex: Having the home you live in increase in value as a general rule does not make you wealthy! I know one person who sold their house and then rented a house because they thought that house prices were at their peak (and can therefore be considered to have invested in their own home). But apart from that the house you live in is not an investment. For a family that starts living in a 2 or 3 bedroom house and then moves to a 4 or 5 bedroom house as they have more children if all house prices go up then the difference in price between a small house and a large house also increases – and they lose.
Ben: I believe that the majority of the population should live in a house that they own or that is owned by a close relative (IE living with parents). For that to be the case it must be possible for a single median income to buy a house – but when two median incomes can’t buy a house that obviously isn’t the case! When applying for a mortgage a bank will assume that 30% or less of your gross income will be used for repayments, and that is roughly what I use.