According to the 2007 Demographia International Housing Affordability Survey¹ there is a “pervasive housing affordability crisis in Australia”.

The survey compared 159 major property markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States. Comparing median house prices and median household incomes it found, overall, the Australian residential property market was the most unaffordable.

Listing the individual Top 25 most unaffordable property markets, Australian cities appeared four times. Sydney retained its 2006 ranking at number 7, Perth enters the list for the first time at number 11, Hobart is surprise entrant at number 20, Melbourne is ranked number 23 and Brisbane is ranked at number 30.

On the list of the Top 40 Most Affordable Housing Markets, Australia failed to get a mention.

On average, the survey found that Australian households would require 6.6 times their annual income to purchase a median-priced house. This was more than double the ‘affordable’ ratio of three times average household income. Interestingly, New Zealand faired little better than Australia, with an income to price ratio of six times. By contrast, Canada was deemed the survey’s most affordable residential property market with a ratio of three times average annual household income required to purchase a median-priced house.

Australia’s biggest property boom has landed … softly

The results of the survey highlight the extraordinary price boom that occurred in Australia’s property markets in the early 2000s and its effect on those wanting to own a home or invest in residential property.

Looking at residential property price developments between 1970 and 2005, a separate OECD report determined that Australia experienced three property bull markets over the 35-year period^2.

In 2004, compared to other OECD countries, the report claimed Australia’s property market was dramatically overvalued by 51.8 per cent. No other OCED country came close, with the United Kingdom overvalued by 32.8 per cent coming in a distant second.

Fortunately, history shows that Australia’s property market has decreased less rapidly than it has ascended. In the five market downturns³ experienced over the same 35-year period, the OECD revealed that the average price change was minus 10 per cent and the maximum ‘bust’ was minus 14.7 per cent.

The good news was that the latest boom, which appeared to last until 2004, largely followed its historical predecessors by experiencing a relatively soft landing. Good economic management and proactive adjustments in Reserve Bank of Australia policy were widely credited as parachuting Australia’s major property markets.

By the end of 2005, figures from the Australian Bureau of Statistics (ABS) that showed the percentage changes in median property values revealed a visibly slowing market.

Markets in Perth and Darwin, which had joined the boom late, continue to swing dramatically upwards but the larger capital cities on the eastern seaboard all showed considerable deceleration.

This news meant that those who were already established in the property market would largely retain the gains from the boom. But for wannabe first-home owners or new investors it meant they’d continue to face large mortgages on entry.

A booming echo?

Despite predictions of prolonged downturn, recent ABS figures have show the residential property market has rebounded and gains returned across the board in 2006 and early 2007.

Whether the property markets are now fully priced or demand will continue to drive up supply prices, only time will tell.

However, one thing remains certain. For new market entrants the Australia residential property remains relatively unaffordable, especially when compared internationally. And, while no one can claim to accurately predict the future, it is probably safe to say that international market surveys (at least in the short-term) will to continue to report Australia at or near the top of their unaffordability lists.

Evidence shows that virtually all of the increase in housing prices has been due to a shortage of land. Land prices have skyrocketed, while the price of building houses has risen only modestly in real terms. From 1993 to 2006, 88 percent of the combined cost of new houses and land has been attributable to inflation of land prices and only 12 percent to inflation in house building costs.

Between 1993 and 2006, the inflation adjusted cost of building a typical house in Australia rose 16 percent. The cost of land for residential development has risen more than an inflation adjusted 125 percent, approximately eight (8) times the house price increase.

Further, there has been a reduction in the lot (block) size on which the new houses are built. In Sydney, for example, the Great Australian Dream of the “house on a quarter acre block” has been replaced by the house on a one-ninth acre block (or a high-rise condominium).

The ABC Four Corners program ran a story on the 17th September 2007 called “Mortgage Meltdown and there is an extended interview with Robert Shiller – Professor of Economics at Yale University USA regarding “Home Prices” and is worth viewing.

The ABC Lateline program also ran a story on Mortgage Stress and is also good viewing.

The 3rd Annual Demographia International Housing Affordability Survey is also available for further reading and is very interesting.

¹Demographia is Affiliated with The Public Purpose, Twice A Top National Journal Internet Site. www.demographia.com The full report is available at www.demographia.com/dhi-ix2005q3.pdf 

² ‘Recent House Price Developments: The Role of Fundamentals’, OECD Economic Outlook Volume 2005/2 No. 78, December – a bull market is defined as more than six quarters (ie 1.5 years) of consecutive 

³ Property downturns are defined as more than six quarters (ie 1.5 years) of negative growth

⁴ Australian Bureau of Statistics, 6416.0 - House Price Indexes: Eight Capital Cities, Dec 2005

⁵ Australian Bureau of Statistics, 6416.0 - House Price Indexes: Eight Capital Cities, Mar 2007