A recent study by Demographia has shown that properties in Australian capital cities are becoming increasingly unaffordable, with Sydney ranked second behind Hong Kong, Melbourne ranked fifth and Adelaide, Brisbane and Perth in the top 25.
The study showed that Sydney ranked number 2 as house prices were 12-13 times higher than median household income, beaten by Hong Kong which shows 20 times higher. Melbourne shows that prices are more than 10 times higher than medium household income, with the other capitals approximately 6 times higher.
Experts are divided into why this is the case but you only need to look at the ever-changing streetscapes of our major cities to see that housing density has increased, usually by building more apartments in established residential areas. The experts call this urban containment.
Urban containment is a policy in which housing density is increased, usually by building more apartments in established residential areas. It’s a policy which also aims to limit (or prohibit) new housing development in the fringe areas of a city.
The recent boom in apartment building is not helping and some argue that the government should encourage more detached, medium-density dwellings to be built in the middle and outer-fringe areas, particularly to keep up with the challenges of “strong population growth.” But this is expensive if the appropriate infrastructure is not in place such as schools, hospitals and transport.
However, it’s not all doom and gloom when it comes to affordability. According to Core Logic Data, their figures showed Sydney property owners typically spend 48% of their annual household income paying off their mortgages. They state this is lower than what people were paying back in 2007, when housing prices were half of what they are now, but interest rates were higher.
According to their stats, on average, Melbourne home buyers spend 40 per cent of their household income to pay their home loans. For the other capital cities, the range is between 28 and 35 per cent.
However, Sydney residents typically spend 29 per cent of their income on rent. For other capital cities, those figures are — Melbourne (26%), Adelaide (27%), Brisbane (25.7%), Hobart (28.4%). The cities in which households spend less income on rents are Perth (22.1%), Darwin (21.3%), and Canberra (22%).
This means that renters are better off from a disposable income point of view and have more income to invest elsewhere. However, they miss out on the capital growth if they owned the property.
Whatever way you cut it, the bottom line is that home ownership in Australia’s major capital cities is becoming increasingly more expensive. There must come a time where there is a correction either via wage growth or a combination of monetary and fiscal policy.
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