In 2020, those houses are around ~$1.8-2M, so ~22.5-25 times the annual income of someone that has their job today. In Melbourne and Sydney generally, housing is 10 and ~13x annual income. Above 6-8 is already considered _extremely unaffordable_. Sydney is 2nd only to Hong Kong in housing un-affordability.
It's a profound change across a generation. Among my college-educated friends, the only one's thinking of buying property are either high income (doctors, investment bankers) or buying in markedly worse (thus cheaper) areas than they lived in as children.
The problem is the asset bubble in home ownership prices. We should have 10+ year secured residential tenancies and rent controls in place, and put home ownership back into the 3-5% compounding asset class. Sydney and Melbourne is insane. Brisbane (where I live) is better, but only just.
I worry about Hobart: the longterm income levels in Tasmania are not going to keep up, the price of housing there is creating a huge social dislocation issue.
To an extent...
>The problem is the asset bubble in home ownership prices.
I just want to point out that these two are, are somewhat tied together as of the recent decade.
A lot of central banks around the world have been doing QE type things, which consists of printing money in exchange for taking assets off the market in (supposedly) equivalent value until they (central banks) are repaid the printed money to destroy. This arguably causes inflation - not in the traditional sense, but in the form of asset price bubbles. The reason they're doing this stuff is because of the lack of liquidity in the market regarding financing debts. In the US in particular, a large part of the FED's balance sheet is composed of mortgage backed securities (houses) and government debt (bonds) which money was printed for...
Anyhow, the point I’m trying to make here, is that the public debt burden we have is a contributing factor to the asset bubbles we see in housing and stocks and other areas...
One potential contribution to a solution would be to tax investment properties/second homes at a very different rate than primary dwellings (which should be taxed at as close to 0% as is practically possible). This would help reduce compounding the effect of demographics with investment portfolio concerns. If governments are to be at the service of their citizens first and foremost, it makes sense to me that they also have a specific tax rate or other restrictions on property ownership by foreign investors. If those things are not legal, then laws should be changed. They exist in some form in many countries, but not all. I doubt those opinions are popular, but at least they are worth thinking about.
as a renter, that doesn't sound like a good solution to me. my landlord would just pass through the "investment property" tax to me, while homeowners in my income bracket would be getting a fat tax break.
people should be assessed a property tax that roughly approximates the local services they consume. after that, we can think about credits for people who are genuinely struggling to make ends meet.
I agree that there need to be several other programs in place to support lower income individuals, including in respect to primary residences, but that is an expanded conversation in a election year ;).
my second (and very self-interested) reason, is that I don't want to be propelled towards home ownership. if I really wanted to I could buy a home now (and probably break even; I live in a low price-to-rent area), but I like renting. I'm quite happy in a 700 sq ft apartment, and I don't want the work that comes with a larger dwelling. I'm not exactly hurting for money, but I just don't see a compelling reason why the alternate version of me who bought a house deserves a tax break. I'm not sure I'm convinced by your argument that this policy would also lower my rent, but I'm not an economist so I can't really say.
> At the same time there is a basic philosophy I espouse that all people have a right to a home and a piece of land, and unless absolutely necessary to society, they should not be renting from the government.
just wanted to say I can certainly respect this, but I have a very different philosophy. land, especially in cities, is one of the only truly scarce things in the world, and its value depends almost entirely on what other people are doing near you. in our era of prosperity, I can agree that people should be entitled to a place to live, but I don't believe they should get to control a specific plot indefinitely.
There is nothing that makes 700 sq ft something you can't own and can only rent. That's a condo.
People will still buy and sell depending on their life goals and situations. If you move, you will be more likely to sell rather than hold your old house for a rental. Refis will still exist, along with the pressures they create for some people to sell, etc.
But it's now much more concentrated. Over time my family and dad's best friends family have ~5 houses and apartments each. When they die there'll be ~5 places split between 3 children and 2 children respectively.
Easy to see how that's not rebalancing things much.
Under such conditions, wages can only stagnate or have modest growth, while prices for scarce resources like land in desirable areas can only go up.
