Housing Affordability

RBA comments

He added: "In dollar terms, Sydney is still way, way more expensive than anywhere else in Australia, and I think it's so expensive that, particularly for a lot of young people, it's in their interests to go elsewhere, where the lifestyle is more affordable."

Mr Macfarlane said it was "too expensive to live in NSW" and presented evidence showing that house prices in Sydney were almost double the average for the rest of Australia at the peak of the property boom in 2002. Even though the gap had narrowed recently, Sydney prices were still two-thirds higher than the average house price for other capitals.

He added: "Sydney house prices are somewhere between 50 and 60 per cent more expensive than Melbourne house prices."

The Reserve Bank this week published figures showing average Sydney home prices were almost 10 times average annual earnings in the state, compared with seven times in Melbourne and a little over six times in Brisbane and Canberra.

Anyone have any historical data on housing affordability across the country????
These figures are care of ABS , care of this post by foundation on property.com


The bottom line indicates why some people think Sydney has a way to go before it becomes reasonably priced. I think it's safe to say it only reached the level it has because of the current low interest rates and the fact that Sydney is still the best place to live in the World ( because it goes with out saying that Australia is the best country to live in ;) ).

Year Sydney Melbourne AveWage
1974 31,800 25,500 6916
1975 34,300 28,700 8070
1976 36,800 32,900 9120
1977 39,200 37,000 10378
1978 43,200 37,600 11364
1979 50,700 38,000 12296
1980 68,850 39,500 13550
1981 78,900 44,000 14824
1982 79,425 46,750 16366
1983 81,425 52,500 18248
1984 85,900 65,000 19507
1985 88,350 75,200 20346
1986 98,325 82,000 22055
1987 120,025 89,500 24106
1988 141,000 109,000 25866
1989 170,850 132,000 27755
1990 194,000 131,000 29975
1991 182,000 127,000 31564
1992 183,300 125,000 32163
1993 188,000 126,000 32485
1994 192,375 130,000 34216
1995 196,750 129,000 35310
1996 211,125 131,000 36793
1997 233,250 142,000 35812
1998 248,750 155,000 37273
1999 272,500 175,000 38620
2000 287,000 191,000 39993
2001 322,500 225,000 42047
2002 387,500 258,000 44376
2003 454,250 276,000 45841

Sydney Melbourne
4.59 3.68
4.25 3.55
4.03 3.60
3.77 3.56
3.80 3.30
4.12 3.09
5.08 2.91
5.32 2.96
4.85 2.85
4.46 2.87
4.40 3.33
4.34 3.69
4.45 3.71
4.97 3.71
5.45 4.21
6.15 4.75
6.47 4.37
5.76 4.02
5.69 3.88
5.78 3.87
5.62 3.79
5.57 3.65
5.73 3.56
6.51 3.96
6.67 4.15
7.05 4.53
7.17 4.77
7.66 5.35
8.73 5.81
9.90 6.02

See Change
Great information See Change thanks!

Based on affordability sydney is looking overpriced. Is this information available for brisbane and perth?
Based on historical affordability

Melbourne is looking pretty overpriced as of 2003, too - historical average between 3 and 4x average earnings, now 6 times - nearly double. Anyone have an update for these figures for the last two years? If Sydney's fallen 10%, then I guess we're around about 9x earnings.

Funnily enough, it doesn't look like affordability improved that much in the last downturn in Sydney, certainly not back to the historical average, anyway...
These graphics clarify the alarming magnitude of the Sydney boom since 1998.


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This graph more fairly illustrates the relative rate of increase in house prices and wages. It is standardized to 1 in 1974.

In interpreting this data, I think there may be many hidden influences confounding median wage growth. Such things as more female participation in the workforce, whether part time or full time, will tend to lower the median wage due to women being paid less on average. Further, more males are working casually or part time now then 20 years ago. However, the ABS includes part timers as fully employed if the person is not looking for further work.


