Despite recent price drops of between 5 and 30 per cent, Aussie real estate remains amongst the most unaffordable in the world. A comparison of median house prices with median household incomes found that the Sunshine Coast in Queensland was the least affordable area, ahead of the Gold Coast, ranked third, Sydney, in fifth place, and Brisbane at number 28. If you want to buy a house on the Sunshine Coast, and work locally, you’ll need to spend 9.6 times the median wage to purchase a home. Properties around Noosa Heads, one of the Sunshine Coast’s most popular tourist destinations, have plummeted in value over the last 12 months. It may not be too long before other towns along the coast also drop, though I doubt they will drop as severely as they have in overpriced Noosa.
So how did house prices get to be so high?
According to the report by Demographia (click here to view the Demographia International Housing Affordability Survey 2009), severe regulations on land use (such as urban boundaries) pushes prices up.
“Governments with land use authority often point to having a certain “number of years” of supply for housing, failing to recognize that this very limitation tells owners whose land can be developed and whose cannot. The result is to increase the price of land and housing. It is inappropriate to use “years of supply” indicators to evaluate housing markets. Price is the only valid indicator and it should be contrasted with incomes, something that the Median Multiple accomplishes.”
Source: pages 2-3 Demographia International Housing Affordability Survey: 2009
Some Australian councils require builders and developers to cover or at least contribute to the cost of infrastructure, which according to the report also increases the cost of housing.
Given that Australian property is still incredibly unaffordable, is the bubble about to burst, sending property prices crashing to the ground? The editors at Aussie newspapers think so, with headlines like “Australian housing bubble ‘yet to burst’“. All of that could be pumped up media sensationalism … except that the people from Demographia tend to agree:
“It seems likely that, sooner or later, the inherent instability and unsustainability that characterizes bubbles will lead to house price declines in Australia. However, were it possible for Australia to retain its highly over-valued house prices, there would still be a significant cost. Future generations would pay far more for housing than in the past, and Australia’s relative standard of living would decline.”
If Australian prices don’t fall by, say, a further 20 per cent, then we might feel like we are better off now, but we may be paying for it later. One way or another it’s going to bite.
I’m interested to know what you think, so feel free to leave a comment below.
I”ve been telling anyone who would listen for the past 3 years that real estate prices were totally unsustainable.
Seriously, anybody with grade 4 maths can quickly work out that if wages go up by 5% and house prices do the same, then the increased price quickly outstrips any wage increase. Agents would point to the fact that house prices have doubled time after time over a century with no majot hiccups.
Well just because a pattern has been demonstrable for a 100 years is no recommendation that it’s forever repeatable. You can use a climate analogy. Right now you would think that the earths climate is stable and constant when in reality the climate we have now is a total anomaly ( unless viewed over great periods of time ) The temperate zone we’re in is unusual and ice ages are in fact far more normal.
Back to real estate. It took a while for the dominoes to start falling because over the past 15 years more and more families worked two wages. That kept them in the game a good while. Then one partner possibly took a second job and that may have kept some going longer still.
On top of that, increasing prices and greater equity let people refinance their troubles away temporarily.
Then prices stopped rising, the banks got nervous, owners got nervous, buyers got cautious and selective. Pretty soon the whole thing starts to implode.
The only real surprise to me, has been how long it has taken to unravel.
A large percentage of people have been living well beyond their means for decades. The banks locking down on finance has just amplified the whole thing as has the loss of share values.
The reason for things hobbling along as they are now, is solely due to the homebuyers grant. When that is withdrawn, look out. And is it even sustainable given that the Government will have fewer property transactions to play with as well as lower business tax receipts?.
Summary? – I think there will be a few years of sensational buying opportunities ahead…