Good news is that there are still cheap places everywhere. But everyone treats them like they're all plague infested or something. Building a new town/city is no easy feat, but it sure used to happen more often in the past.
However, your point in general stands that houses in Australia are much more expensive than they were 30 years ago. But a better metric is the proportion of income required to pay for a house.
It's also worth noting for Australians and Americans that these housing cost issues are a global issues in many successful cities around the world.
Some cities and states have avoided these issues. In particular Texas in the US has seen huge growth and has managed to keep prices down.
Inflation was also in the >10% range (https://www.abs.gov.au/websitedbs/D3310114.nsf/home/ABS+Chie...) so if your wage kept up with inflation and you could weather the high interest rates for a few years then your mortgage:income ratio shrunk very quickly.
> Among my college-educated friends, the only one's thinking of buying property are either high income (doctors, investment bankers) or buying in markedly worse (thus cheaper) areas than they lived in as children.
Personally I scaled down expectations and bought a small "affordable" apartment. It's fine for me and achieves some financial stability but I wouldn't want to raise kids in one.
Something has to have changed since then.
What was the interest rate like back then and what kind of terms did he get for his loan?
In 35 years an awful lot has changed. What are you thinking specifically?
Interest rate wouldn't be too hard to find, though it'd be a lot of trouble to find out the terms of the loan.
One thing I can comfortably say though is that they'd been living at home and saving for a while, so could pay quite a lot of the full housing cost up front. Maybe 30-50%. Nowadays it's a joke to think about doing a 50% down payment on a 1-2 million dollar home.
But siem already posted that interest were around 17% and someone else mentioned 10% inflation in the eighties
Then you throw in immigration and global markets and a somewhat clearer picture emerges
Can you elaborate on what you're saying here?
> Or it's becoming a rich area and next generation...
Yeah in a sense it has to become a rich area because of housing costs. The "new frontier" where houses (not apartments) are 3x median annual income is 2 hours drive out of the city.
Most people with the means to pay cash for a property would likely be savvy enough to understand that that they would be better off getting a jumbo mortgage at 3.25% and deploying that capital at a higher rate elsewhere.
Sellers want buyers to pay cash to reduce risk of the transaction failing. Fewer parties in the transaction is less risky. Buyers can always refinance the house after they have the title.
Existing residents aren’t necessarily buying new houses at 8x multiples. And the new arrivals to an area might be tech workers pulling in $400k, and can afford that $1.2M house with just a 3x multiple.
The same payments/gross income ratio for a worker earning a median salary is a lot better than for someone earning $400k (as the payments to net salary ratio for the latter is higher).
Not to mention the probability of sustaining the income at the current level in the next 20 years is probably different as well.
If you're imminently expecting a housing crash, then sure, go for it.
What I’m really giving up in this situation is the right to make significant improvements to my unit, and such. In exchange, I don’t have to pay for any repairs due to wear and tear. I don’t think it’s a terrible deal, but I would like to own a home, simply so I can have a living space that I alone fully control.
Or is its prevalence as an ideal a product of a burgeoning middle class through the last century?
I understand it's not even so common (or common as a goal) now in continental Europe, they think it's some silly English thing to care so much about home ownership.
Personally, most of the people in my age cohort (mid 20s) who've bought homes, have bought in areas considerably further away from the city than they were raised.
And GP said 'grew up in' not 'born into', so average mother ~40 at 10 years old and ~50 at 20.
So yes, average Australian baby has a 40-50yo mother while 'growing up', especially for the purposes of house expectations which I'd have thought would more likely be formed over adolescent than younger years.
In prior generations, rent was a way to express a preference about longterm vs. short term occupation of a given space, or it was a way for people with relatively little credit or capital to get access to space. But it seems impossible for purchase prices to perpetually outpace rent prices, and it is unsettling to imagine the fraction of the economy dedicated to land ownership growing perpetually.
I'm guessing you meant this rhetorically, but it relates to something I've been wondering for a while. in very expensive areas, you tend to see a very high price-to-rent ratio. even if you could afford to buy, it might not make sense economically unless you plan to hold on to that house for a pretty long time.
