Sydney Facing a Housing Affordability Crisis

In Australia by Glen BurnsLeave a Comment

Sydney house prices have rose by seventy per cent in the past five years, the average price has reached $450,000. First homebuyers are facing tough decisions either moving to cheaper cities with less opportunities or face higher living costs. Prices in exclusive areas on the foreshores of Sydney Harbour are reaching multi-million dollar price tags, as people seek to live closer to their employment, in Sydney’s central business district.

Far away from glitz and glamour of elite suburbs, is Western Sydney, were one in ten Australians live, the average housing price is rising as well, once an entry point into the property market, average house prices have risen 30 per cent in the last year alone.

The Reserve Bank puts Sydney, along with Melbourne and Perth as the only Australia cities where housing has become more expensive in real terms over the past five years. In other cities, like Brisbane, which claims the title of Australia’s fastest growing city, house prices have remain inline with inflation.

One of the biggest winners from low interest rates and high house prices is lenders. It has become difficult for new homebuyers to buy a home with a home loan. Higher prices have meant bigger mortgages and lenders are keen to attract new business, selling low interests rates, to a market that remembers the high rates of the 1980’s reaching as much as twenty per cent.

Deregulation of the banking industry in the early 1990’s has lead to an array of new lenders, from colourful characters like John Symond from Aussie Home Loans, seen to be taking on the ‘big banks’ for the Aussie battler by dropping interest rates to insurance companies expanding their business into lending. Big banks have attempt to soften their image by opening their doors on weekends, opening offices at display home centres to home buyers, so they can cash in on the great Australian land rush.

Symond, debuted this year on the BRW Rich 200 list worth an estimated $158 million, along with other founders of non-bank lenders, Wizard’s Mark Bouris $88 million and Mortgage Choice’s Rod and Peter Higgins combined are worth at least $100 million. John Kinghorn of Rams has been on the list since 2000 is believed to be worth at least $119 million.

However, the smaller non-bank lenders, retrain a small market share to be successful, larger listed banking stocks have brought strong returns for there investors by dominating the market. Of the thirteen listed bank stocks on the Australian Stock Exchange, all have pleased investors with their five year average annual return ranging from a modest 12.3 per cent for Suncorp-Metway to a rewarding 22.9 per cent from regional bank Bendigo.

Banking Stocks: 5 Year Average Annual Return

Bendigo Bank Limited 22.90%
Wide Bay Capricorn Building Society Limited 21.90%
St. George Bank Limited 20.70%
Bank Of Queensland Limited 20.10%
Macquarie Bank Limited 19.20%
ANZ Banking Group Ltd 16.80%
Westpac Banking Corporation 15.50%
Adelaide Bank Limited 15.30%
Commonwealth Bank Of Australia 15.10%
National Australia Bank Limited 14.50%
The Rock Building Society Limited 13.70%
Bank Of Western Australia Limited 12.70%
Suncorp-Metway Limited 12.30%
Average: 17.00%

The four major banks, National, Commonwealth, ANZ and Westpac, are the main players; though legislative restricted from merging with each other, they have acquired smaller regional banks to retain their market share amidst the aggressive competition from new players. The major four hold a bulk of the home loan market, currently lending Australians $651 billion, their combined profits in the last financial year reached $10.2 billion.

The Australian Bankers Association denies that the banks are being greedy; they claim low interest rates have saved borrowers $4,060 per annum on the average home loan compared to interest rates ten years ago. However, those figures don’t take into account the size of the average home loan in the past five years alone has increased in New South Wales by 42.9 per cent according to the Real Estate Institute of Australia, while at the same time average weekly family income has increased by just 20.7 per cent.

The Real Estate Institute claims that home loans are most unaffordable in New South Wales, and it continues to deteriorate. However, that might be reversed if to some extent if the predications of the market crash are correct, even though many economists are divided on if it is going to happen.

Most economists have been able to agree on the uncertainty of global markets along with fundamentals won’t allow prices to accelerate as much as they have in the past five years. The Reserve Bank remains cynical at even modest growth predicting fall in housing prices in the short-term in Sydney, claiming that there is a significant oversupply of apartments.

Lenders clearly will need to be concerned about these predictions, to ensure that their borrowers, particularly property investors can repay their loans. Symond’s from Aussie Home loans, is warning investors to be vigilant, and first home buyers shouldn’t take out large mortgages as, “they have no financial buffer for the bad times, like losing their jobs or other changed circumstances.”

