That Australia has one of least affordable housing markets in the world won’t surprise most. In a country where double digit yearly price growth is common enough, why would it?
Of course, some markets are pricier than others. Sydney is much less affordable than, say, Perth. In fairness, Sydney’s property market lost touch with the national one years ago. There’s little point in comparing it to Perth these days. Sydney’s an international city in every sense of the word, for better or worse.
Sydney now ranks as second only to Hong Kong in the global unaffordability stakes. That’s quite an achievement, all things considered.
Hong Kong is one of the densest city-states in the world. As a result, they’re never lacking in demand. It also happens to be on China’s doorstep, which doesn’t hurt house prices either. And it’s position as an Asian banking hub makes its property market that more attractive.
It’s impressive (or depressing) that Sydney ranks just behind Hong Kong. Nonetheless, it goes to show the kind of position Sydney occupies on the global scene. Sydneysiders can be excused for thinking house prices are out of control. By any measure, they’re probably understating the problem.
It’s worth mentioning that Melbourne was ranked fourth on the list. It sat just behind Vancouver, but ahead of both San Francisco and London.
So how is housing affordability measured here anyway? Researchers at Demographia simply compared house prices to household incomes. They found that the average Aussie home is worth 5.6 times the average household income.
To put that in context, a measure of 5.1 and above is considered extremely unaffordable. A ratio of three or less, meanwhile, is considered affordable.
At 5.6, Australian property is, on the whole, very unaffordable. But on a market by market basis, the differences become a lot more stark.
Sydney, for one, has a price to income ratio of 12.2. In a city where median house prices are over a million, you can appreciate how overpriced the market actually is. The typical home is 12 times higher than the average annual household income. How anyone manages to buy property in Sydney is astounding. Only Hong Kong, with a ratio of 19, could claim to have a more distorted housing market.
The implications of this are obvious. We have to face the fact that owning a home is beyond the scope for many of us. The middle class aspiration for homeownership is fading fast.
The one saving grace is that house prices are now showing signs of cooling off. The rampant growth during the first half of last year slowed during the last quarter. That should help temper rising unaffordability. But that’s a small victory in what is a losing war.
Affordability: Measuring house prices in China
China’s housing market wasn’t included in the survey. But it’s worth looking at it in the context of Australia’s low affordability.
China, like Australia, has a two-speed housing market.
In Beijing, a typical flat costs 22 times the average household income. Remember, an affordable ratio is somewhere closer to three. At 22 times the average household income for a flat, very few people can afford to buy homes in Beijing.
Like China, we have our very own winners and losers. While growth in Beijing is surging, prices have fallen by a quarter in other cities around China. That’s similar to what we’ve seen in Perth, Adelaide, and Darwin. The only difference is scale.
One area where China completely trumps Australia is when it comes to housing oversupply.
By some estimates, there are 65 million empty investment flats in China. In a country where most people earn in the region of $10,000 a year, these flats are likely to remain empty.
So where are the buyers going to come from? Hard to say, especially in light of China’s ageing population. Every generation in China is smaller than the one before it. That’s what 30 years of a one-child policy will do to a nation.
Problem is, it’s the 20–30 something’s that buy homes. Yet you wonder where China will find these buyers in the future. It’s not that there aren’t any young people in China. But, relative to the size of supply in the housing market, there aren’t enough of them to meet demand. That’s a huge problem China’s property market doesn’t have an answer for.
For economies wedded to China’s prosperity, that’s an even bigger problem. When housing construction (and buying) slows, it has tangible effects elsewhere. It impacts incomes, consumption, and wealth negatively. And since these things never occur in isolation, it affects every one of China’s major trading partners, Australia included.
What does this mean for us? If the imbalance in China’s housing market continues, trouble awaits. If house prices decline across the country, there’s a likelihood that consumer spending will tank. That, more than anything, threatens to turn China’s slowing economy into a full blown crash. And as the knot holding the global economy together, that won’t be good for any of us.
Junior Analyst, The Daily Reckoning
PS: Uncertainty over China’s economy is at the forefront of what’s playing out across global markets today. As house prices decline, so too will China’s purchasing power. That could hasten a crisis that spreads around the world.
According to The Daily Reckoning’s Vern Gowdie, we’re already standing on the edge of this next financial crisis.
Vern is the award-winning Founder of the Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s Top 50 financial planners, Vern believes there’s nothing we can do to stop what’s coming.
It won’t be only stock markets that crash when the crisis hits. There’s another multibillion dollar market that’s poised to collapse when the credit bubble pops. Australia’s gone through two such credit bubbles in its history. The third, and latest, has been building for the last 65 years. When it pops, it won’t be pretty.
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