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Despite what they say, Australia is as affordable as a decade ago

In his recent commentary on Switzer Commsec chief Economist Craig James explained why he believes despite all the media hype that Australian homes are still affordable. He said:

The Rismark housing affordability measure indicates that home prices stood at 4 times household disposable income in the December quarter – a figure broadly unchanged on a decade ago.

Over the past decade disposable income per household has risen around 70 per cent while the average home price has lifted around 67 per cent.

What do the figures show and what does it all mean?

Gen Y has no reason to blame parents or grandparents – home affordability hasn’t really budged in the past decade. Home prices may be up, but so are disposable incomes.

Now when you are measuring home prices, you want the best information available.

And that is the data from the RP Data/Rismark Home Value index.

And if you want to measure income, there is no better source that the Australian Bureau of Statistics.[sam id=43 codes=’true’]

Put the two together and you should have the most accurate measure of home affordability.

The latest figures for the December quarter reveal that the median price of a home, in data taken from all regions across Australia, was $450,000.

The ABS national accounts estimate of disposable income was $1007.5 billion. The estimate of the number of households across Australia (from the Housing Industry of Australia) was 9,002,348. And the estimate of disposable income per household was $111,919.

Put the data together and Rismark calculates that the median home price was around 4.0 times disposable income in the December quarter.

That result for housing affordability was up from 3.9 times income in the September quarter 2013 and recent low of 3.7 times income in June quarter 2012 – the latter result being equal to the best result in three years and just above the best (most affordable) result in a decade.

Over the past year the median home price rose by 5.9 per cent, outpacing the 1.7 per cent lift in income per household. But interestingly over the past decade, the average income per household has risen by 70.6 per cent, outpacing a 66.7 per cent lift in home prices.

What does it mean? Simply, Australians have got richer over time. And, in fact, over the past decade, incomes have grown slightly faster than home prices. But broadly over the decade little
has changed in terms of home affordability – it has gone sideways.

Certainly homes are less affordable than 20 years ago, but that is not because income growth has been sluggish, but because wealthier Australians, utilising lower interest rates, and benefitting from more affordable basic necessities like food, clothing and transport, have channelled extra dollars into the family home. Homes are bigger and of higher quality than 20 years ago.

The latest data supports the Reserve Bank view that recent increases in home prices are not of undue concern.

But, clearly home buyers and investors must still make rational purchasing decisions.

What do the figures show and what does it all mean

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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