Sydney Prices vs Incomes

Time for some navel gazing.

I've often wondered about the price of Sydney property relative to the average income of ~$60k, so decided to do some digging around.

According to this article, the median house price in Sydney is $569,000

I'm going to quote some income figures from the ABS found here.

The average weekly earnings per person nationally was: $1,197.50, multiplied by 52 gives: $62,270

If we assume a two income household, we get $124,540.

If we divide the median house price by this, we get roughly 4.6. So the median price is 4.6 times the gross earnings of a two income household, which seems unsustainable. I think the general rule of thumb is 3 times income.

Further down we see the average weekly earnings for NSW is: $1,210.10, or $62,925.20, not really different from the national average.

Now, an interesting snippet comes from here

In Sydney [2005-06] the mean income per week ($1,559) was 43% higher than in the rest of NSW ($1,092). This compares with 40% higher income in Sydney than the rest of NSW in 2003-04.

Does anyone know where they got the Sydney mean incomes? The rest of this hinges on that.

Lets assume, based on the quote above, that the Sydney mean income is 40% greater than the NSW average.

We get $1,210.10 * 1.4 = $1,694.14, or $88,095.28 p.a. which seems about right to me, based on a professional salary for someone with 5 or so years experience.

Again, assuming a 2 income household, we get $176,190.56 pa. If we divide the median price by that, we get a price to income ratio of 3.2, which seems much more sustainable.

I think this goes a long way to explain why prices in Sydney are so high. Once I considered the two quartiles above the mean (i.e. the 50% of Sydney earners earning greater than the average), the seemingly unsustainably high prices of desirable Sydney areas become a little clearer.

Obviously there are a lot of assumptions here, in particular the 40% Sydney premium to earnings. I would love to find actual numbers, but for a back of the napkin calculation I think it'll do.

Why are prices in Sydney so high? Because people have more money, i've finally figured it out :rolleyes:

Thoughts? Am I missing something?

My $0.028 ;)
 
Why are prices in Sydney so high? Because people have more money, i've finally figured it out :rolleyes:

Thoughts? Am I missing something?

Pete

Prices are not expensive everywhere in Sydney.

Also, compared to other cities where there is land as far as the eye can see
, Sydney has essentially run out of land.

So I wouldn't be surpriced if we follow London and our prices keep going up.....
 
The problem with all these analyses is you are working on averages.

One superstar surgeon is going to earn in one year more than about 20 Target check-out persons.

Apply this to the houses as well. Point Piper mega-mansion versus Blacktown (or some other lower income area).

The stats are massively skewed due to the volumes at each end of the scale as well.

The superstar surgeon/rockstar/sportstar will spend $10 mill on a knock-over in a postcode suburb because he can.

It might only be worth $6 mill, but they don't care; just want to live there.

This skewes the figures, and it only needs to happen a small handful of times to do it, but it's not a reflection of what the masses are doing.

Same with wages; the wages are supposedly going up each year, but it's really only the higher-end income earners that are getting the big pay rises; the average punter is being slit form ear to ear slowly.

If you want to know what's going on, just look at the average house in an average suburb that the average family would buy - because that's most of the population who buy.

Then see what they earn and compare that.
 
What I don't understand about the average income vs. house price relationship (and it's effect on capping growth) is that a large proportion (ca.70%) of the population already owns a house. So if they want to uprade they don't start from scratch, they usually already have equity in their existing house. So the income vs. house price gap is much smaller for the majority of the market. First home buyers (the ones most affected by the current large multiplier) only make a relatively small part of the market. Or am I missing something?

kaf
 
Obviously there are a lot of assumptions here, in particular the 40% Sydney premium to earnings. I would love to find actual numbers, but for a back of the napkin calculation I think it'll do.

Why are prices in Sydney so high?
Prices are 40% higher than mean incomes dictate they should be because their loan is significantly lower & the deposit is significantly higher. Upgraders have a large deposit because their previous PPOR doubled in value in 10 yrs & they paid off principle, so for their next PPOR they only need to borrow around 50%.

Maybe a better metric would be median price/median borrowing ?

Demographia often quotes the Sunshine Coast as severely unaffordable - it has a price/income ratio of > 11. However, it's full of retirees, with no mortgage, so the price/income ratio is irrelevant. The median income/borrowing ratio makes it v. affordable for it's (high deposit) demographic.

OTOH Western Sydney has a high level of FHBs, and it's prices & incomes are much more in proportion. The price/income ratio corresponds well to the price/borrowing ratio and it also makes it affordable to that demographic.
 
You also have to compare median salary to median HOME and not house.

That includes apartments and townhouses as well.

Especially in Sydney where the gap between house and unit prices is huge and a lot of people living in units.
 
Also remember that average or median income does not translate into average/median buyer. People in the bottom 10-20% of incomes are almost certainly not buying.

A better (but impossible to construct metric) would be something like fraction of non-home owners who can afford a 75th, 50th and 25th percentile home based on an 80% lend (use current and long-term interest rates) and do the calculation for singles and couples.

The real question is what fraction of people with decent jobs (or who have no significant pay rise on the 3-5 year horizon, that is they are only going to get CPI increases from now on) are only able to look at the bottom 25% of properties.

Remember there is a heck of a lot of people that earn pretty decent money (over 75K). In any given year less than x% of people will buy a property.
 
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