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Can lower income buyers build housing wealth too?

By johnboy - 23 September 2013 7

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By Ian Winter, Australian Housing and Urban Research Institute

The historically low interest rates being enjoyed by Australian households are fuelling talk of a housing bubble, despite efforts by the Reserve Bank of Australia to hose down what it calls “unrealistic alarmism” around these dangers.

Many of these hopeful buyers – particularly first home owners on low to moderate incomes – will look to outer suburbs of our cities. But just how well will they do in accumulating long-term wealth through their housing choices?

However, the biggest cause of increased wealth has been the restructuring of the housing market with increasing demand for inner and middle ring suburbs generating higher prices, a process observed in all Australian capital cities.

Once relatively egalitarian across Australian cities, our property markets have become polarised. The most affordable homes for lower-moderate income home buyers are now confined to the outer suburbs and will only increase in value at slower rates compared to housing in the more expensive inner and middle suburbs — effectively trapping poorer households on the edges of our cities.

Bid rent curve for residential property. AHURI report, The benefits and risks of home ownership for low-moderate income households

The increased change in demand for inner and middle suburbs can be seen in a bid rent curve, which shows the variations in property prices and rents as one moves further away from the Central Business District (CBD).

Places where rents or prices are greatest reflect the most desirable locations, often being closest to the CBD (where amenity and employment opportunities are better and transport costs lower), and decline the greater the distance from the CBD.

Melbourne’s southern corridor house price curve and constant prices. AHURI

Comparing the bid rent curves for five Melbourne corridors (western, northern, eastern, south-eastern and southern) showed that in 1981 the price curve was flat in all five corridors, with little difference in price as distance from the CBD increased. By 2008 that had changed, with all five corridors showing much higher prices in inner and middle ring suburbs and much lower out towards the fringe.

Melbourne’s south eastern corridor house price curve and constant prices AHURI

In addition, house prices in 2008 were much higher at any point on the five curves compared to 1981, showing that lower-moderate income home buyers built housing wealth no matter where they bought so long as they stayed in their home for 25 years. Suburbs where properties were 10% cheaper than the Melbourne median house price in 1981 performed relatively well financially when compared to suburbs that were more expensive in 1981.

Melbourne’s eastern corridor house price curve and constant prices AHURI

Six of the cheaper and eight of the more expensive suburbs studied in the research performed better than the median increase in value over the 1981–2006 time period. Of the six areas with the largest increases in wealth between 1981 and 2006, four were lower price areas in 1981, and of these, three had been industrial suburbs close to the CBD that had housed working class families.

Melbourne’s northern corridor house price curve and constant prices AHURI

For current and future lower-moderate income buyers the map of what is affordable is starkly different to that available to their peers in 1981. In 1981–82, 88% of Melbourne’s local areas offered reasonable choice for lower-moderate income purchasers; however, by 2007–08 only 8% of Melbourne’s local areas were affordable, and all of these were in outer urban or growth zones on the tail end of the bid rent curve: the Yarra Valley (eastern corridor growth zone), Casey (south-eastern corridor growth zone) and Melton (western corridor growth zone).

The research suggests that if lower-moderate income buyers purchase in these outer urban and growth zones they will build housing wealth over time, but at a much slower rate than buyers in more expensive suburbs. This slower rate of capital gains in the growth zones can be seen when comparing their resale prices with inner zone homes.

Melbourne’s western corridor house price curve and constant prices AHURI

A startling 36% of growth zone homes sold four to five years after purchase were sold at a loss, while only 9% of inner zone homes were sold at a loss; after six to seven years, 8% of growth zone homes sold at a loss compared with 6% of inner, showing that capital gains growth had caught up with the transactions costs (such as stamp duty and agent fees) involved in buying and selling a property.

The lower rate of capital gain growth means lower-moderate income home buyers risk making a loss if they have to sell early for reasons not entirely of their choosing, such as interest rate increases, loss of job, loss of second income, a need to relocate for employment, or divorce. These households are also less likely to be able to afford to wait to sell until capital gains growth has negated transactions costs.

As home prices are rising faster in middle and inner zones than in outer and growth zones, it is increasingly difficult for lower-moderate income buyers to improve their housing wealth by trading up to middle and inner areas even if they have accumulated substantial equity in their homes. This has implications for households who need greater access to public transport, employment, health care and educational opportunities than are available in the outer and growth zones.

If house prices into the future are to be affordable for new buyers and yet grow for owners — at least at the rate of inflation so as to build housing wealth to buy into aged care housing — then policy should seek to “flatten” the bid rent curve.

Research shows a land tax, based on land value and universally applied, will most affect higher value land concentrated in the inner and middle suburbs, causing land prices to drop and therefore increasing housing affordability.

In addition, ensuring there is greater equity in amenity throughout all urban areas, rather than focusing public investment in inner city areas, will help increase the desirability and value of homes in the growth areas. The amenity of outer suburbs and growth zones can be increased through better physical infrastructure, particularly public transport, and strategic investment in child care, health care, and education centres.

Co-author Matthew Lovering is a writer/analyst at the Australian Housing and Urban Research Institute.

