Australia | Aug 03 2011
– Australian house prices are among the most unaffordable in the world
– the problem is nation-wide and not restricted to cities
– AMP sees little relief in sight
By Greg Peel
The rule of thumb is that house prices cross over into “unaffordable” territory when the median house price exceeds five times the median income. This suggests that unless you are earning $100,000 per year after tax then a house worth more than $500,000 in Sydney, for example, is unaffordable to you. I would wager, nevertheless, that there are plenty of people in Sydney on incomes of less than $100k with mortgages a lot bigger than $500k at present, which is why there were warnings from some economist circles prior to the GFC that Australia's debt-to-income ratio was dangerously overblown. It would all end in tears, they said.
It has ended in tears for many, but not for any vast majority of Australian mortgage-holders. The GFC saw Australian house prices dip around 10% net and then recover to new highs, before more recently plateauing. This is in stark comparison to the US, where the average house price has fallen by a third, and to other Western countries such as Ireland, Spain and to a lesser extent the UK. All along the issue in Australia has been one of lack of housing supply, countered by immigration rates, that have led most economists to assume Australian prices simply cannot fall. Never mind that Australia's household debt-to-GDP ratio exceeded that of the US before the GFC.
Australia's household debt blow-out nevertheless goes a long way to explaining why consumer spending has done nothing but trend down since the GFC, and savings trend up. This is not something that can be achieved overnight, and only now, some three years later, does the RBA suggest levels of debt, income, and savings are reaching what used to be historical norms.
In the meantime, there seems little end in sight to Australia's housing unaffordability. The economists at the AMP note that the past decade saw the median Australian house price more than double to $417,000 while at the same time the median income rose only 50% to $57,000. As the following graph depicting the ratio of the two shows, the unaffordability spike in the noughties was quite dramatic. And the broken line suggests that a return to affordability could be achieved if house prices now remained flat, but they would have to remain flat for another eight years.
Is that possible?
It was only ten years ago when Australian housing was considered affordable, AMP notes, but on a global scale it is now “severely” unaffordable. Maybe we should blame the Sydney Olympics, along with loose monetary policy and bank lending post 9/11. But it's not just a story about Australia's largest city. AMP notes unaffordability in Australia is “all-pervasive”, impacting on every state and territory, city and town. City-wise, back in 2011 houses in 50% of suburbs Australia's five major cities were considered affordable, but now that number's fallen to 4%.
As the following table from the AMP shows, Australia is very expensive compared to a range of other Western nations.
The result of such high prices is quite simply a barrier to entry to Australia's first home buyers who by definition are mostly young. Boomers and Gen-Xers who bought the family home prior to the twenty-first century are sitting pretty, and in some cases laughing all the way to the bank. It does now mean, suggests the AMP, that The Great Australian Dream is simply that – a dream. Even if the average Australian first home buyer does succeed in living the dream, “high house prices mean taking on very high levels of debt,” says the AMP, “that will constrain their lifestyle for many years into the future”.
It doesn't seem to be deterring everyone nevertheless – there are new entrants to the Australian property market every day. But what are the chances of prices returning to the “affordable” range? On that, the AMP has the last word:
“Significant, widespread house price drops appear unlikely in Australia, meaning that housing will remain unaffordable for many years to come".
Technical limitations
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