I've been trying to learn more about why high price-to-rent seems correlated with expensive areas, but it's kinda tough to google for when all the hits are just practical guides to help you decide between renting or buying. if there's some deeper connection, it may that rent stays well below the price to own for a long time.
You might not expect such housing supply restrictions to cause land prices and rent prices to rise at different rates. But you would expect them both to rise. There may be real estate speculators investing on a momentum theory, but renters aren't willing to pay a premium based on the past trend in rental prices. This theory wouldn't support unbounded divergence between land and rent prices, but it would support some divergence consistent with what I've seen over the past few years.
You have very few rights (even in comparison to Wales or Scotland). So landlords use you for example to live in a property they plan to sell immediately. Typically they sign a rental contract and shortly afterwards advertise the house for sale. You need to cope with all the viewings, probable breaches in the tenancy (agents will enter the house quite often without notice) and the certainty that after ~6 months you will need to relocate again (which also impacts your credit score).
My experience renting in other places in Europe is, in comparison, fantastic. Totally boring (in a good way) experiences in Scandinavia, Germany and Belgium. Rent, pay, stay undisturbed for years, return keys, get deposit back and go. Also much lower prices.
I really enjoyed, in particular, living in Ghent.
I'd much rather be renting and have $300k in a diversified portfolio than own a $300k house and no other assets.
> Real Estate is a major wealth generator for people who get on the ladder.
ultimately this comes down to luck and how much of your income you spend on housing vs put into investments. there are certain locales where home prices are skyrocketing, but over the long term, average home appreciation is basically flat (but with lots of variance).  actively investing in rental properties is a different story, of course, but involves a lot of work, too.
> Finally you can't live in your 300k diversified portfolio if the market crashes.
sure, but rent is only about half of my monthly expenses currently. by the same token, you can't eat your house or fill up your tank with it. if you're worried about a crash and/or losing your source of income, you can always rebalance into bonds.
Rents are also high in these very high cost cities.
Continental Europe has places with higher rates of home ownership than the UK.
Norway - 82%
Spain - 78 %
Italy - 72%.
All higher than the UK at 64%.
California on the other hand, is absolutely pathetic when it comes to this. So absurd watching a state whose booming economy is funneling most of that money to property owners pockets. A huge and abject failure that will be in future economics textbooks as the example of how giving local government too much power creates huge bottlenecks.
Not to be overdramatic, but NIMBYism and overly restrictive zoning is California's equivalent to a tumor. Unchecked growth (of housing prices) that sucks all the resources out of the host (renters and people looking to buy a first home).
Eventually, they will wise up, move out of their expensive rentals and turn frugal - likely outside of these cities with a good possibility of leaving the state.
In their absence, new young folks in their high-earning high-spending phase will move in, and the cycle repeats itself.
None of this is bad for California. The state, in the desirable cities, is a meat grinder drawing in a constant supply fresh, gullible, overpaid talent, working not just to pay high rents but high everything, including state income tax, while saving very little. When they get exhausted, they leave, and make room for more fresh meat.
IDK, most people in know in California seem to be saving 30-50% of their post tax income. That's clearly not the case anywhere else in the world.
Or maybe I just know exceptionally low earners with poor money sense.
Given the constant furor surrounding housing affordability in California's desirable cities, I'm leaning towards the former.
If so, they're saving only roughly 15-25% income?
49.3% is the top rate you'd pay in California at the highest bracket (or 50.3% if you make over a million) .
If your income is over 2 million a year you'd pay an effective rate of 44%.
If your income is $200K, your effective rate is about 34%.
Then saving as much as possible and hoping stock or RSUs will get you the rest of the way there to buying something (or buying a 1 or 2 bedroom for ~one million once you find an SO and working from there).
If you're able to get total comp from 200k -> 400k and save 50% of that or more per year into a total market index fund for ten years that's pretty good, especially if you start at 21 or 22 out of school.
The economics make sense even when you ignore the other benefits (great environment for cycling, running, general outdoor activities - huge amount of smart people to learn from and work with, huge amount of companies hiring, startup opportunity, high quality food, etc.)
