Residex: Price growth slows as affordability bites

By Leith van Onselen

Residex has released its home price results for May, which revealed a sharp slowing of growth at the national level, with national house values rising by 0.36% over the month and unit values falling by 0.23% (see below tables).

As you can see, results were mixed across the separate regions, with several capital cities recording a fall in values over the month.

According to Residex founder, John Edwards, the slowing rate of growth is welcome, as it lowers the risk of markets like Sydney moving into bubble territory. However, the overall market remains overvalued and too expensive for the typical family:

With any luck, the statistics will continue on this new trend of lower rates of growth over the next few months…

Housing markets, particularly Sydney, were moving to a “boom” like performance. This was dangerous and could have led to a “bubble” and a severe correction if it continued. The slowing of the market at this point in time suggests that we are going to avoid this outcome. Having said this, the market is still overvalued and in reality too expensive.

The data clearly points to the difficult affordability conditions for the median family in most capital cities.

The percentage of after tax income it takes to make home loan repayments does not adequately tell the story. A better statement of the position is the calculated number of after tax dollars a median family has to spend after meeting home loan repayments.

The Sydney median family who buy the current median property valued at $823,500 with a 20% deposit only have around $821 per week to spend after making home loan repayments. This amount is clearly insufficient for comfortable living.

While I obviously agree with Edwards’ view that Australian homes are overvalued and far too expensive, I do not understand how he has derived the above household income figures. The below table extract, which comes from the ABS’ household income and income distribution survey, shows the median gross (pre-tax) household income levels across Australia’s capital cities in the 2011-12 financial year:

As you can see, annual pre-tax median earnings were as follows in 2011-12, which are well below the levels claimed by Edwards:

• Sydney: $89,752
• Melbourne: $81,536
• Brisbane: $79,768
• Adelaide: $68,016
• Perth: $88,140
• Hobart: $68,224
• Darwin: $102,388
• Canberra: $110,448

While it is true that there would have been some modest income growth since 2011-12, the above ABS figures presented above are pre-tax, therefore are overstated.

So in reality, the affordability situation is even worse than claimed by Edwards.

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