Australia | Oct 10 2007
By Chris Shaw
In both 2003 and 2006 the Sydney and Perth residential property markets suffered what Westpac economist Matthew Hassan classed as affordability crunches, meaning the markets reached a point where the number of potential buyers who are effectively priced out of the market increases enough to impact on demand.
Hassan’s concern is that markets in Melbourne, Brisbane and Adelaide are heading towards similar affordability crunches with prices up an average of 15% since January.
On his estimates each of these markets has now experienced a greater worsening of affordability levels than did the Sydney market at its peak, the major offsetting factor to any crunch being the likelihood the current shortage in available housing will limit the impact of reduced affordability.
The bank’s model to determine housing affordability has shown to be useful in determining the point at which deteriorating affordability impact on the number of buyers, this point being when affordability is 15-20% below the average level of affordability going back to 1990.
The Brisbane, Melbourne and Adelaide markets are now within this range, Brisbane down the most at 18.7%, Melbourne at 16.7% and Adelaide at 15.1%. The situation is made more difficult though by other factors also coming into play and here Hassan notes the conditions are quite different across the three markets.
Brisbane for example is enjoying strong demand and a significant supply shortfall, enough to lead Hassan to suggest the market may actually enjoy further gains rather than an affordability crunch.
Melbourne is a far more balanced market in comparison while Adelaide appears the most exposed, as both economic and population growth is weaker here than in the other two markets.
On balance Hassan suggests all three markets appear at less risk of a crunch than were Sydney and Perth, particularly as prices would still need to rise by 15-20% in these markets to bring them to the same affordability (or lack thereof) level as in Sydney.
Assuming a crunch doesn’t occur Hassan does expects the reduced affordability will at least slow the rate of increase in house prices in these markets, meaning 10% annual gains are now less likely to be an every year occurrence.
Indeed, in terms of affordability limits Hassan suggests housing price growth of more than 5% annually may be difficult to maintain in coming years, which would make for a most unusual upswing in the housing cycle.