It's still a shame though because if Prop 13 was phased out and housing was built we could have all of this without having to waste huge amounts of money on overpriced, run down, tiny little houses, but that's Moloch  for you and local NIMBYs operating in their own self-interest.
Obviously I'm not talking about people who move to the Bay area to start a business, etc.
Wonder if we can thank prop 13 for that? (Frozen property tax that constrains supply and encourages ani-development stance by removing the tax consequences of appreciating property)
Per the US Census, median income in 1973 was $10,500, so the price of your parents' home increased by 3x median household income.
Looking at a completely unremarkable house in the sunset of SF on Zillow. It sold for $1.725M in Nov of 2019 after selling for $997k in June of 2014. Household income today is right around $60k, so an increase of more like 12x median household income in 5 years.
Just madness. (And yes, I know that the median household income in SF is higher than the nationwide, but that'd apply in the past too.)
 - https://www2.census.gov/prod2/popscan/p60-096.pdf
 - https://www.zillow.com/homedetails/610-Rivera-St-San-Francis...
You can review the permits here: https://dbiweb.sfgov.org/dbipts/default.aspx?page=PermitType...
I'm not sure what those values in the permits really mean, but they can't be the total costs. Hell, the kitchen remodel probably has $20,000 just in appliances.
According to https://blog.housemanager.calstate.aaa.com/blog/how-much-wil..., the price for a mid-range kitchen remodel in SF is ~$83,000, $65,000 for the bathroom and $30,000 for an average roof replacement.
Looking at the pictures of the kitchen (https://www.zillow.com/homedetails/610-Rivera-St-San-Francis...) and bathroom (https://www.zillow.com/homedetails/610-Rivera-St-San-Francis...) those numbers seem like they're probably closer than the permit numbers.
It looks like they also remodeled the half-bath as it matches the remodeled master.
It's probably more like $100-150k in renovations.
> "The valuation data is based on information provided by a variety of sources, including without limitation, local contractors, design professionals, cost estimators or nationally published construction cost data books or websites."
So it looks like SF figures $98/sq ft. + $10,561 for the kitchen remodel and $8/sq ft. for reroofing, etc.
In either case, even if it did cost 3-4x that permit amount, we'd be talking about 10x the median household income instead of 12x over those 5 years. Still just a crazy situation.
Most of the blame? Probably.
The same that happened to your parents happened to landowners of huge properties. They still pay peanuts for property tax 40 years later. In the end - it helped people who got there first and then screwed everyone else over. It helped rent seekers more than anything.
The issue that seems to have developed is that towns are building commercial property, as it brings in sales taxes or payroll taxes which total a lot more than property taxes
Why? It doesn't change the total inventory, nor the ratios of how many want a home vs have a home.
> The issue that seems to have developed is that towns are building commercial property, as it brings in sales taxes or payroll taxes which total a lot more than property taxes
Commercial property also includes apartment complexes too doesn't it? In my town there is an excess of commercial retail and office property, and builds are shifting to apts/condos as far as I can tell.
Lower incomes would actually be better off because it would mean that more properties would sell, lowering the price of homes, and thus rentals would have to come down in price too. Churn in housing market could lead to more housing developments as well - since you have to pay full price of the land you are just sitting on. You'd be better off developing the land than just sitting on an empty lot and paying lots of property tax.
More availability -> lower prices. A lot of people hold because the income:expense ratio on their property is really great. If your rental home goes from $1000/yr in taxes to the $15k/yr that every new homeowner is paying, you'll see that cut into your rental income. You could try to raise rent by $1000+/month but that won't happen because salaries aren't gonna rise that fast. So, you'll sell.
Thus, as a homeowner, when you go to sell then you will get less... A lot of these homes will fund peoples retirement in other regions. I see a lot of people in older age (who don't want to deal with renting, don't want to pass the home down, or didn't save for retirement) selling their homes here and moving to somewhere cheaper. They get to live a nice life off the gains they made.