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thefirstbruce said:
In interpreting this data, I think there may be many hidden influences confounding median wage growth. Such things as more female participation in the workforce, whether part time or full time, will tend to lower the median wage due to women being paid less on average.

Yes, but the relevance of 'median wages' is limited, as will be explained shortly.

Generally households can be considered as a single economic unit, particularly for major shared expenses like housing.

Singles and divorcees excepted, I don't think it's quite fair to draw conclusions by comparing average individual income (AWOTE) and house prices.

Rather, I would use 'median annual household income' instead.

With rising female workforce participation in the 70s, 80s and 90s, average household income grew much faster than average income. Note that this can happen at the same time that average full-time wages are holding steady or dropping!

Therefore, while the ratio between average individual FT earnings and house prices may have increased greatly, the ratio between average household incomes and average house prices has increased, but to a lesser extent. When today's lower interest rates (and thus lower repayments) are factored in, the difference is lesser still.

I subscribe to Parkinson's Law in that expenditure (and house prices) rises to meet income (or serviceability). In this context, people will buy the dearest house they can afford. Hence the rapid increase in project house sizes in the last 40 years despite shrinking household sizes.

Along with other things like first homebuyer grants and easier finance, the rise of the dual income family may have had an inflationary effect on home prices. Affordabilty has declined greatly for single income earners and remained about the same (or become only a little harder) for dual income earners, who need that extra job because everyone else has one!

With female participation rates high (and unlikely to rise too much further) and more people remaining single it is extremely unlikely that the household income will continue to grow faster than individual income in the future. I would expect it to grow at about the same rate, with a tendency towards a lesser rate as average household sizes decline.

This means of course that this driver of house price growth (ie household incomes growing more than individual incomes) we've seen in the last 30 or so years will not be anywhere near as powerful in the coming decades. Instead we'll have to look to other trends (eg falling household sizes or competition for land) to get the above-CPI capital growth rates most of us hope for.

Rgds, Peter

Valid point re 'median annual household income'. Do you know if those stats are readily available ?

Another thought is, that if a households income is higher then they potentially can pay a greater percentage of that income on mortgage. ( this is assuming the basic cost of living was static , which isn't necessarily the case ..:) ) Therefore giving a further reason as to why there appears to be an excessive increase in prices relative to wages.

See Change
Tim and SC, yes the graphs are a plot of SC's data. I have tried to find raw data via ABS for Brisbane and other caps, but can't access anything going back more than a few years. If anyone knows how to get it, I am all ears.

Peter, excellent points re median wage and household income. I think the delay of marriage, the divorce rate, and the casualization/mobilization of the workforce, are quite significant factors though. Combined with this, the fertility rate has declined significantly, due very much to economic pressure. Obviously many dual incomers are choosing a path to economic security and/or personal consumption before commiting to parenthood. I think the declining fertility rate will have serious consequences down the road, almost as serious as the ever more hostile environment for entrepreneurs and small business.

As for future trends, I know several 20 somethings who have or are considering buying PPORs in partnership with friends. I think this will be a logical choice for many over the next decade, and may keep prices rising. And I hope the local councils accomodate house design that allows for 3 or more adults to live harmoniosuly on the same lot. i.e.

I have spent a lot of time exploring attached dwellings on the northern fringe of Brisbane. Regulations have been relaxed in the last 6 months to allow a 'granny flat' to increase in size from 40% of area of main dwelling to 60%. This allows for a 2 bedroomed granny flat (new term is 'associated dwelling') on a 600m2 block, with the 3 bedroomed main dwelling. These return just under 7% gross yield and are still considered one home on one title, with one set of rates :). When I can get the gross just over 7%, I shall start rolling.
Further, it would obviously be a fairer analysis to compare median FT income or household income of each city to that city's median house price, considering wages vary significantly between capitals.
Agree with everything written so far re: household earnings and variants between capitals, etc. But these are all demand side factors.

