How to Explain Housing Affordability to the Treasurer

Sydney is now one of the world’s most expensive cities to live in.

Recently, Treasurer Joe Hockey denied a housing affordability problem, arguing that if there was one – people would not still be purchasing houses.

The Treasurer argued that as a starting point to buying a house in Sydney, non-home owners should make an effort to seek high paid employment.

However, the limited data available that tells us who is buying homes is indicating that it is investors buying up property and NOT hopeful homeowners.

The price signals in Sydney’s housing market disguise the fact that most of the population cannot afford to buy houses and units in Sydney based on their income.

Let’s look at why.

First of all, let’s look at what the average house in Sydney is worth.

When I talk about the ‘worth of Sydney houses’, I am referring to the median (middle) value of houses in the greater Sydney metro region.

The ‘greater Sydney metro region’ is from the Eastern Suburbs of Sydney, all the way out to the suburbs just before the Blue Mountains (see Map 1).

Map 1



The reason I use the median value is because it is one of the best measures of central tendency in real estate. Houses can be really unique.

The highest value house could represent a celebrity mansion in Point Piper while the lowest value house could represent an empty car space that someone accidentally left a creepy dolls house on.

These properties can throw off what a typical house is worth.

So, we use the median because it doesn’t take into account crazy outliers – it is just the middle value of houses. data indicates that in the 12 months to April 2015, the median house in Sydney grew in value by 15.09 per cent.

This means that you take the value of the median house in April 2014 ($821,500) and calculate 15.09 per cent of that figure – which is $123,900.

So, the median house in Sydney grew by $123,900 in one year.

You then add this onto the value of houses at April 2014 ($821,500 + $123,900) to get your April 2015 figure – which is $945,000!*

*Figures are rounded.

Is That A Lot of Money?


With that money you could:

  • Buy your weekly groceries for the next 60 years (assuming you buy $300 worth of groceries a week).
  • Pay off a $35,000 HECS-HELP debt, 27 times.
  • Make 135,000 visits to a GP with a co-payment of $7.
  • Get Netflix for 8,750 years.
  • Produce three quarters of one episode of Game of Thrones.

Now think about that house value in terms of your income and savings.

Imagine saving up $82,150 to make a 10 per cent deposit on the median Sydney home in April 2014 (remember that’s $821,500).saving

Think about how long it would take you to do.

Now imagine in one year, that median house grew an extra $123,000.

Your deposit is now approximately $12,300 short.

Never mind how much debt you’d be saddled with even if you did manage to get a mortgage.

It’s not like incomes are going up an extra $123,000 a year.

In fact, ABS data of average weekly earnings tells us that real dollar incomes are virtually unchanged since the 1990’s.

Contextualising This Housing Boom: Why Isn’t Everyone Freaking Out?

One of the reasons Treasurer Joe Hockey and some politicians and journalists are not freaking out is because they think about housing affordability is in reference to the past.

For example:

I stated that in the 12 months to April 2015, house prices in Sydney went up 15.09 per cent.

In terms of percentage value increases, Sydney houses have seen higher growth rates on the median value home.

According to data, the peak of percentage value growth of Sydney houses was from October 1987 to October 1988, when house prices went up 38 per cent.

At the peak of the recent housing boom from 2012 to 2015, the highest annual growth rate was just 20 per cent.

So, this is what the historical growth rate for the median value house in Sydney looks like:

Graph 1

graph 1  OTH

The peak growth rate in the late 1980’s and the peak growth rate in the housing boom from September

2012 to the beginning of this year are circled.

Looking at housing booms in percentage terms like this, it does appear that Gen Y are complaining about something their parents went through, only their parents went through a boom nearly twice as large.

However, looking at percentage growth rates is very misleading.

It masks the fact that we are in the worst housing affordability position in over 30 years.

Let’s unpack why.

Measuring by Percentage Increases is Misleading When Talking Affordability

Our presentation of data can impact the way people read it.

The median house in Sydney did increase in value by 38 per cent in the 12 months to October 1988.

But 38 per cent of what?

Remember how the 15.09 per cent increase for April 2015 was calculated?

We took 15.09 per cent of what houses were worth 12 months prior.

In the exact same calculation, that 38 per cent increase to October 1988, is a 38 per cent of what houses were worth in 1987. In 1987, houses were not worth that much:

The median Sydney house was worth about $121,500 in 1987.

Thirty-eight per cent of that is only $46,170. By October of 1988, the median house value in Sydney was worth about $167,600.