That (generally) increases your tax assessed value. Whenever you renovate or build out - they will factor that in and tax you more. Your taxes don't stay flat with building more. You're incentivized to hold and not build - if anything. Zoning isn't in your favor either - you can't just add 10 units to your SFH. Remember - people bought when they couldn't afford to renovate - so they couldn't build out and then hold at peak development. They bought at lowest development and held. It's only after the property got really expensive that they could because they moved, rented the place out, and started raking it in.
So, what people do here is keep the properties as close to the same as possible because it's too late to build out more. (And zoning) If they're able to "renovate" in such a way where they can put up an in-law unit that adds like $100-200k in assessed value, they'll do that because then they can charge $2500+/month for that unit. Ideally, in their case, they'll just convert the garage and never get taxed more. But it adds housing but at a worse quality for both the main home owner and, likely, the person in the in-law than if they just built out a lot of nice apartments somewhere. If you have a "historical" house in San Jose - you can renovate the interior all you want and get no increase in tax assessed value as long as you don't modify the exterior. In one home I was in, they gutted the entire interior of a 900sqft 2-bedroom house into a 5-bedroom 2-bath so that they could rake in $5000+/month in rent out of 5 students going to SJSU. This resulted in 0 increase in tax assessed value - it's a common move and we can probably agree shoving 5 adults into 900sqft isn't ideal. A lot of people buy homes and will renovate them to add as many bedrooms as possible - each new bedroom is like $1000+ in rent you can charge. But - remember, the interior space doesn't increase. You just cram more people in the same square footage - different than how apartments would build up and give people the same amount of living space.
To give you another idea of why you wouldn't probably build out - my neighbor bought his house for $1.2m (This was like 2013). They spent who knows what demolishing the old home and putting up a new one. The house isn't like 5x bigger or anything - it's modestly larger than what was there. We'll say maybe 2x the interior square footage. Mostly because they added a second story on the new design. The tax assessed value is now $2.3m for that property (nearly double). If you're a landlord - would you spend $500k+ on renovating/building a property to be taxed on it too? Nah - better to just hold and rent. Besides, zoning gets complicated. There are only so many SFHs that you can make bigger and bigger to get more rent.
There's a reason why almost all the housing in the bay area is outrageously expensive but has nearly original interiors from when it was first made from 1930-1975 - it's cause people don't wanna improve the property because it will be rented anyway. The cost to improve isn't worth it - it doesn't outweigh the tax increase and the minor gains in rent. The cost to change the interiors to add more bedrooms in the same square footage is the only thing that is a sometimes worthwhile investment.
While still a lot, I’d suspect it’s quite different from today’s situation.
IF you drive those owners out via property tax increases, you have new owners just as concerned with the same anti-density drivers, maybe even more because they're in even greater debt at a higher price and can less absorb a feared price decrease.
With Prop 13 people have zero incentive to allow building because they benefit from extreme housing value increases with no downside. Prop 13 also means only new people are paying any of the real costs for the town since their property tax dwarfs the tax of old owners (one year of a new owner's property tax can be more than the entire cumulative thirty year payments of a neighbor).
I wish Prop 13 was changed so every year local town failed to build X houses (where X is some large value determine by how large the property tax spread is from new and old owners) property tax on those protected by Prop 13 would jump 10% capping out at the actual fair market valuation of the property.
This way if people don't want to build at least they're actually paying for it.
This will never happen though given the current incentives.
I think the key problem is that housing can be an investment or affordable, but it can't be both.
For instance, the median household income in SF is around $100k/yr. By its own measure in SF - $100k/yr is considered poor for a household of 4. I have a hard time believing that somewhere around 50% of residents in SF are poor.
I feel like something is off with the way this is measured. How can it be that a large amount of housing is SFH (can't be rented on a $100k/yr income), about half of people rent here (thus - half of people can't be prop 13 beneficiaries), and yet the median income is $100k/yr? The median rent in SF is beyond $2,500/month - which is the max a $100k/yr household can afford.
I've looked at the stats a bit and it just feels like the incomes are estimated to be too low across the board for households. I see way too many homes/apartments where there are 3+ working adults.