But......there is a supply side to this equation too.

As has been acknowledges in this thread, real estate tends to be bought with borrowed money.

But what is the "price" of that money?

Well of course the price of money is the interest rate at the time "Acme Bank Ltd will lend you a sum of money at X%".

But more than that, the price of money is the real interest rate - that is, the nominal interest rate less CPI.

Yes, as people earn more (or less) they can afford to borrow more (or less) money. But even without changes to income, changes in the real interest rate (the cost of money) will affect the capacity of individuals to borrow.

And if people can borrow, you can bet that they will (and the cycle moves up).

And if people cannot borrow, well....

And if people cannot borrow, well....

Pitt St,
just a simple question,when you way up the downsides
if consumers spend less,will this send more business
to the wall,or the banks share price falls as the demand
for new loans drops, imho,some of the banks are overvalued
but that will change.
good luck

Obviously interest rates are an important factor in determining affordability , but one aspect I know little about is the actually supply of money. I know this has been a factor in some previous property downturns.

What factors control money supply, and do you have any thoughts on how this might impact the current property market.

See Change
Pitt St, I acknowledge the supply side of things. And I have been intending to grasp the mechanics of Aust. mortgage origination more deeply.

My vague understanding is that overseas wholesale lenders consider Australia a great country to lend to at the moment- our nominal rate is higher than the US (? and Europe) which means higher margins for the wholesalers, stable politically, terrorist threat less likely, strong medium term economic growth based on resource sales to China, high employment, the Reserve Bank and Coalition are respected for their economic management.

For as long as we are held in this regard, I should imagine money will be cheap. Unless the RBA have something to say. And from Bernie Fraser's many comments in the last 12 months re overpriced housing, I think Canberra must be throwing around ideas how to cool investors and help first home buyers.
Further to my original post, above, using data available from the RBA and combining it with existing CPI data (refer to numerous other posts), I constructed the attached graph.

It is a 12 month (financial year) average of the interest rate of a standard variable mortgage, and the CPI rate that year (back to 1959/60).

The nominal interest rate (RBA figures) less the CPI rate gives us the real interest rate for housing lenders in any given FY.

You'll note that inflation jumped massively in the mid-1970's (following the first OPEC oil price shock in 1973) and that, combined with the then regulated financial syste, actually led to negative real interest rates throughout much of the 1970's.

In the 1980's real interest rates rose consistently, perhaps fuelled by the need to compete on the international financial stage (the financial sector was deregulated in 1983).

With the 1990-91 recession, the fall in interest rates and inflationary pressures, real interest rates fell throughout the 1990's, reaching their lowest point in 2000/01 owing to the inflationary effects of the introduction of the GST.

Since 2001, inflation has more or less continued to fall, while interest rates have steadily increased, and consequently we have higher real interest rates.



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Mark, plotting both CPI and median wage rate increase would be interesting and pertinent to demand and supply side.

SC, I emailed 'Foundation' at propertyinvesting.com re getting median house figures for other capital cities. He graciously provided a link to a free source if anyone is interested. I'll plot a graph eventually, unless someone else wants to.

(page 3)

P.S. I should mention the figures in this report are indices using 1990 as 100. 'Foundation' suggested lookin up the median house price for one of the years and converting indices to prices.
Pitt St said:
In the 1980's real interest rates rose consistently, perhaps fuelled by the higher real wages of the era (under the Accord) and the need to compete on the international financial stage (the financial sector was deregulated in 1983).

Though didn't real unit labour costs fall under the first 6 years of the Accord (as shown here: http://www.acirrt.com/pubs/WP65.pdf ) ?

The strong employment growth of the time (ie more people in jobs and higher household income) and the tail end of the baby boomers buying or upgrading would all have increased buyer activity.

The lifting of the regulated 13.5% cap in interest rates would have been significant, so that money was more freely available but more expensive.

Rgds, Peter