Property News

Quality, not quantity, powers house booms

30 December 2006

Housing booms are driven by a desire to live in bigger homes or better suburbs rather than a shortage of land.

Macquarie Bank interest rate strategist Rory Robertson says lower interest rates in the past had increased the purchasing power of borrowers by about 60per cent.

In a study on home affordability, he says the increase in home-buying power led to a rush by existing home owners for prime inner-city locations.

"The surge in housing demand was not for an increased number of houses anywhere near as much as it was for higher-quality houses in higher-quality locations," he said.

"The evidence is that the surge in home prices spilled out from well-located suburbs to our urban fringes, not the reverse."

Mr Robertson says that although outer suburban homes in Sydney have enjoyed roughly the same percentage price increase as inner-city homes over the last decade, the wealthiest suburbs outperformed in the years between 1996 and 2000, while outer suburbs surged to catch up in the latter part of the boom.

Over the past year, outer suburban housing prices have slipped. Australian Property Monitors reports that the median price of houses sold in southwest Sydney in the six months to November was 25 per cent below its level at the peak of the boom in 2003.

First-home buyers are increasingly being forced to the city fringes.

Mr Robertson cites research showing 74 per cent of homes sold in Queensland in the September quarter of 2001 were within the reach of first-home buyers on the average income with a standard borrowing capacity.

By the same quarter of this year, only 15 per cent of homes sold were within the reach of first-home buyers. In Brisbane, the figure was only 7 per cent, with most likely to have been on the periphery.

Mr Robertson says the increase in house prices has now neutralised the increase in purchasing power sparked by lower interest rates.

He calculates that house prices have risen 75 per cent faster than average wages over the past 20 years.

Reserve Bank figures show that the average repayment on new mortgages are about 28 per cent of household disposable income, compared with 30 per cent in 1989, when mortgage rates peaked at 17 per cent.