If we imagine for a moment that pigs had little wings and made their home in the skies, and governments would do nothing to attempt to boost property prices even as they flatlined or grew at a level consistent with the CPI, we can credibly forecast a scenario in which housing would be on the very long road to affordability.
This is a scenario put forward by more than a few economists and federal MP’s, who are in search of a scenario where housing affordable could at some point down the road be achieved but with no downside for existing mortgage holders.
This begs the question, what if somehow Gandalf, Harry Potter and Tinkerbell all got together to cast a spell on policymakers and the broader economy, somehow guaranteeing various wage growth and housing price growth outcomes were to come to pass, when would housing become affordable?
The parameters of today’s analysis are as follows:
– Wages will grow at 3% per annum, every year for as long as it takes. This compares favourably to the pre-Covid 5-year average rate of wages growth of 2.15%.
-The yardstick for a house to be considered affordable for a household is when mortgage repayments reach a level equivalent to 35% of gross median household income. This is fair bit higher than the traditional yardstick of 30% of gross income
-We will assume mortgage rates are cut to a level of 4.75%, which represents a cut of roughly 1.4 percentage points from where they currently stand. This is significantly lower than the average discount variable rate of 5.9% provided to owner occupiers in the 15 years’ worth of pre-pandemic data on offer from the RBA.
Based on these parameters, Sydney will reach our defined level of affordability in the year 2096.
While the performance on this metric is better elsewhere in the country, it’s far from stellar. For the capital cities, Perth would be the first to return to affordability in this scenario, with that occurring in 2049, 24 years from now.
The Reality
While the scenario of growing wages faster than housing prices is a relatively popular one, it’s also unrealistic. All it would take is one government looking to improve it’s standing in the polls to intervene to boost prices to undo potentially over a decade’s worth of progress.
From a more practical perspective, attempting to pin wages growth and housing prices in such a tight range over a period of years would be extremely challenging, over the course of a decade verging on an impossibility, for the 20+ years required to return even one capital to affordability it would astronomically challenging.
In short, its a scenario that doesn’t work politically and doesn’t work practically.