How has housing affordability in Canberra changed since the eighties?

The Eighties – a time of pastel suits, skinny ties, cut-off denim, huge hair & shoulder pads. A time when everyone was walking like an Egyptian, breakdancing and singing wake me up before you go go. We saw the beginning of the end of the Cold War and we watched as the world’s biggest beverage superpowers went head to head in the Cola Wars. It was a time when kids around the globe were watching the Teenage Mutant Ninja Turtles and helping a heroic plumber named Mario rescue his princess.

While a lot has changed since then, some things remain the same. The Teenage Ninja Mutant Turtles and Mario are still keeping kids glued to the screen - it's just that the screens are smaller and more portable than before. And people were voicing concerns about housing affordability back then, just as they are now.

Back in 1985, the median house price in Canberra was around $90,000 and the median unit price was around $72,000. Those numbers seem amazingly low when you compare them to today’s median house price of $700,000 and median unit price of $435,000.

That’s an increase in value of $610,000 (770%) and $363,000 (600%) respectively in 35 years. And that is a good thing. You want property to increase in value. Property ownership has been the basis of wealth creation for many Australians and you can’t ignore how important it is for the long-term prosperity of our country.

At the same time, looking at those figures, you can’t blame some people for thinking that housing is becoming more and more unaffordable. But, that’s not really the case. Once you start looking a little deeper, the evidence begins to paint a different picture.

According to statistics from the ABS, back in 1985, the average Canberra income was around $22,500 a year. That means that if you wanted to buy a typical house in 1985 it would probably have cost you about four times your annual salary.

However, the demographics in Canberra have changed significantly in 30 years. In 1985, Canberra had just reached a population of 250,000 people and most households survived off a single income. Today we have a population of almost 400,000 people, which has obviously led to an increase in demand for housing in the ACT. At the same time, it’s now much more common for both adults in the household to be earning an income. Average incomes in the nation’s capital are the highest in the country at $58,000 a year, so we can assume that your combined household income is currently around $116,000 a year. That means buying a typical Canberra house is going to cost you about six times your annual household income.

But rather than focussing on changes in the price-to-income ratio, University of NSW Economics PhD Nigel Stapledon suggests that the rent-to-price ratio is a better way of assessing changes in value. He was quoted in the Australian Financial Review as saying, “The history is that prices and rents have risen relative to income… we are spending more on housing and the value of housing has risen sharply relative to income.” He also mentions that “without rental growth, you can’t get price growth.”

So, let’s have a look at the Canberra rental market. Independent currently has a vacancy rate of 0.65% – which points to a lack of housing supply in the market. If this vacancy rate holds, we can expect that average weekly rents will rise. And that will have a follow on effect of pushing up housing prices further. The good news is, the lack of supply can be addressed through taxation policies (such as the lease variation charge), by making more land and appropriate housing available to meet the demand, and through forward thinking planning policies

One example would be to open up more areas to inner-urban revitalisation and create more opportunities to provide age appropriate dwellings (such as single-level townhouses) so Canberrans can age in place in the suburbs they have lived the majority of their lives in. This would actually have a number of key benefits:

• It would reduce infrastructure costs in greenfield developments
  Increase ACT government revenue through rates and other property levies.
• Allow properties to represent the ‘highest and best’ rather than the ‘lowest and worst’ use of land.
• Increase turnover of affordable established homes, by ensuring that there are options for people to move into when they need to (not force them to stay in homes that no longer meet their needs because they lack other options).
• In turn this will increase affordable options for first home buyers, which will also reduce pressure on rents and vacancy rates.

When looking at changes in affordability, you also have to consider that the cost of borrowing is considerably less expensive than it was 35 years ago. In 1985, average variable interest rates were sitting at around 11.5% to 13.5%. Today, we are experiencing the lowest interest rates we have ever seen in Australia. Depending on your financial situation, you can find a home loan with an interest rate of under 4% in July 2019.

These days the majority of first home buyers are borrowing 95% of the purchase price of their property, which is fine if you can afford the repayments. So if you buy that $700,000 house and it only increases in value by 3% a year (which is significantly lower than the typical appreciation rate), in 5 years you will have built up over $91,000 in additional equity.

We’re not trying to say that buying a home is going to be easy, but it can be done. Sure, it’s going to require some sacrifices (you might not be able to purchase that expensive new car you’ve been looking at, and you might not be able to go out every weekend), but that has always been the case.

Very few people have ever bought their own home without making some changes to their lifestyle.

If you’re thinking about buying your first home or an investment property and you’d like some easy to understand advice, get in touch with one of our Independent offices

*Independent is not a financial advisor. The information contained is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before making any commitment of a legal or financial nature you should consider the appropriateness of the information having regard to your circumstances and needs and seek advice from a legal practitioner or financial or investment adviser.