Housing affordability is an illusion: Why the median price is misleading and skewed by new suburbs

Written by Lachlan Drew

3 December, 2019

Housing affordability has been stable since 2009, but data mining masks the social impact with high volumes of lower quality property reducing the median price, Lachlan Drew reports.

While notionally dwelling prices have increased at the same rate as household incomes, according to raw data on the median price of residences and domestic earnings, these figures obscure important details.

In June 2019 the ratio of median dwelling values to household income was 6.5 which is equivalent to where it was in 2009. But this is a national figure and hides significant variation.

According to the Grattan Institute, real house prices started to grow much faster than real average earnings from 1996. The average growth of 3 percent over the last decade comes by virtue of the housing correction in 2018/19, when prices fell 12 percent peak-to-trough in Sydney and 10 percent in Melbourne. So, while the average is about 3 percent growth in dwellings and income over this time, the balance was only really brought about by the housing correction.

What is needed is a solution that increases affordability without pushing up buying power and allows new blood into established housing areas.

The typical Sydney household is now spending 8.2 times their gross annual household income in order to purchase the median value dwelling, up from 6.6 times a decade ago. In Melbourne households are spending 7.2 times their annual income (up from 6.4 in 2009) and Hobart households are spending 6.5 times (up from 5.9).

Even though mortgage rates have fallen and are plumbing their lows of nigh on 60 years, households in Sydney, Melbourne and Hobart are on average allocating a larger proportion of their incomes towards servicing new mortgages than they were in 2009. This is a function of increasing mortgage sizes.

Moreover, while the median ratio has stayed relatively stable over the last decade, noting the points made above, it still clouds the true picture. 

Buying a house on the median ratio will not get you what it once would. 

New houses in numbers tend to be built on land opened on the outskirts of cities. These houses, given their location are cheaper and their increased numbers keep the median price of houses lower.

So, while the median ratio has stayed the same, what that ratio buys has moved far away from more established areas in the more desired suburbs of capital cities.

Mortgage rates are low and that has helped serviceability for people who have mortgages, but wages growth is anaemic at around 2 percent and not expected to accelerate anytime soon according to the RBA.

Affordability is influenced by interest rates, the size and term of loan repayments, and household income.  The housing market corrected in 2018/19 mainly due to the macroprudential rules and tightening of credit. With house prices stabilising and now growing (rapidly in Sydney and Melbourne), while income growth is sluggish affordability is becoming more of an issue.

Longer term strategies for improving housing affordability will rightly include many elements on both the demand and the supply side. 

The housing markets in most Australian cities have become very segmented. Housing affordability is localised with people increasingly locked out of areas they are not already in. This has societal implications with Domain data bringing into sharp relief the housing divide in Sydney and Melbourne. And what of the future? Low inflation might well keep interest rates low, but other things being equal this leads to higher house prices. And low inflation also keeps wages growth low and means the real value of housing debt is eroded slowly. 

What is needed is a solution that increases affordability without pushing up buying power and allows new blood into established housing areas.