Syd/Melb house price-to-income ratio hits record high

By Leith van Onselen

Core-Logic RP Data has released a new report looking at property price-to-income ratios for Australia’s major markets, which finds that both Sydney and Melbourne’s valuations have hit an all-time high:

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In March 2016 the ratio of house prices to annual household income in Sydney was 9.8 and for units it was 7.2. Both property types are currently recording a record-high ratio. 12 months ago these ratios were recorded at 8.9 for houses and 6.8 for units. Note that the data goes as far back as September 2001 and at that time the ratios were recorded at: 6.0 for houses and 5.7 for units.

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The ratio of property prices to annual household income in March 2016 for Melbourne were recorded at: 7.7 for houses and 6.1 for units. The ratio for houses is currently at a record high while for units it peaked at 6.6 in December 2010 and March 2011 indicating an improvement in affordability for units since that time. In March 2015, these ratios were recorded at 7.2 for houses and 6.0 for units. Affordability has deteriorated over the year for each property type however, detached housing affordability has deteriorated much more rapidly than units. In September 2001 the ratios were recorded at: 4.6 for houses and 4.8 for units…

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Outside of Sydney, Melbourne and Canberra housing affordability is improving with each capital city having a current ratio which indicates affordability has been worst in the past. The problem is that almost 2 out of every 5 Australians live in either Sydney or Melbourne and these two cities have also been the epicentres of employment and economic growth over recent years. Deteriorating housing affordability in Sydney and Melbourne impacts on significantly more people than deteriorating housing affordability elsewhere around the country.

The full break-down by capital city can be found in the report.

In our mid-year subscriber’s report, Battle of the bubbles: Sydney vs Melbourne, I tracked a range of valuation/affordability measures pertaining to these markets.

Specifically on house price-to-income ratios, the report notes the following about Sydney and Melbourne:

One useful metric commonly used to gauge whether a housing market is over-valued is the “median multiple”, which measures the median house price as a multiple of median household disposable income.

The below chart plots the situation across Australia, with house prices derived by averaging the latest available results from the three major private housing data providers against the Australian Bureau of Statistics’ (ABS) median household disposable income data for 2013-14, scaled-up by wages growth since then:

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Clearly, Sydney housing is most over-valued by this measure, followed by Melbourne.

The next chart zooms in on just Sydney and Melbourne and shows the median multiples under each of the three major private housing data providers. Again, Sydney wins hands-down:

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Note that I specifically measured house prices only across each of the major data providers and used a different source for median household disposable income than RP Data.

Nevertheless, the results are similar and point to lofty valuations in both Sydney and Melbourne.

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