Affordability in the driver’s seat

Those of you who have been reading my newsletters and/or attended my recent Seminar will know that for some time I have been predicting that house price growth will be limited by affordability. This will be particularly noticeable in our two major capital cities (Sydney and Melbourne) and will also occur to a more limited extent in the other high cost cities. As a consequence, my recommendations have been directed to buying second hand units in these two cities in areas which are close to transport nodes.

You will also be aware that I have predicted that unit values in Melbourne would exceed Sydney values shortly.

The predictions are moving to fulfilment as is clear from the table and graph below which presents the market’s performance to the end of July.


The results provided above are not subject to any future revision. Residex has developed technology which allows it to release statistics on the performance of the markets with proven high levels of accuracy with lower levels of data than is required for hedonic and stratified median results. This means Residex is able to release accurate results earlier than any other party in the market. The Residex method is unique and while it is based on a repeat sales technology it is not the usual method and therefore avoids the inherent problems in generally accepted hedonic, repeat sales and stratified median methods.

Across Australia the total unit market growth rates have exceeded the growth rate for houses. This has now been occurring for the last two years. The unit growth rate was 3.46% from July 2008 to July 2009, while for the same period, housing growth was 1.87%. For the current year units grew by 10.89%, while houses grew by 9.55%. Looking at the specific capital cities the result are not as clear cut.

Sydney is Australia’s least affordable city and has been this way for a decade or so. It is therefore natural, that if my view is correct, we should be able to see a trend developing that shows units outperforming houses with respect to capital growth. In Graph 1, I have presented a comparison between houses and units since January 2004. At this time period, I have set the value of median house and median unit to one dollar. From this dollar, I have applied the median growth rate that has been attained by each (houses or units) to end of the July 2010.

Graph 1 – Rolling 6 Month Growth – Sydney


Units are outperforming houses, and in Sydney, have been doing so for quite a long time. I can hear some saying, “This would be expected as there are so many new units which are expensive, and it is these new units which are distorting the growth figures”. This is not the case as Residex’s method of growth determination takes this into account and does not get caught in this bind.

There are a couple of interesting things in this graph. It shows us that affordability is driving the growth rates. You will notice how housing values dipped when the RBA increased interest rates and made housing which was already unaffordable even more unaffordable. (November 2003 to December 2007).

Units which were affordable or much less un-affordable did not react the same way during this period. Once rates got to a level that caused hardship, even the unit market started to react. It is also clear to me that people want to live in houses; however, affordability drives them into units. I make this simple statement because once both markets are as equally affordable to get into, both present growth patterns that reflect house markets outperforming unit markets. Note that affordability is again creating difficulties since the interest rate increases from October 2009, and the unit market is once again, starting to outperform the housing market.

In a situation where interest rates are basically now at the long term average, I can safely assume that the current level of affordability is likely to stay. Thus, my hypothesis is likely to be reality.

Between Melbourne and Sydney, with respect to units, I notice that the difference between the two at the end of July is $17,500. However, I predict that Melbourne’s rate of growth is likely to be a less than Sydney’s in the next few months. So perhaps Sydney is safe for a longer period than I expected.

This brings me to my last point.

I am convinced that Sydney is the next port of call for quality growth over the next few months, and my reasons are as follows:

  • If Labor is removed from office in NSW, this will result in a much improved view of the State’s prospects which will stimulate growth;
  • The economic position of NSW is improving;
  • The housing numbers indicate to me that Sydney is at the start of a new period of growth.

Housing growth cycles usually start with higher cost areas moving into growth. This is natural, given that people who will be in this segment of the market will be company owners and corporate executives. They are the first bracket of people to benefit from economic improvements or circumstances that give them sufficient confidence to turn their inherent demand into buying action.

Graph 2 – The Growth of Different Price Brackets – Sydney Houses


Looking at the performance of the very high cost areas and comparing these to the typical and low cost areas, we can very often see what the market is doing, or is about to do. Graph 2 presents an analysis on this basis.

The houses in the over $2.9 million band were not affected by the Federal Government’s grant stimulus package. This segments pattern is normal, while growth in the other price bands, was, in effect, brought about by Government actions.

If we disregard the lower cost segments and focus on the period from about July 2009 we can see the high cost area is moving forward and outpacing the other sectors. This is a normal formation/trend for the start of a new period of growth. We also normally see a secondary higher growth number following the first growth period.

The graph, data and my experience leads me to the view that in the next 12 months, we will see growth in the Sydney housing market which will be similar to or a little less than the previous 12 months. This growth due to affordability issues will not be as high as we have seen in some other house price growth periods. This suggests that by this time next year, the typical Sydney house will have a value in the order of $750,000.

John Edwards is a director of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and individuals. Go to


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John Edwards


John is Consulting Analyst for Onthehouse, Australia’s most comprehensive real estate portal, and Founder of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and the general public. Visit

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