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Housing (un)affordability

Michael Knox

Politicians have told us that Australian dwellings are becoming increasingly unaffordable. The question is, is everything politicians tell us in fact true?

We thought we would look at housing industry data on the price of dwellings in five Australian cities (Sydney, Melbourne, Brisbane, Perth and Adelaide). We decided that our measure of affordability should be the median dwelling price divided by average annual earnings.

In the chart below, we see the ratio of the price of dwellings in Sydney, Melbourne, Brisbane, Perth and Adelaide divided by the average annual earnings in each state:

Chart showing the ratio of median dwelling price versus average annual earnings for the five mainland states of Australia

What has happened this decade in Brisbane, Perth and Adelaide?

Let us take as a benchmark the last quarter of the last decade:

  • Brisbane – dwellings have moved from 6.1 times average annual earnings (in the last quarter of 2009) to 5.9 times average annual earnings (in the last quarter of 2016).
  • Perth – dwellings have moved from 6.2 times average annual earnings in 2009 to 4.9 times average annual earnings in 2016.
  • Adelaide – dwellings have moved from 5.9 times average annual earnings in 2009 to 5.4 times average annual earnings in 2016.

In Brisbane, Perth and Adelaide the price of dwellings has declined this decade relative to annual earnings. There is no affordability crisis here. What we think is happening though is a substitution effect. The big production of housing units has meant that more people are moving from houses to apartments over the course of this decade. This is keeping average dwelling prices lower relative to the level of earnings.

Nevertheless, we say there is no worsening in affordability.

Sydney

The (un)affordability of Sydney dwellings is legendary, so let us see what the data tells us. Again, we are looking at the ratio of average dwelling prices divided by average annual earnings. 

Sydney dwellings were 7.1 times average annual earnings in the December quarter of 2009. In the December quarter of 2016, Sydney dwellings were 9.4 times average annual earnings. Sydney affordability (or lack of it) is living up to its legend.

Why is the price rise so dramatic in Sydney?

Philip Lowe, Governor of the Reserve Bank of Australia, speaking in Melbourne in March, said that he thought the problem was a lack of supply. Under-investment in transport infrastructure in Sydney had generated a shortage of land for development. The best cure for this was investment in transport infrastructure which would make Sydney land available. We have separately described in our Budget piece a number of Federal government programs which have the objective of increasing investment in transport infrastructure with emphasis in the Sydney area.

Melbourne

Melbourne dwellings have become more unaffordable over the period. We note that investment in transport infrastructure in the Melbourne area has been greater than the level of transport infrastructure investment in the Sydney area. This would appear to have made more land available for development in the Melbourne area, and has served to improve affordability in Melbourne relative to Sydney.

Conclusion

Housing affordability in Brisbane, Perth and Adelaide is stable this decade. Affordability has worsened moderately in Melbourne. Affordability has worsened remarkably in Sydney. Housing (un)affordability appears to be a Sydney event rather than a national event.

Up until 2013, affordability in Sydney had actually improved. Since that time there has been a sharp increase in dwelling prices relative to average annual earnings. We understand that under-investment in transport infrastructure in the Sydney area has contributed to this unaffordability.

Melbourne has seen greater investment in transport infrastructure than Sydney, and this has served to improve affordability in Melbourne relative to Sydney.

The Federal budget contained a number of programs aimed at improving investment in transport infrastructure in the Sydney region. These programs, if implemented, should increase supply which should in turn improve housing affordability in the Sydney region.

More information

View more analysis from Michael Knox by clicking on 'economic strategy' in the popular topics list to the right of this page. Alternatively, contact your Morgans adviser or nearest Morgans branch

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.