This article is based on an AHURI Evidence Review, which draws from a number of AHURI research projects.

This piece has been co-authored by Matthew Lovering, a writer/analyst at the Australian Housing and Urban Research Institute.

The Conversation

This article was originally published at The Conversation.
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7 Responses to
Can lower income buyers build housing wealth too?
breda 4:19 am 25 Sep 13

From the article:

“Once relatively egalitarian across Australian cities, our property markets have become polarised. The most affordable homes for lower-moderate income home buyers are now confined to the outer suburbs and will only increase in value at slower rates compared to housing in the more expensive inner and middle suburbs — effectively trapping poorer households on the edges of our cities.”
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This is simply incorrect. The poorest suburbs in established cities up till about the 1970s were the inner city slums which are now among the most expensive. In Sydney, places like Vaucluse and Point Piper have been upmarket for at least 100 years. Ditto some of the fancier parts of the North Shore.

It used to be that if a family improved their economic circumstances, they would move out from the grimy inner city to the leafy suburbs 10-15 km away. In those days that was much nearer to the edge of suburbia than it is now.

This mythology of a golden era keeps popping up in academic research which is usually thinly veiled support for social engineering. Like this bit:

“Research shows a land tax, based on land value and universally applied, will most affect higher value land concentrated in the inner and middle suburbs, causing land prices to drop and therefore increasing housing affordability.”

What “research”? We have exactly that system in Canberra via our very high rates. I don’t see much sign of inner city land values dropping as a result.

The main cause of skyrocketing property prices is strangulation of supply by planning restrictions (e.g. Bob Carr’s idiotic attempt to close down the expansion of Sydney) and regulatory imposts on developers and builders.

As for the outer borders expanding as population increases, short of cramming everyone forcibly into apartments, that’s inevitable, and hardly evil. Large cities have multiple sub-centres for things like employment and education and health services. There are plenty of people in western Sydney (where my family live) who never go into the city from one year to the next. There’s no need to.

miz 4:41 pm 24 Sep 13

Chop71, I did try but there are so many lemmings!

Chop71 11:57 am 24 Sep 13

miz said :

A primary stumbling block for me personally is the ‘unimproved value’. These values are unrealistically inflated in this town, to the point where I consider them to be a govt rort.
Eg, where I live, the unimproved value was $124K in 2003, $193K in 2007, and $370K in 2012 (i.e. it has almost tripled in 10 years and almost doubled in the last 5 years), with no quantifiable improvement in local amenity.
Something has to be done about this.

You could vote them out and give the other mob a go at running this over rated city council.

miz 8:16 am 24 Sep 13

A primary stumbling block for me personally is the ‘unimproved value’. These values are unrealistically inflated in this town, to the point where I consider them to be a govt rort.
Eg, where I live, the unimproved value was $124K in 2003, $193K in 2007, and $370K in 2012 (i.e. it has almost tripled in 10 years and almost doubled in the last 5 years), with no quantifiable improvement in local amenity.
Something has to be done about this.

arescarti42 12:24 pm 23 Sep 13

magiccar9 said :

The biggest problem I have found (being “lower income”) when trying to buy a house is that lenders aren’t willing to consider anything beyond your “low” income when are loaning.
Understandably the outcomes from the GFC(s) have shocked the banks etc back into line with their lending, but they are now so strict with it that anyone on lower incomes can’t actually rummage the $ to buy in the first place.

Thus you can have the cheapest or most expensive houses in the land, but if people can’t borrow to buy any of them they’re totally useless.

It depends how you look at it, in my view Australian banks are still pretty loose with their loans.

You can still get loans 100-120% of the value of a property, with 95% LVR loans being very common. 32.7% of new home loans in Australia have LVRs of 80% or higher, 38.7% of new home loans are interest only.

These sorts of loans aren’t allowed in many other countries because of how risky they are.

I’d argue the problem is that house prices are ridiculously unaffordable for people on low incomes, not that the banks are too strict with their lending.

magiccar9 11:58 am 23 Sep 13

The biggest problem I have found (being “lower income”) when trying to buy a house is that lenders aren’t willing to consider anything beyond your “low” income when are loaning.
Understandably the outcomes from the GFC(s) have shocked the banks etc back into line with their lending, but they are now so strict with it that anyone on lower incomes can’t actually rummage the $ to buy in the first place.

Thus you can have the cheapest or most expensive houses in the land, but if people can’t borrow to buy any of them they’re totally useless.

arescarti42 11:36 am 23 Sep 13

The issue with this sort of analysis is it looks at the past and projects it in to the future. The time period 1981 to present includes the simply phenomenal price growth from ~1996-2010, which was completely unique in modern Australian history, and completely unsustainable. In this case, you simply cannot draw conclusions about the future based on what happened in the past.

The recommendations are spot on though, if we want to improve productivity and equity in this country, we absolutely need to tax land more and incomes/businesses less.

On another note, the bubble talk recently really only applies to Perth and Sydney, and isn’t hugely surprising. Perhaps also unsurprisingly, Canberra is the only capital city projected (SQM) to experience continued price falls throughout 2013 and 2014.

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