Counteracting, the picture, is the cost of owing a house may be more expensive than being stuck in the traditional trap of renting, which is amazing considering we have the lowest interest rates in decades, strong economic growth, tax incentives and low inflation. The Economist reported last month, that rental yields have fallen to 4% from 7-8% over the past few years and investors shouldn’t expect rental rates to rise, as inflation is expected to keep prices down.

The Howard Government, however, remains a strong supporter of home ownership; he sees the economic benefits it has for the economy. A strong housing sector can boost demand for new houses, thus creating additional jobs fuelling growth. As part of the new tax system in July 2000, the Federal Government coordinated with the States, to provide a $7,000 grant to first home buyers, which was increased up to $14,000 between March 2001 and June 2002.

The New South Wales Office of State Revenue says it has paid over $1.37 billion to 137,800 first home buyers since the scheme began. At the same time it was giving, the State Government collects stamp duty. On the average $450,000 house stamp duty sets the buyer back $15,740, effectively cancelling out the benefits of the first home buyers grant. Clearly, this is an inefficient tax regime, with one level of Government giving, what the other takes. However, with the State Government increasing reliant on the revenue, it is unlikely it will cut back the tax. The State Government is being blamed for allowing prices to rise so quickly. The key reason why Sydney’s house prices continue to rise faster than any other Australian city, is the premium of land, less and less is available for development leading to a relance on building more apartments in the inner city. It appears decades of poor planning haven’t taken into account the expected population growth. If planning fails to keep pace by making more housing available it is inevitable that, housing could simply become unaffordable in Australia’s largest city.

“There would not be the frenzied competition for houses in older suburbs we are seeing today that is pushing prices in those places to astronomical levels and beyond the reach of average Australian families, if we had been building enough new houses in new suburbs over the last 10-15 years”, said Patricia Gilchrist, Executive Director of UDIA.

The State Government is making progress by looking at options for creating new housing in semi-rural land in Western Sydney in the Bringelly district, which currently consists mostly of farmlands ideal for future housing. They also plan on developing major regional centres like Hurstville, Chatswood and Parramatta by encouraging residential apartments near railway stations to allow easy access to public transport.

While these remain plans, they may not ultimately solve the problem; Sydney remains the epicentre of the country economic development, more opportunities are available making it increasing desirable place to live. The demand may be underestimated, and it will do little in reducing house prices in areas close to the city, as people seek to be closer to work. The Government faces another challenge, and that is those who remain locked out of the private property market and are turning to them for help. They are struggle with the cost of home ownership or renting. Six per cent of Australians opt for public housing instead. Rents are generally set at a maximum of 25% of income, opposed to private renters who are at the mercy of the market. New South Wales is in a unique situation in that private rents are the highest in the country, making public housing an attractive alternative In effect, current renters have developed a dependency on cheap public housing because they no reason to give up their place to those more in need, because to renting privately would cost them an estimated forty-three per cent in rental costs.

With a considerable price difference, and price security, there is high demand for public housing; the waiting list for public housing continues to increase, in 2000 – 01, it reached 101,561 in NSW, two per cent of those are regarded as in the greatest need. The Council of Social Services has called on the Government to increase public housing stock by ten per cent to reduce the waiting list.

Public housing tenants, live right across Sydney, from the outskirts of Western Sydney in estates like Minto, Claymore, and Mt. Druitt to high rise buildings in the exclusive Rocks district in Central Sydney, with million dollars views to match. However, the estates of Minto, Claymore and Mt. Druitt are better known, and for the wrong reasons, often seen as ghettos to the wider community.

Travelling through the estates in Minto and Claymore in Sydney’s South-West, you witness walls of graffiti, mothers screaming at their children, run down shopping centres, broken beer bottles, and townhouses that appear uninhabitable. On the inside the townhouses have broken walls, worn out carpets, unhinged doors and an unmistakable smell. That is the public housing, and across the road, from the run down townhouses, you see the opposite. Brand new private homes selling upwards of $300,000, more than any them will be able to afford, protected by security systems and deadlocks.

It is a depressing site, to see an environment that illustrates obvious social division, eighty-two per cent of public housing residents are in the lowest 40 per cent of household income distribution and the main source of income for most is Government pensions and benefits. For them, a place in the Rich 200 list appears a fantasy, home ownership appears unrealistic and attempting to seek employment hindered by their surrounds.

Glen Burns in Sydney. E-Mail:

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