The Housing Market

Yes, it is true: housing is expensive in Australia. Measured as a multiple of average wages, Sydney housing is nearly one-and-a-half times that of London, and over twice that of New York. All of Australia’s eight capital cities are dearer than Boston, Washington, Chicago and Tokyo. Shortly, we will look at whether we are facing a serious shake-out in prices, and if affordability is on a knife edge or not.

But first, some top-down statistics, as shown in the exhibit below.

We are expected to have over 10 million dwellings valued at over $6.5 trillion in F2017 – almost four times the nation’s annual GDP – with almost three times as many houses as we have flats and apartments. The average dwelling price totals just over four times the average household income, and is estimated to have a value of $636,000 in June this year.

Our population density equates to just over 2.5 people per dwelling: twice that at the beginning of the last century in 1901. Our dwellings are now much bigger – they have almost tripled in size – with dwellings of three bedrooms or more accounting for almost three-quarters of all dwellings.

Australians will have borrowed almost $400 billion this fiscal year on new housing plus alterations and additions to existing dwellings, as the next exhibit shows.

We can afford all this on top of existing debt, as the next two charts below suggest.

Debt servicing is as low as it has been in five decades, due of course to record-low interest rates.

Our Capital Cities

Excluding city-states such as Singapore and Hong Kong, Australia’s population is one of the most urbanised on the planet, as the next exhibit reminds us. Our eight capitals account for two-thirds of our population, yet prices vary enormously between these cities, as the second exhibit below shows so starkly.

Sydney is the odd one out, given its prices are so far ahead of the second priciest, Melbourne. The two charts below suggest the degree to which Sydney and Melbourne prices seem to be well above trend. Both are in ‘bubble territory’ – Sydney alarmingly so.

In December 2016, Sydney house prices were thought to be 27% above trend, while Melbourne house prices were estimated at a more modest 9.5% above trend.

The difference is even more marked when just apartments and flats are compared between the two big cities. Sydney’s apartments are also in ‘bubble territory’, in contrast to Melbourne’s below-trend performance due to oversupply (especially in the city’s CBD).

As observed in the above charts, Sydney was undersupplied for nearly a decade leading up to 2013; and its apartment prices in December 2016 were thought to be 18% above trend. In contrast, Melbourne went into overdrive during this period, resulting in a buyers’ market with apartment prices below trend by some 5%.

Indications are that price growth is now abating as we head into 2017; and some capital cities are seeing falling prices. So, what does this mean?

Firstly, Australia’s economy is not threatened by its world-leading dwelling prices: they are affordable according to the earlier debt servicing exhibit, where the ratio is the lowest in some five decades. The below chart reinforces the fact that we have lived with an affordability ratio in the high range (three-and-a-half to four times the value of household incomes) for a decade and a half, without dire things happening.

Yes, Australia’s household debt (mainly mortgage debt) as a share of GDP is one of the highest in the world; but it is manageable. And our corporate debt and government debt as a share of GDP are among the lowest, if not actually the lowest, in the world. Overall, we are not living too far above our means compared with most other developed nations.

Sydney is the stand-out loner among our capital cities in regards to housing affordability, with Melbourne not that far behind (especially with houses). NSW’s economy is doing well – indeed, it is the best in the nation – but that may not protect it from a dwelling price correction in the year or so ahead, or a longish period of flatlining in prices until incomes catch up to restore equanimity. Melbourne is not doing so well, with a higher unemployment rate; and the housing market is probably more vulnerable.

So, while there is room for concern in our two biggest cities, it is not panic stations for the nation at large. But we do need to increase supply; and we do need to warn homebuyers of the dangers of going too deep into debt when interest rates are rising.

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