Price growth in Melbourne and Sydney is not sustainable

I must be missing something here.  I have been told that I am slow.

But for the life of me I cannot see how the recent price growth in Sydney and Melbourne (up 15% and 12% respectively over the last 12 months) is anywhere near sustainable.

Nor can I see how the median Australian house price (which apparently is $535,000) is just over four times the disposable average family household income.  That would mean that on a gross basis, the average Aussie family earns about $175,000 each year.

Hmmm, something must be amiss.

Experiment

Each article i write is kind of like an experiment.  Topics are chosen often because the common rhetoric doesn’t seem to add up.  Sometimes they get picked because I like to disagree.  Many more are actually written than published.

In most cases we go back to basics – “explain it to me like I was a five year old” – it worked for Denzel Washington in the movie, Philadelphia, and it works for us too.

So in this regard we did the following:

• Went to the 2011 Census for each capital city and found the median family household income
  
  
• Worked out – via average weekly earnings – which are updated by state/territory twice each year –how much, by proxy, family incomes may have risen since the last census.  There was a big variation between each city.
  
  
• Determined disposable income (gross wages minus tax) using an up-to-date (2013/14) online calculator.
  
  
• Recorded dwelling prices by capital for all dwellings; houses and attached product according to the latest release from RP Data.
  
  
• Used AFG’s mortgage index to determine the average loan to value ratio for each state/territory.  Overall, the average equity is 32% on recent home loans according to AFG.
  
  
• Applied a basic online mortgage calculator using a principal and interest loan; 30 year time frame and 5.95% variable interest rate (the average rate, according to the RBA). 

Our aim here is to find out two things:

• The current dwelling price to income ratio for each capital, and
  
  
• The proportion of disposable family income needed to pay the average mortgage in each city today. 

Now that sounds pretty logical, right?  No silly things like prices versus nominal GPD; nor is income determined by national accounts.  Just a simple comparison between what we say we earn; what we have left over, in theory at least (as day to day expenses just seem to be escalating far beyond CPI), after tax; and how much a dwelling costs to buy.  Importantly, it is measured on a city by city basis.

So here are the results – all for March 2014.

Sydney 

Houses are very overpriced; attached property is heading that way.

Melbourne

Like Sydney, Melbourne’s houses are very expensive and attached property is heading the same way.

Visit Michael's website, read his blog, follow him on Facebook and Twitter, or connect via LinkedIn.