Before you pick up your laptop and throw it victoriously at Joe Hockey’s head, we need to factor in inflation.

The 1987-88 values are not adjusted for inflation.

Since the 1980’s, the purchasing power of money has declined and some things have become more expensive.

This means that the value of Sydney houses ($167,600) was worth a lot more in 1988.

If we adjust these figures for inflation (I used the RBA inflation calculator) the value of Sydney houses in October of 1988 were worth about $357,200 in today’s dollars.

But this is telling too.

This suggests that if house values in Sydney had only gone up by inflation, they should be worth about $350,000.

Instead, they are worth almost three times that much.

In fact, even if you measure the real dollar increase over 1987-88, by adjusting the $46,170 figure for inflation, the real dollar value boom in 1987-88 is still smaller than the one in 2013-14.

The $46,170 increase in 1988 works out to be approximately $98,000 when adjusted for inflation, which is markedly smaller that the peak real dollar value increase of $150,000 between January 2014 and January 2015, when house values rose 20%.

So how else can we think about affordability?

What this Housing Boom Really Looks Like: Introducing the House Price Index

The ‘House Price Index’ (HPI) is a number that represents, at any point in time, how much house prices have increased since our first point of data collection in January 1979.

At April 2015, the HPI for the median house in Sydney was 20.70, which means the median house in Sydney has increased in price by 20.70 times the house value in 1979.

Graph 2 plots the HPI for the last 30 years.

In Graph 2, I have circled the big housing booms througout the last 30 years (1987-88, 2003-04 and 2013-14).

The slope of the HPI represents the rate of growth in this indicator.

It is clear from this data that Sydney houses are currently in their largest, longest housing boom.

Graph 2

house price OTH 2

The State of Income and Unemployment

If the average Sydney-sider had large income growth that kept up with increases in house prices, then perhaps the rate of value increase would not be a huge concern.

Unfortunately, the Australian economy is not doing too well.

This is reflected in Graph 3, which shows the unemployment rate over the last 10 years.

Graph 3


At April 2015, the unemployment rate was 6.2 per cent of the labour force, which is above the 10 year average of 5.1.

Factors such us unfavourable weather, the decline in resource prices, the construction phase of the mining boom ending and the offshoring of manufacturing have culminated to sustain a high level of unemployment.

This 6.2 per cent figure is only the official unemployment rate.

The official unemployment rate does not capture people who are unemployed and have not looked for a job in the last four weeks from being surveyed by the ABS.

The official unemployment rate also does not capture those who are unable to work within one week of being surveyed by the ABS.

Don’t ask me why, they just won’t count you in the labour force.

The official unemployment rate also does not capture underemployment.

To be considered employed by the ABS, you only have to work a minimum of one hour per week.first home buyer dreaming house

These measurements mean that we are likely undermining the real level of unemployment.

In 2004, an economist called Steven Barrett estimated that the official unemployment rate could be underestimating real unemployment by half.

In other words, the real unemployment rate could be closer to 12.4 per cent.

Among youths, this number is even higher.

The official youth unemployment rate at March this year was 13.65 per cent, according to ABS labour force data.

When unemployment is high, wage growth theoretically slows down.

This is because employers have a larger pool of jobless people to choose from when filling positions.

When more people are employed and the labour market is tight, employers need to incentivise workers to stay with higher wages.

As per the theory, wage growth in Australia is at a 10 year low. This is plotted in Graph 4.

Graph 4


One other important note about the nature of employment in 2015: causalisation of the workforce has almost doubled over the last 30 years.

When people were looking for work in the 1980’s, workers were more likely to find employment in a full time position.

According to historical ABS data, approximately 15 per cent of the workforce were part time or casual in the 1980’ employment

In 2015, that number has risen to approximately 30 per cent.

Part time workers are less likely to experience wage growth, as has been demonstrated by a 2015 Federal Reserve study in Chicago.

This is because workers are more likely to bargain for more hours, as opposed to higher wages.

Not only are there now less jobs available to Australia’s workforce, but there are less secure, well-paying jobs available.

High unemployment and low wage growth in the context of a booming housing market mean that those without equity in housing, in other words non-home owners, will find it harder to purchase houses.

Comparatively, it is much easier for someone who already owns a home to re-invest in the housing market.

Not only can they receive benefits in the form of negative gearing tax concessions and a capital gains tax discount when they sell, but home owners have earned hundreds of thousands of dollars of equity in their home.

