High prices, low supply and rocketing demand means Australia’s housing affordability is now among the worst in the world, according to a new report.
The 2022 Demographia International Housing Affordability report ranks Sydney in second place for being the least-affordable housing market, internationally - only behind Hong Kong - with several other Australian cities also making the top 20 list.
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In fact, five Australian capitals rank among the 20 most unaffordable cities in the world.
And these rankings come as no surprise, given the national median house price surged 25.7 per cent and units by 7.7 per cent in the year to December 2021, with little sign of cooling.
The report uses a cost-versus-income ratio to assess house prices for 92 major markets across Australia, Canada, China, Ireland, New Zealand, Singapore, the UK and US.
The 20 least-affordable cities to buy a house
According to Demographia’s report, the least-affordable cities (listed below with the median multiple of house prices relative to income) are:
Hong Kong, China (23.2)
Sydney, NSW, Australia (15.3)
Vancouver, British Columbia, Canada (13.3)
San Jose, California, US (12.6)
Melbourne, Australia (12.1)
Honolulu, Hawaii, US (12)
San Francisco, California, US (11.8)
Auckland, New Zealand (11.2)
Los Angeles, California, US (10.7)
Toronto, Ontario, Canada (10.5)
San Diego, California, US (10.1)
Miami, Florida, US (8.1)
London, UK (8)
Adelaide, SA, Australia (8)
Seattle, Washington, US (7.5)
Riverside-San Bernadino, California, US (7.4)
Brisbane, QLD, Australia (7.4)
Denver, Colorado, US (7.2)
New York, New York, US (7.1)
Perth, WA, Australia (7.1)
Sydney now second-least affordable
With prices more than 15.3 times its measure of middle-income housing affordability (median house prices divided by gross median household income in Q3 2021), the report finds Sydney has the second-most unaffordable housing market in the world.
The report ranks Sydney second only to Hong Kong, where property prices are 23.2 times the average annual income.
Melbourne also makes the top of the list in fifth place, with property prices 12.1 times the average annual gross median household income.
Elsewhere in the top 20, Adelaide sits in 14th place, Brisbane in 17th and Perth in 20th.
In these Australian cities, median property prices are 8, 7.4 and 7.1 times the city’s average annual household income, respectively.
Surprisingly, New York is in the number 19 spot, equal with Perth, meaning that relative to median household income, houses are now less affordable in many Aussie capitals than they are in The Big Apple, America’s most-populous city.
Why do Australian cities rank so high?
In short, we’ve seen a pandemic-induced housing-affordability slump.
As the report explains, the “demand shock” experienced over the past two years has led to an unprecedented deterioration in housing affordability across the nation, squeezing many people out of the market.
The Reserve Bank has lowered, and held, the cash rate at a record-low 0.10 per cent since November 2020 in an attempt to ward off some of the economic side effects from the extended COVID-19 pandemic.
And it was this - in combination with a sea- and tree-change shift away from our major cities in search for more space and lower prices - that has also driven up property prices in once-affordable cities like Brisbane, as well as many regional areas.
As we know, Australia’s cost of living has also come under scrutiny, something this year’s Federal Budget attempted to address.
The high housing costs now pose a threat to the middle-income standard of living in Australia, and in other cities around the world, as affordable housing becomes further and further out of reach.
“[The cost] of essential parts of the middle-class lifestyle have increased faster than inflation; house prices have been growing three times faster than household median income over the last two decades,” the report’s authors pointed out.
“[Housing has been the] main driver of rising middle-class expenditure in recent decades.”
Interest rates set to rise
Lower mortgage rates have been a significant driver of the increase in property prices seen over the past couple of years.
But the likelihood of a cash rate increase in the near to medium term has increased significantly.
Since the onset of the pandemic, the RBA has provided significant economic stimulus and support, and repeatedly stated it didn’t expect conditions for a rate increase to be met until 2024.
And the banks suggest property owners could face higher mortgage repayments as early as June as financial markets and economists warn a rapid run-up in inflation could force the Reserve Bank to lift official rates above 2 per cent within the next 12 months.
Combined with growing concern about the upcoming federal election and rising cost of living, CBA said it believed the Reserve Bank would have to start increasing interest rates by the middle of the year.
However, I don't see the RBA raising interest rates as soon as that. They are waiting for consistent, stronger “real” incomes growth.
Sure, property values in our capital cities are expensive, but that's the cost of living in large, world-class, seaside cities in the best country in the world.
However, with an improving economy and more migrants coming into our country to compete for space, while the pace of property price growth is going to slow over the year, there is no property slump ahead.