What’s going on guys Its Jordan de Jong here and today I want to talk about Housing Affordability, over the last couple of years we have seen some serious fluctuations in the housing markets, many like to hold property and economic cycles accountable for these fluctuations, but there is also some significant regulatory intervention that plays a role, and for a good reason. Homeownership runs deep in the veins of Australians, we take some serious pride in our patch of land, and by doing so it brings a great sense of community and belonging, makes us feel wealthier and provides security around the retirement stage of life. Taking a step back Housing affordability is basically how much we spend on housing in relation to everything else, when housing affordability increases, meaning it costs more to rent or own a home, and we have less to spend on goods and services that stimulate the economy in diverse ways. We’ve had some great property growth runs historically in Australia, mostly driven by population growth, a booming economy over the last 25 years, but more predominately the increasing number of females coming into the workforce, meaning households now have double incomes to borrow against, giving them access to a larger loan amounts they then use bid up the price for their desired property. Moving forward, Wage growth is what is essential to keep up with the current rate of Housing affordability, with a higher income we can afford more expensive properties, however, Australian house prices have more than doubled since the mid-1990’s, and wage growth has significantly slowed down over recent years, sitting just above 2% PA. This is why we have the need for human intervention through the form of financial regulations and government policies, if housing affordability was to skyrocket or plummet out of control there would be significantly less lifestyle and luxury spending leading to lower economic activity and higher unemployment. Moving forward, there are a couple of elements that affect housing affordability, which in one form is just the price of property, obviously with lower-priced housing and the same level of income, we could afford to buy properties in our desired locations with room to grow our families, however, this is where the cycle all begins, because majority of us want to live in those same locations. This is where supply and demand play’s it role, which is our first element, because there’s only a handful of hotspots where we all want to live, being either close to the CBD’s, close to the water, but not too far from civilization and finally, close to that like button so you can smash it and help with the YouTube algorithm. As we’ve seen in places like Bondi, St Kilda, and our cities, this generates a high demand for areas that only have limited supply of land, so when a desired property comes on the market, that demand drives its price to almost unaffordable levels, we try to counter this demand with more supply by building towers with smaller places to live. The problem with builder higher and smaller is it's expensive and because its expensive developers want to ensure they get the best returns, so they build tiny shoe boxes with one or two bedrooms, fitting in the maximum number of apartments they can into the building under the local council regulations. But remember, demand comes with many drivers, one is location yes, which they got right, but another is liveability, it’s hard to raise 3 kids in a one-bedroom apartment that’s now the only affordable dwelling in the area, so they cut out a big chunk of the working class between 25-55, who have high incomes that ultimately drive the price property. This creates an oversupply of apartments that only a subset of the population would be happy to, and can afford to, live in, pushing the rest of the population into the neighboring suburbs where it's more affordable to live in a larger house. This, in turn, gentrifies that area, meaning new cafes, shops and restaurants pop up over time, slowly increasing the demand for that area further until it becomes unaffordable, then we get pushed to the next neighboring suburb and the cycle repeats itself. Of course, most people don’t buy their properties outright, we borrow money to purchase a property, which brings us to our second element – Interest rates, which is how much we pay the banks to borrow that money, for the following example, think about our incomes, as money coming in, and we use 30% of that money coming in for our housing costs, in a 5% interest rate environment. As prices increase over time, we borrow more money to purchase more expensive property, and if interest rates remained at 5% we are paying more money to the bank to borrow that money, and if wage growth isn’t increasing at the same rate as property prices, more of that 30% of income goes towards paying the bank than actually paying down our mortgage, potentially pushing out loan repayment terms. This is why the RBA has recently brought down the cash rate, which in turn gets pushed onto interest rates, meaning we can pay more of our mortgage down and less In interest to the bank, this is one of our biggest risks though because the cash rate is a kind of one-size-fits-all in the economy. Retirees might be relying on the interest earnt from large savings to live off in their retirement, so when interest rates come down, they earn less interest from their savings and will have to start spending their savings sooner than expected, this is why it’s a one size fits all, because whether it goes up