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With low wage growth and relatively high dwelling values, how far can prices continue to grow?

According to a report compiled by Aussie with figures provided by CoreLogic, the Australian residential property market has grown by a massive 412% over the last 25 years; representing an annual average of 6.8% [1].

If we take a look at the individual capital cities, the rate of growth observed in both Sydney and Melbourne have far outpaced the rest of the country. This leads to a substantial deterioration in the affordability measure for these 2 cities to some of the worst levels seen since 2008.

With dwelling values rising faster than incomes, the deterioration in affordability has given rise to higher debt to income ratios across all national markets.

Between 2001 and 2018, the national debt to income ratio increased from 4.3% to 6.7%. Over the same period, the percentage of household income required for a 20% deposit also increased from 85.9% to 134%.

According to Aussie, if national prices continued to grow at the same rate over the next 25 years, this would see median dwelling values rise by $2.9 million by the year 2043.

The report states:

"If the historic averages play out over the next 25 years, Sydney values would be breaking the $6.3 million mark and Melbourne would be over $5.8 million."

This rate of growth does not factor in the impact of future economic and demographic changes that may arise in the future. At the same time, price growth has shown to be cyclical.

Australia’s affordability on a global scale

When comparing Australia’s housing affordability with the rest of the world, it's important to note that house prices vary dramatically between capital cities.

For instance, the median house price in Brisbane is approximately $577k, whereas in Sydney the median is $1.14 million, almost twice as high [2].

One thing that needs to be taken into account when comparing affordability worldwide is the price to income ratio.

Demographia’s survey on global house prices (2017) suggests that houses that are up to three times the median income are deemed affordable; five times the median income is severely unaffordable [3].

According to the study:

“There are 26 severely unaffordable major housing markets in 2017. Again, Hong Kong is the least affordable, with a median multiple of 19.4% up from 18.1% last year. Sydney is again second, at 12.9%. Vancouver is third least affordable, at 12.6%, followed by San Jose, with a median multiple of 10.3% and Melbourne, with a median multiple of 9.9%. The least affordable 10 also includes Los Angeles (9.4%), Honolulu (9.2%), San Francisco (9.1%), Auckland (8.8%) and London (8.5%)."

Compared with 2018 figures reported by Aussie, Sydney’s dwelling to income ratio has improved slightly since 2017 and is now at 9.3 times the median income, and although this makes it particularly tough to get into the property market for first home buyers, there is a silver lining for Australian home buyers.

Finance and the availability of credit

Sydney may be unaffordable under that banner, however, to compare house prices here with overseas, we must consider the interest rates on loans, which can vary by large amounts.

For example, in Australia, an average home loan rate is currently around 2.7-3%, and a little higher for investors. Australia’s low, stable RBA interest rate is helping mortgages become more affordable.

Many Australians forget that in 2010, the average mortgage interest rate in Australia was around 7.5%08%. On a $600,000 mortgage, the interest repayment alone was around $45,000 per year or $865 per week.

Current rates put the average mortgage interest repayment on a $900,000 property at $36,000, or $692 per week.

So how does this compare globally?

Canada, UK, and Japan all have substantially lower interest rates than Australia however, there are other factors to consider [4].

If we consider Japan as an example, a house of around $590,000 would cost you a measly $6,500 in interest each year, with the borrower benefitting from locking in a 35-year fixed-rate loan of just 1.09%. The overall cost of living in Japan is also cheaper – however, their homes are tiny by Australian standards.

Meanwhile, just across the Tasman Sea in New Zealand, Auckland’s median house price in 2018 was measured at $862,000 (AU$ 813,547), whilst mortgages are quite a bit higher, at 5-6%.

Much like its international counterparts, the increasing desire to be located close to CBD’s in major cities coupled with land zoning restrictions have proven to be a catalyst for a shift in demographics. 

With constantly rising dwellings values, there has been a strong movement towards higher density living and smaller lot sizes- being a cheaper alternative to houses. This is particularly prevalent in world cities with populations in exceeding 5 million.

This view is also supported by the study conducted by Aussie:

“Due to changes in land zoning regulations and worsening housing affordability, there has been a consistent trend towards smaller blocks of land. 25 years ago the typical vacant land area was approximately 820sqm nationally and block sizes have trended smaller over the years to record a current median land area of 610sqm. The recent upswing in the median land area nationally is mostly attributable to vacant land sales across the Sydney housing market where new land subdivisions located in the outskirts of the city fringe have pushed the median lot size higher.”

What can be made of this?

Though Australian property prices may have reached unsustainable highs in some suburbs, it is important to remember that mortgage interest rates have never been this low.

Whilst diving into the property market in the current climate may appear fraught with risk, the reality is, you will pay less in weekly repayments for this home than you would have paid 10 years ago, on a mortgage worth $500,000.

Compared to overseas examples, overall Australians are getting more “bang for their buck” when it comes to getting a dwelling of substantial size and in a favourable location.

For those considering their options, it' strongly recommended that you seek the advice of an appropriately qualified professional to develop a strategy that is suitable for you.

Bradley Wearne - General Manager & Head of Research at Meridian Australia

P: (02) 9939 3249


[1] Aussie -

[4] HSBC, CEIC data


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