MUCH of the current debate around affordability could leave investors with the impression that it is a nationwide problem.
This couldn’t be further from the truth as PPA’s Affordability Index (AI) clearly indicates. Calculated using the median price, median income, an LVR of 80%, and the current interest rate, the index uses data collected between 2000-2016.
History tells us an AI of 20% to 30% is the sweet-spot for those looking to invest as prices will invariably rise while an AI of around 40% is indicative that properties have become unaffordable and best for investors to remain clear of.
As you can tell from the table above affordability concerns are very much a ‘tale of two cities’, notably Melbourne and Sydney which currently have an AI of 44% and 59% respectively. Some cities are also seeing their affordability improve. Perth for example is experiencing and will continue to see prices decline after a strong 10-year growth period,
The other capital cities are still very affordable based on their long term affordability index measure. In fact, they are the most affordable they have been since the very early 2000s.
With current high levels of angst around affordability, it is absolutely essential that investors understand the fundamentals that drive the Australian residential property market and don’t over-react unnecessarily.
The concept that the Australian residential property market moves in cycles is well known. Prices rise, fall, stabilise and then rise once more. Eventually, affordability constraints will lead to prices peaking, before undergoing a correction to bring them back from their peaks.
It just happens that Melbourne and Sydney are peaking or very close to peaking and this is where the mainstream media attention is focused.
Over the past few years Sydney has been ‘making up’ for the protracted period of price stagnation between 2004-2012 when the median house price increased by a little as 23 per cent in eight years.
Since 2012 it has sky-rocketed by over 60 per cent.
While apparently boom-like conditions, the market is in fact making up for lost time. This has been compounded by a chronic undersupply of housing supply over this period, strong population growth and falling interest rate environment.
I am confident that once prices peak in Melbourne and Sydney, they will drop or stagnate and we will begin seeing some significant wage growth.
When this occurs, there will be much less discussion around lack of affordability.