One day a first home buyer is sitting, thinking and they make the concious decision to start saving for a new home (that or their parents boot their lazy ass out on the street). Either way though, few – if any – look to history. Why look at the past? You want to buy a new house now not 20 or 30 years ago and my GOD there are some gorgeous houses on domain.com.au right now… *drewl*. I’m sure we’ve all heard the stories from our parents though…
When we bought our first house it cost $40,000 and was a 3 bedroom oldish house on a big block of land.
$40,000. That’s the price of a new car these days not a house. Of course inflation has taken all that away from us but just how much of the current house prices we are seeing now are due to inflation, and how much are due to other things? Should a $40,000 house in 1980 now cost $500,00? Or maybe $300,000? Well it turns out these types of questions have already been answered because we of course keep track of everything now. A simple Google search gives us a nice pretty graph from over at Wiki.
This particular way of measuring affordability is widely accepted. You compare the average house price to the average wage. If your countries average pay is $40/year then you can still compare the price of affordability even though we have an average pay of $70,000/year. As you can see, things really haven’t been the same since about 1996 at which point housing prices went mental. This strange increase has happened over the course of a decade and a half so it’s hard to spot, but to take us back to our first home buyers being kicked out by their parents, we remember that none of this information is common knowledge to them.
Why would it be? They only just started looking! So let’s go have a look shall we? What’s a moderately old, nice sized house cost these days? Melbourne is a decently big city so lets look about 20km’s from the city… How about this one?
It costs an average amount (actually it’s cheaper according to the latest figures from the REIV which was $535,000 at the time of writing this post) and has everything a new average type of person/family might want. It’s not 10 bedrooms, but it’s also not 1. It has a nice backyard for the children or dog and is close to civilisation. “$500,000 must be what the median price is” says our bright eyed first home buyer. That’s just what they cost I guess, no two ways about it.
And that’s the trap.
I see many young adults falling into this assumption today. Not knowing any history, looking at today’s prices they instantly assume and accept that $535,000 is the median price of houses in Melbourne. Well I prefer to make my decisions based on facts and according to that big, pretty graph up there an affordable, average home should be costing new home owners roughly 4 times the average wage. Given it’s 2012 I’m going to estimate that an average wage is now somewhere around $70,000 (even though I know plenty of 20-something’s on far less than that). Ye-old simple math takes over and we get 4 x $70,000 = $280,000.
That’s what this house should cost if we were living in what Wikipedia describes as an “Affordable” housing area. So the obvious question you now ask is “Well why doesn’t that house cost $280,000?” and basic economics answers that with Supply vs Demand. When supply is limited and demand is high, the price goes up. Way up in this case. The reasons for this supply/demand imbalance is too much for this post but you do need to be aware of one thing: