So, just how unaffordable are Australian homes?  - Ironfish

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So, just how unaffordable are Australian homes? 

Feeling priced out of the market? There’s still hope…

Since Bernard Salt’s now infamous ‘smashed avocado’ comment went viral in 2016, housing affordability has garnered much debate and publicity, with governments at all levels facing increased pressure to address the issue through their policy-making decisions.

And while there’s evidence that the market – in Sydney at least – has been losing steam since 2016, all the five major Australian capital cities have continued to feature in the lists of the ‘least affordable’ cities in the world.

Urban planners, Demographia, recently published their annual housing affordability report; in which  Sydney retained its ranking as the second-least affordable city in the world. Melbourne was ranked fifth, while Adelaide, Brisbane and Perth also showed up within the top 21 ‘least affordable’ housing markets in the world.

Ranking City Price to
income ratio
1 Hong Kong 19.4
2 Sydney 12.9
3 Vancouver, Canada 12.6
4 San Jose, USA 10.3
5 Melbourne 9.9
6 Los Angeles, USA 9.4
7 Honolulu, USA 9.2
8 San Francisco, USA 9.1
9 Auckland, NZ 8.8
10 London, UK 8.5
16 Adelaide 6.6
18 Brisbane 6.3
21 Perth 5.9

Source: Demographia’s list of severely unaffordable major housing markets, 2017

However experts often disagree on exactly how unaffordable the market has become. For example, Corelogic points out that Demographia’s data is based on house prices only and doesn’t include apartments – which can skew the result.

Independent property analyst Michael Matusik suggests that housing affordability is entirely relative – and this is especially the case when it comes to investment property.

“There are reasons why a regional town’s dwelling values are less than those of a capital city and why a smaller capital’s property prices are lower than Sydney’s or Melbourne’s. 
 
“Leaving aside the somewhat insulated drivers behind Sydney and Melbourne’s price spiral in recent years, the great leveller is local household income. 
 
“Yes, it is cheaper to buy a dwelling in Brisbane than it is in Sydney, but to many locals, buying or renting in Brisbane isn’t affordable at all,” Matusik says.

 

Affordability benchmarks

According to Matusik’s benchmark, affordability is ranked into five grades starting from ‘very affordable’ down to ‘very unaffordable.’ Buying affordability is expressed as a price to income ratio. Rental affordability is expressed as the percentage of income which goes towards rent.

Interestingly, for both benchmarks, Matusik uses family income for detached houses – as these are the most common demographic that occupy a standalone house –  and household income when ranking apartments/attached dwellings as household income takes into consideration shared households, such as students or young professionals who choose to live together.

 

 

 

 

Detached houses

BUY RENT
Price to family income ratio % of family income put towards rent
Attached dwellings Price to household income ratio  % of household income put towards rent

 

Matusik buying affordability benchmarks:

Dwelling price to income ratio

1 Very affordable Under 3 times the price to income ratio
2 Affordable Between 3 and 5 times
3 Slightly unaffordable Between 5 and 6 times
4 Quite unaffordable Between 6 and 8 times
5 Very unaffordable Over 8 times

Based on these benchmarks here are the results for Australia’s three largest capital cities:

Buying affordability results:

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Matusik Renting affordability benchmarks: 

% of income paid towards rent

1 Very affordable under 20%
2 Affordable between 20% and 30
3 Slightly unaffordable between 30% and 35%
4 Quite unaffordable between 35% and 40%
5 Very unaffordable  over 40%

Based on these benchmarks here are the results for Australia’s three largest capital cities:

Renting affordability results:
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The long road to improving affordability

In mid-2017, a report released by the Australian Economic Development Commission stated that Australia’s affordability problems would continue for at least 40 years – adding much fuel to the fire in the housing affordability debate.

The report points out that the continuous rise in the population of Australian cities, the lag in the pace of housing construction, as well as the disparity in income and housing price ratios have led to the fact that the traditional Australian dream of owning a detached house is no longer possible for many people. And in future, more and more Australians will not be able to pay off their home loans completely when they retire.

To address the issue, some people are turning to investment to get their foot in the door to home ownership. These ‘rent-vestors’ typically buy a property in an area which they can afford (but don’t necessarily want to live in) – sometimes looking to other cities – and then renting in their preferred suburb. Rent-vesting is becoming increasingly popular – it’s a strategy employed by some Ironfish staff also, including Ironfish National Housing Manager, Josh Ure.

‘Rent-vestor’ Ironfish National Housing Manager, Josh Ure

“Many Australians, especially young people are so afraid of the media hype that they give up before they’ve even started. I’m a rent-vestor – I would have loved to buy a home in Sydney, but I couldn’t afford to buy in my preferred suburb – but I can afford to rent there.

“I also want to take advantage of the market cycle and try to buy at the bottom of the market. I bought in Queensland because Sydney was unaffordable for me and I believe the cycle timing is right in Brisbane, and I’ll be looking at Perth for my next purchase.

“It all comes back to the Portfolio Approach. A lot of Ironfish staff own property in 3 or 4 states and there’s a reason for that – and it’s not because they like Sydney or Melbourne. They buy good properties, at the right time of the state’s property cycle – and that’s where a company like Ironfish can help.”

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