or down, it’s good for some and bad for others. Finally, when the cash rate comes down, interest rates are still in the hands of the banks, they might choose not to pass on the full interest rate cut and keep more of the profits themselves, funnily enough, when the cash rate goes back up, they will pass on the full increase as quickly as they can. Serviceability is the last element we will talk about today, prior to 2014 banks use to assess our serviceability very differently, where someone earning $80,000 a year could borrow something like a million dollars, don’t hold me to these numbers exactly, it’s just what I’ve been told, but it was a lot easier to borrow more money. So, when people have access to borrow more money in a competitive egocentric environment IE the property market, it forces them to spend that money, therefore driving the price of property up. But since 2014 APRA has required that all lenders must assess loans using the greater of either a 7% serviceability rate or a 2% buffer on the actual loan rate, This was great as it limited the amount individuals could borrow and stopped property investors purchasing multiple properties, reducing the overall demand in the market. This did take its toll eventually and had an impact on the market between 2017-2019 because the market was already falling, and access to money was tight, there was limited demand for people to take advantage and snap up these properties at a lower price, so, on the 21st of May 2019 APRA removed these serviceability restraints as they believed “it is no longer required”. This is a relatively new market impactor, previously we haven’t really seen a financial regulator implement something that significantly impacted the market as it did in 2017-2019, so we have to be very aware now of how APRA, the RBA and Government and are feeling about the housing sector and overall economy. I think APRA will step in again once consumer confidence has recovered and try to intervene before this new accessibility to borrow more pushes housing prices too far forward, so, all of these elements are essentially balancing acts that try to moderate property prices. Housing affordability doesn’t just impact people with mortgages, it also includes the rental market too, rental increases impact how much of a tenants income goes towards providing a roof over their head, so when property prices start increasing, there’s a bit of a lag due to 12-month leases, but eventually, rental prices go up too. Supply and demand also have an impact here, if there’s demand to rent in a particular area with short supply, people are happy to pay more for a better quality property, pushing up rental prices, and to make things even worse, platforms like Airbnb have made what use to be a typical rental property into a mini-hotel, taking away from the supply of available rental housing on the market. So why is Housing Affordability so important? although some people are happy with being renters their entire lives, it is less secure, they generally have to move much more regularly, there are issues with make changings like painting a room or adding a split system and you have to deal with rental managers to get anything fixed or whenever they decide to do a random inspection. Increasing housing affordability for renters makes it harder for them to save for a deposit to actually purchase a property, back in the 1990’s it use to take 6 years to save for a typical 20% deposit, now it takes somewhere around 10 years, which means their renting for longer periods, and missing out on potentially tax-free capital growth while trying to save. This creates a wealth divide between generations, as older households who already retain wealth in property, increase their wealth further with compounding capital growth, while those still renting trying to save for a deposit, fall behind due to inflation and property prices growing faster than they can save. Flowing into inter-generation inequality as the bank of mum and dad is now essential for the younger generation to get into their own property, creating an even larger wealth divide, purely dependant on the success of one’s parents. Going back to my original statements about household economic spending, if more and more of our income is being consumed by housing costs, then we have less to spend and inject back into the economy, slowing economic growth and increasing unemployment. From one extreme to another, a significant drop in housing prices would cause some serious economic instability, we would feel less wealthy, start saving more and consuming less, having the same effect on the economy as an increase in housing costs, this is why we can let either happen dramatically and finding a balance is the absolutely key. A good potential future counter to housing affordability is new technology allowing us to spread out wider and maybe shift some of the demand away from our CBDs, because that’s where the jobs are, to somewhere more affordable, for most anything longer than an hour commute into work is considered undesirable, and is why there is so much demand to be around our cities. With an increase in technology that allows us to work remotely, we can start to work from home, or have other smaller working hubs further out that require less commute time to get to, or infostructure spending into something like fast trains that connect affordable areas to our CBD, this would also cut commute times considerably. Until next time, happy house hunting.

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