Thursday, May 22, 2008

Housing Less Affordable Than Ever

Despite reports of house prices plunging in some parts of Sydney as homeowners forfeit on their mortgages, the big picture shows that average house prices overall continue to increase. It is true that price growth has slowed in many areas, and virtually stopped in some, but prices are not showing any sign of collapsing anytime soon.

Add to the already high price of housing the ongoing increase in interest rates and housing affordability is still falling dramatically. Although there is a shortage of supply, which is the main reason prices are still high, that shortage is not being met by investors willing to meet the demand. That’s because despite the demand, the cost of actually building new accommodation remains excessive.

Thanks to a number of factors, including high development costs and red tape, investors just can’t get the rental return to justify the capital outlay. Now that seems odd at a time when rents are increasing rapidly and are themselves creating an affordability crisis for tenants. If we follow the chain all the way down to the last link, we come to the fact that average wages are no longer enough to buy an average house, or even it would seem to rent one.

We’ve arrived at this situation in part because of the increasing number of user pays fees and charges that afflict our society. In the case of new housing developments the fees and charges alone can add as much as 20 percent to the price. On top of that the cycle of speculative gains depends on ever increasing prices, resulting in overvalued properties.

To get things back into balance, either wages must rise or prices must fall, or some combination of the two. There is no short cut, and it can either happen quickly or slowly. It’s like ripping off a bandaid: quickly involves short term pain before recovery, while slowly results in a less acute pain drawn out over time.

But one way or the other it has to happen.

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