If I look at all the people I've worked with or socialized with - I can't find a single one where the household income was below $150k+. I know there's a bubble in terms of what I've worked with or interacted with - but the truth is that anyone below $100k/yr income was very likely renting with someone else. (Which would push the household income higher)
Subsidized housing is not very common within the bay area. I doubt 20%+ of people are living in that...
[Assuming you live like you make $150k/year (a bit over 150% AMI), you'll have about a quarter million per year left over after taxes. You could save $2.1M (a bit over 150% of median home) in cash in just below 9 years.]
I am not sure how much money I would need to make to do this.
My worry is that I lived through 2 recessions and we'd almost certainly lose everything if I lost my job and couldn't afford the mortgage.
It is a shame that there are no national supply-siders in congress who are willing to to 'encourage' coastal building.
Briefly poking around a mortgage payment estimator (assuming 20% down, 3.75% 30 year fixed rate), annual mortgage payments come to roughly 7.2% of purchase price (including tax and insurance). Slightly higher towards $100k price (7.8%) and slightly lower towards $1.5M+ (6.8%), but lets say 7.2%.
So, for a house priced at X times median income, you're paying 0.072X of annual median income every year into mortgage payments. 2-3x in the chart means 14-21% of income spent on mortgage. 8x means 57.6% of median income spent on mortgage. (Quick reminder that 20% down on an 8x house is 160% of median annual income in the first place)
My wife and I, with our 3 kids, currently live in a house that's bigger and has 5 bedrooms and 3 1/2 bathrooms and of course the cars are housed. It's more luxurious in every way than the house I grew up in.
I think this situation is not uncommon. Sure, houses cost more. So do cars. Both last longer, are more energy efficient, have more amenities, and are better in just about every way. I'm not surprised they cost more.
Prices are also sticky. If you bought a home at $X, you're going to psychologically want to get that back when selling. If you're a buyer, you've seen prices at X and you've become accustomed to thinking it costs that.
And a lot of people say that there's been a "massive housing boom" when production is a tiny fraction of historical levels. This can be understandable. If your area used to increase housing by 1% per year from 1920-2007 and then shrunk down to 0% per year from 2007-2015, increases of 0.5% per year might seem like a boom. However, it's below historical levels and might be coming after a near decade of under-creation. As such, there can be huge pent-up demand combined with a level of building that's still well below normal (but seems high compared to post-mortgage-crisis levels).
This isn't the best graph because housing production had already dropped off by the 90s, but it's still pretty clear. Everyone in expensive US cities thinks we're building lots of housing. However, when you look at it we're just not. Compared to the dip after the mortgage crisis, we're definitely building more. However, these expensive cities are also seeing historic levels of high-income job growth and migration towards them while having building at lower than historical levels. Maybe Australia is different, but it's probably just a comparison with post-mortgage-crisis lows and not actually a building boom. Even with new stock coming in, it can take years (think 5-15) to settle.
(Old link but the same still applies)
is that really true? I keep hearing people who can't find rental properties to rent, or have huge waiting lists.
I suspect that perhaps renters' is a market that has a price expectation, which is not met when the property prices are so high. The "normal" rent is about 5% (p.a.) of the property's market value. However, as bank interest rates dropped, property valuations skyrockets, and rent income cannot keep up. This would lead to landlords who sees tenants as a PITA to just not rent out (saves on any potential damages, low/zero utilities etc, not to mention no inspection, agent fees and other misc).
Seeing the ratio of median house price to median home buyer's income would be interesting.
If more and more below-median-income people are renting because they can't afford to buy, that's definitely important and interesting.
I think it's about time we started asking why. Most people don't understand why. Why is it so hard to build shelter. Why is something we've done for hundreds of years so well, all the sudden become so hard and so innaccessible that only the most elite can afford it.
looks at TSLA $650
The majority of people base their housing budget on the monthly payment they can afford.
When interest rates are low, people can afford higher principal values.
When interest rates go up, the amount of a monthly budget that can go toward principal goes down.
Housing prices will tend to fluctuate to match what people can afford, and what people can afford is determined by their monthly payment.
When you’re bidding against other buyers, the more they can borrow for a constant monthly payment, the higher the equilibrium price will be.