While non-home owners were working hard, saving, sacrificing and looking for the elusive (yet apparently abundant) high paid job, anyone who happened to own the median house in Sydney in the last 12 months would have earned $123,900 for doing absolutely nothing.

It is no wonder that the share of first home buyers taking out home loans has fallen to a dismally low 7 per cent of purchasers.

Intersectionality and Incentives: I’m not Just Talking about Gen Y

A straw man has been created in characterising non-home owners who cannot afford to buy in Sydney.

This caricature of a non-home owner is a spoilt, white girl or boy in Generation Y who is too busy buying every new gadget they can find to save up for a house.

They also DEMAND to live by the beach and will not accept anything less.

This is because young people derive all their energy from the beach.piggy bank house

The energy it takes to type this opinion piece requires me to sit on the beach as I write.

An aggressive starfish has taken my wireless mouse.

It’s annoying, but as a young person I can’t leave the beach or I will melt.

There is a lot to be said for being a wealthy, white non-home owner in Sydney, who is privileged enough to have the opportunity to live with their parents, even if they choose to rent.

For some, if their parents are not reliant on the family home as an asset for retirement, it is likely they will benefit from the asset later in life as it is passed through the family.

But these spoilt beach babes (yes we are also babes) are a small portion of people who cannot afford to buy in Sydney’s housing market.

Anyone who was not born into a family where there is a homeowner, people who migrate to Sydney for work, homeless people, people without support networks and low to medium income earners are victims of the current housing affordability position.

They are found in all age groups and are among different races.

The median household income in Sydney, before tax and superannuation, is $83,460

I worked this out by taking the median household income for Sydney at the 2011 Census and indexing it by wage growth over the last 3 years.

If we divide the median house value in Sydney ($945,000) by the median household income, it can be seen that the median house in Sydney is worth 11.3 times the median annual household income.

This is not taking into account mortgage repayments with interest, and it does not take into account tax or superannuation which further limits the money available to households.

For a more detailed analysis of average incomes and mortgage repayments, you can read my blog post prices

And what of those who are not on the median income?

Our necessary public servants such as registered nurses (who earn between $55-80,000 per year), teachers (who earn up to approximately $70,000 per year – if they are lucky enough to get full time placements) and police (who start at approximately $65,000 per year) do not earn nearly enough money to afford the median house in Sydney.

However, we would greatly suffer if people left these professions in search of higher paid work.

With such a large amount of savings to gather, rapidly increasing house prices, rising unemployment and historically low wage growth, it is little wonder that people are dis-incentivised to purchase houses.

Many are forced instead to rent and live more ‘for the moment’ than save up years’ of their income for a house they will be paying off for decades to come.

But overall, it leaves many without the security and autonomy that comes with a place to call your own.

I think it is safe to say that yes, Mr. Hockey, we might have a bit of an affordability problem.

Want more of this type of information?

Eliza Owen


Eliza Owen is the Market Analyst for

'How to Explain Housing Affordability to the Treasurer' have 2 comments

  1. June 20, 2015 @ 2:30 am Jeff

    Some important things well worth taking into account when looking at affordability are –
    Most homes aren’t bought by individuals
    Inflation rates are higher than we are lead to believe – 6 – 7% compounding puts things into a more realistic perspective
    First home buyers tend to want to run before they walk – median prices are just that. Start at the bottom and work up. As you mention – being in the market keeps you up with the market
    The most important factor in buying a house is the mortgage – this freezes the price for the life of the mortgage – the sooner this is done, the sooner your income, the value of the house, and everything else in your life inflates making your mortgage much more affordable.
    Everyone does it tough at the start – all of our parents struggled with their entry into property ownership – ask them !
    I recently bought an investment property within a self managed super fund. A one bed apartment with a parking space in Balmain, Sydney. It cost $540,000. A 20% deposit, stamp duty, legal fees etc cost approx $150,000. Mortgage is $432,000. First 5 years interest only then interest and principal over 15 years. At the moment interest is 5.6% ( higher rate than is possible outside a self managed super fund ) and repayments are less than $2100per month. I have it rented for more than this ! IT IS CHEAPER TO OWN IT THAN RENT IT !
    I think what Mr Hockey really meant is if you want to own property you need to get off your ass and make it happen – not sit around wingeing that it is too hard – if looked at in perspective it has always been hard to get started and the sooner it happens the easier it is.


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