If you talk to most Australians and ask what their most successful investment has been, a large majority will reply that it is their own property or their investment property. This is not surprising, since 2000 there has been a massive increase in real estate prices. The increase in property prices has far outstripped the increase in the average full-time earnings of Australian workers over this time, as reflected by the graph below:
As these prices have risen, this has seen the need for home buyers to get larger and larger loans to finance the purchase. Fortunately, over that time interest rates have declined and the Australian economy has kept employment high which has meant the ride has been fairly smooth for those already on the train whilst some pain has been felt recently for those with higher level of debt.
Whilst this trend in interest rates has reversed over the last few years, the property market has remained strong for a number of reasons, including the fact that there has been a massive influx of immigrants since the Covid era a few years ago. Since 2004, there had been a net migration in Australia of some 4,576,000 people up until June 2024 (source ABS). Given the ABS predicts the Australian population is approximately 28 million, this is a fairly large number given the increased demands on housing supply and other infrastructure.
In my adult life (I am 50 years old), there appears to have been a political will to keep the property train going at all costs. During the GFC, with the help of China, Australia sailed through the effects of this, whilst other Western countries had a massive decrease in their real estate markets. Whenever the property market looks like it is stalling, there is a new government initiative to keep it going. These have included First Home Owner Grants, Stamp Duty exemptions and the ability for Self Managed Super fund to acquire residential property with borrowed funds (in 2007).
This has resulted in the ability of people being able to buy into the Australian dream as getting harder and harder on average.
Let’s look at some numbers of the current situation provided by Leith Van Onselen from Macro Business. He does regular updates on his YouTube channel and is definitely worth a look.
The Australian property market is worth approximately $11.3 Trillion.
Note that the Australian GDP is only approximately $2.5 Trillion.
This means that the ratio of Aust Property to GDP is equal to 4.5x as compared to the US at 1.7x.
It is also worth noting that the value of Australian shares to GDP is 1.2x and in the US their share to GDP is 1.75x. It is widely held that the US share market is currently at historically expensive valuations.
Now what does all this mean for people that are trying to get into the property market and get their part of the Aussie dream?
The first thing they need to do is get a deposit so as to be able to go the bank to get a loan. Traditionally banks like to see a 20% deposit to avoid mortgage insurance but it is possible to get a loan with a lower deposit.
Given the current average Australian house price is $976,800 at the end of the December quarter according to the ABS. Based on the 20% figure this is a deposit of $195,360 for the average house.
Given that you need to earn income, pay taxes and pay rent before you can even start accumulating a deposit this is a big ask for most people. That is why the bank of mum and dad is becoming a popular if not essential way for young people to get access to a deposit or assist with ongoing maintenance of the loan. This is effectively bringing in a class system where the ability of being able to get a house depends on the financial position of your parents. This will obviously have a devastating impact on society if the young who are working cannot get a start in building their future.
Let’s compare the mathematics of having a loan and buying a house to 1991 and 2024.
In 1991:
Debt to Income – 70%
Median House to Income – 3x
In 2024:
Debt to Income – 180%
Median House to Income – 8x
These costs are for the person acquiring the property and does not consider the cost for “the bank of mum and dad”, which may include delayed retirement or lower retirement funds.
The mathematics above says that this cannot last, but the one thing that Australia has shown for the last couple of decades is that nothing stops the residential property train. However, the laws of gravity must eventually come into play, but at the moment it may be more fitting to quote H R Jackson Brown Jr: “May your dreams defy the laws of gravity”.
Article by: Rob Coyte, CEO, Shartru Wealth Management
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