Housing affordability affecting new home buyers and low income earners the most

 The Australian Bureau of Statistics this week released a fascinating set of data; Housing Occupancy and Costs, 2011-12 (see the release here).  The release provides a very thorough overview about housing costs across different regions and age groups, income levels, tenure types and a wide range of other factors.

The average (mean) cost of housing (weekly) across each state and nationally, as estimated by the ABS is provided below:

Mean housing costs

One of the headline findings from the release is that housing costs as a proportion of gross household incomes have remained broadly unchanged since the 2003/04 financial year at about 14% (see graph below).

National housing costs as a pc of ghi

For the purposes of this study, “housing costs are the recurrent outlays by household members in providing for their shelter for themselves. The data collected on housing outlays in the SIH [Survey of Income and Housing] are limited to major outlays on housing, that is, mortgage repayments, rent, property and water rates as well as body corporate fees”.

So… the costs don’t include expenses such as maintenance, repairs or insurance.   Adding these costs into the scenario would likely more than double the cost of housing for those home owners who fully own their home (ie they have no mortgage repayments) and add about 13% to the cost of housing for those individuals paying down a mortgage.  The scenario for renters of course wouldn’t change as these costs are covered by the landlord.  Additionally, mortgage costs include both interest and principal payments; realistically the principal payment component should be considered as savings.

The proportion of household income dedicated to housing costs is demonstrably higher across lower income households and the proportion is rising over time highlighting that financial stress is likely to be higher across these cohorts.  Based on the most recent data for 2011/12 the lowest income quintile is dedicating 26% of their gross household income to housing costs compared with 22% over the 1995/95 financial year.

Housing costs as a proportion of gross household income has drifted higher across all income quintiles, however the lowest earners have seen the largest increase in costs as a proportion of income.

Housing costs as a pc of ghi by quntile

Across the different types of housing tenure, the lowest proportion of gross household income being dedicated to housing costs is evident for home owners without a mortgage at about 3%t based on the most recent data – no surprises there.  This group doesn’t have the burden of mortgage repayments or rent to pay.   Households paying down a mortgage showed the second lowest ratio of income to housing costs at about 18% of their gross household income, while renters are on average dedicating about 20% of the gross household income to housing costs.

Housing costs a pc of ghi, national by tenure type

There’s not a great deal of difference in the proportion of gross household income dedicated to housing costs across the states.  Proportionally, housing costs are the highest in the Northern Territory at 16% of household income and lowest in Tasmania (where housing prices and rents tend to be much more affordable) at 13%.

Houses costs as a pc of ghi, states and territories

The thing that strikes me about this release from the ABS is the low proportion of household income being dedicated to housing costs by those households paying down a mortgage.  At just 14% of gross household income, it appears that the average home owner with a mortgage has a substantial buffer before they suffer mortgage stress.  The old rule of thumb was that if a household is dedicating more than 30% of their gross income towards servicing a mortgage they were considered to be in ‘stress’.  Based on the data, nationally, about 18% of households are dedicating more than 30% of their gross household income towards housing costs (this is across the board, not just for those home owners with a mortgage) and 5.6% are dedicating at least half of their income to housing costs.

Hoiusing costs as a pc of ghi, national by pc segments

Clearly this 18% is where the focus needs to be from a social and affordable housing policy perspective.  As can be seen in the graph below, those households dedicating 30% of their gross income or more towards housing are very much concentrated within specific lifecycle groups – particularly lone persons aged under 35, single parents and young families.  The results also suggest that it isn’t so much those people that have had a mortgage for some time that find it challenging to repay mortgages, rather it is those recent first time buyers.  This also potentially goes some way to explaining why first home buyer activity is currently so low at a time when mortgage rates are at virtual record low levels.

Proportion of housing costs by lifecycle cohort

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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8 Responses to Housing affordability affecting new home buyers and low income earners the most

  1. Ashley Talbot [ Architect ] September 2, 2013 at 12:13 pm #

    My view:

    Housing Design undertaken at the interface of Conventional and Industrialised Building Methods, is a requirement for Housing Life-Cycle Affordability.

    While the way we build remains essentially the same ie: masonry construction, we will
    only, ever, tinker at the edges of formative change – reduction – to Housing Cost ; without which, there will be no ‘springboard’ for change within the broader issue of Affordability.

    I should say that, ‘by putting my $ where my mouth is’, I have developed a patented Building System which under-cuts conventional housing by an effective degree, while providing an
    open-ended range of building types and designs.

    • Tim Lawless September 2, 2013 at 12:32 pm #

      Thanks Ashley – while Im not expert on construction materials I would have thought there has been a move towards housing construction using light weight materials, pre fabrication and more sustainable design. Feel free to post a link to your new building system. Tim

    • Michael September 26, 2013 at 7:23 pm #

      It has already been proved that the entry to home ownership is not the price of the house itself, but the cost of the land, accounting for inflation housing per square is not a lot different from what is was in 1998, we bought a 21sq house for 130 grand and today you can still get a similar size house for not a lot more money, but back then our land was 42 grand and today for the same block (628sm) the cost would be more like 320 grand.

  2. Nick September 2, 2013 at 9:33 pm #

    Thanks for the analysis. The concept of “dedicating” a percentage of income towards housing costs does not appear to consider voluntary extra mortgage payments, which I believe is a current trend, and which while likely to contribute to wider economic stress, e.g. lower retail spending, is not likely to result from or contribute to individual economic stress. This could describe a major portion of the “lone persons under 35” category.

  3. Michael Sier September 3, 2013 at 11:19 am #

    “At just 14% of gross household income, it appears that the average home owner with a mortgage has a substantial buffer before they suffer mortgage stress.”

    This is ok if you are already “in” the market (assume 80% or less LVR), but as we are seeing with 50% less FHB approvals in 2013 could it be a case of unable to enter the market for the first time on current median price to income ratios? (assume 90% LVR)

    How long will investors continue see “value” in the entry level before yields are no longer viable? Without investors seeing worthwhile returns, and FHB unable to afford to enter, the entry price point may see some weakening.

    • Jared September 26, 2013 at 10:39 pm #

      I don’t understand this logic. If FHBs can’t afford to enter the market it’s because they are being outbid. So what makes you think prices are going to fall? If anything they are putting a floor under the market.

  4. Janelle Yu September 13, 2013 at 3:17 pm #

    Very informative analysis . Thank you for sharing this post . Keep it up

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