Sydney's property boom has been dead for three years, but that hasn't improved things much for first-time buyers interested in a well-located family home. Changes to the city's median house price over the past decade explain why. It rose an eye-popping 250 per cent between 1996 and the peak of the boom in late 2003. And it is still 2.3 times the 1996 level. So the recent weakness in the housing market has done little to repair the damage caused to housing affordability during the previous decade.
A Macquarie Bank economist, Rory Robertson, showed just how far out of reach the bands of suburbs close to the city centre and close to the coast have become for most new buyers. He chose five popular suburbs within 10 kilometres of the GPO - Bondi, Bellevue Hill, Bronte, Mosman and Paddington - and calculated the average median price for those neighbourhoods. It was $1.6 million, almost $1 million higher than before the boom.
The event that made owning a home in a big city so difficult was the halving of interest rates during the 1990s. That structural change in rates, made possible by low inflation, boosted the purchasing power of home buyers by 60 per cent and triggered a surge in demand for well-located houses. The result was a once-in-a-lifetime price increase that permanently downgraded housing affordability for newcomers.
Robertson estimates that home prices have risen 75 per cent faster than wages over the past two decades. Since buying and paying off a house is the biggest financial event in most people's lives, the gap between the growth in property prices and wages has greatly devalued the lifetime earnings of non-home owners, particularly young people.
The average price of an Australian house, including land, has risen from four times pretax annual wages to about seven times in 20 years. That means an aspiring first-home buyer on average earnings of about $55,000 a year must contemplate borrowing $350,000 (assuming a 10 per cent deposit), rather than $200,000, to buy an average house.
Those with average incomes who brave the housing market for the first time must make what Robertson calls the "never-satisfying compromise between house and yard size and proximity". They have been pushed towards the periphery of cities and beyond, priced out of the market for well-located family homes.
A new housing index in Queensland has highlighted this national trend. The Urban Development Institute of Australia (Queensland)/Matusik Affordability Measure uses average income, interest rates and assumed borrowing capacity to estimate what proportion of housing in 22 urban centres in Queensland is within reach of those wanting to buy their first home. In 2001 the average household could afford 74 per cent of the homes being sold across the state, but that had fallen to 15 per cent by the September quarter last year.
In Brisbane, just 7 per cent of homes were classified as affordable to first-home buyers and those were probably on the urban fringe.
"Something similar has happened in the major urban centres of other states as well," Robertson says.
Despite the compromises being made by first-home buyers, they are being forced to take out bigger mortgages that stay big for longer periods. That means today's young home buyers have far greater financial risks than was typical in earlier decades. They are much more exposed to things such as illness and sudden job loss for more of their lives than people were in the past.
There are predictable signs that home ownership is falling among those aged under 45. The ratio of owner-occupiers in the 25-35 age group has dropped by 10 percentage points in the past two decades and the rate for 35- to 44-year-old owner-occupiers is also edging lower. For most of the 1990s first-home buyers accounted for more than 20 per cent of home loans but this ratio slumped as the boom approached its peak. By early 2004 the proportion of first-home buyers crashed to just 12.6 per cent and even less in Sydney. The proportion has not risen above 18 per cent since.
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