Housing Affordability – When Is It The Best Time To Buy?

Thursday 27th October, 2016

Recently in the media, there has been a lot of backlash about a “smashed avo” article and housing affordability for young people. This post examines what the housing affordability issues are, as well as the perspectives of various generations on the same issue to ask this question -when is it the best time to buy a house?

The housing market, who is this open to?

I’ve been an avid reader of the Australian Property Investor magazine, and a fan of Bernard Salt, the original author of the smashed avo article. At first glance his controversial article just seem to attacked “hipster” cafes, but if you are a regular reader of Bernard’s, you’d know what he is trying to do is touch on housing affordability and the decisions of the younger generation.

Most people think that housing affordability is a recent issue which has only just arisen. I agree that housing affordability isn’t at its best at the moment, but this has been an issue that has been around for a very long time. In 1975, about 40 years ago now, the big issue in the media was… you guessed it, housing affordability.  Back then it had risen to a massive 3 times the average household income from in just 10 years (see graph).


Now lets take a step back and see what life was like in 1975

The average annual income in 1975 was $7,618 per year.  The average house in Sydney costs a massive $28,000.  Back then the average house size was about 100m², and only about 35% of women entered the workforce.  Housing development standard were also far more relaxed.  Some other interesting facts include a population of 13.7 mil, average age of late 20’s, people got married around 22, VCR’s were just invented along with the digital camera and the first personal computers were introduced around 1977.

Now let’s fast-forward to 2015, 40 years later.

Housing affordability is now 4 times the average household income, which is a pretty incredible result give the average size of houses has increased from 100m² to 200m² and there are a lot stricter housing regulations.  The average income today is $72,000, up by 10 times over 40 years.  Average house prices in Sydney are up to $850,000, which is closer to 30 times greater.  But remember house sizes have doubled and household incomes have increased as now 45% of women enter the workforce and this trend continues to increase towards much needed parity.  The population now is about 24 mil, the average age is late 30’s with people living longer and getting married around 29.  We’ve now got access to the internet and all kinds of computing devices, which is both a blessing and an ongoing distraction.

So what’s all this got to do with smashed avocados? 

Well consider this; smashed avo on toast at a “hipster bar” costs $22.  A lot of millennials will eat out around 5 times a week.  So that $22 smashed avo becomes about $5,500 per year, almost as much as their parent’s earned in a year in 1975.  Then they complain about housing affordability, which given isn’t the best, but the older generations are viewing this younger group as wanting all their fancy luxuries, as well as bigger houses in expensive areas – but don’t want to work hard for it. Is this viewpoint reflective of what is happening? As each generation grows, are the ones after us becoming less impressed with the housing market due to its affordability or is it because they are not willing to work as hard as the generation before? These questions have complicated contexts, and thus are complex in their explanations but requires some understanding if we are to examine the housing affordability issue.

So, returning to the question that I posed at the beginning of this post is – when is it the best time to buy a house?

Personally, I was fortunate enough to have owned a lot of properties during the recent house price boom of 64%. When I starting buying after the GFC (Global Financial Crisis); most told me I was crazy, making a terrible mistake and that the housing market was about to crash.  The same people now are saying, boy you were lucky, but house prices are about to crash and you are going to crash and burn.  I purposely avoid talking about my recent property ventures for this reason; I’ve honestly grown tired of listening to the naysayers.

When I starting buying after the GFC (Global Financial Crisis); most told me I was crazy, making a terrible mistake and that the housing market was about to crash.  The same people now are saying, boy you were lucky, but house prices are about to crash and you are going to crash and burn.

I’d like to highlight what prompted me to buy when everyone else was selling and talking “gloom and doom”.  Following the GFC in 2007, house prices had dropped slightly and were predicted to flatline, which is why no one was buying.  Property tends to go in 7-10 year cycles of “booms”, then flatline, then boom.  There was a boom around 2000, it was flat until a boom around 2007, then flat following the GFC, which I knew back then would lead to another boom around… you guessed it, 2014.  Buying property takes time and I knew being in a flat period meant that it didn’t matter how early in the flat period I brought, I was setting myself up for the boom in 2014.  I brought properties in 2009, 2011 and 2012 when everyone was trying to sell and good discounts were available.  We reached June 2013, the market was still flat and there was an excess of stock and I knew a market up-lift was very imminent.


Referring to the graph, housing affordability verses income was the best it has ever been since 2003, and I had a feeling there was pent up purchasing power just waiting for that uplift to release, where everyone would come out of the woodwork for fear of missing out on the boom.  I decided that it was a good time to buy a block of land, as building prices were down during the market downturn and I could secure today’s price, but finish the build as prices increased.  We purchased our current block and home in June 2013 negotiating a large discount from the developer, who was struggling to reach their end of financial year targets.  Imagine negotiating upwards of $35,000 discounts at a housing estate sales office now with waiting lines for the land!  We went on to build and saw the value of our land alone rise $250,000 from the boom period of 2015-2016.  As opposed to what the naysayers said, it wasn’t just dumb luck I had brought when I did, but the results of many years of reading as much property literature as I could, following tried and tested forecasting methods and ignoring the constant and unsubstantiated doom and gloom.

So where to now?  Well housing affordability is undoubtably high at the moment, the worst it has been for a while.  In similar situations after the 2000 boom and 2007 boom, house prices dropped slightly, before flattening out for a number of years, while incomes caught up and affordability improves.  So I’d agree with the naysayers at the moment, that house prices will drop, though slightly very soon, and then stay flat for a while.  What have I done recently with this timing – I have just sold our principal place of residence at the peak of the market, which will limit my exposure to the drop and increase my cash available to take advantage of buying opportunities during the flat period, likely around 2018/2019, with the next boom around 2023.  For those looking to buy, just look at the history of house prices, having increased 30 fold since 1975, anytime is a good time to buy if you plan to hold for the long term. But in the short term, don’t feel rushed as there is plenty of time to make that purchase in the up-coming buyers’ market and prices are over-inflated just now, though people have personal reasons that don’t often align with the market movements.  For millennials and naysayers complaining about affordability, I’d suggest sacrificing some of life’s luxuries, such as smashed avo, just as the generations before have done to get into the market.  Housing affordability is bad at the moment, but will improve with your incomes over time and there is no rush at the fear of missing out.

If you want yesterday’s prices, go ahead and build a 60m² 2-bedroom home in the country as you’re parents had to start with and you’ll see affordability now is much the same as it has been, it is just the circumstances and contexts have changed and adapted with time and so should the buyers too. Otherwise unfortunately you can’t have your smashed avo and eat it too, it’s just life.

Written by Michael Whitehouse (Facebook, Twitter, Linkedin)
Edited by Vivian Pham (Linkedin, Twitter)

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