The truth about housing affordability

Is housing affordability in Australia really as bad as what it’s been made out to be? If you believed all you’ve heard the last few years, you might well think so. But the term ‘housing affordability’ is often thrown about recklessly by journalists and many self-proclaimed property commentators with few truly understanding its meaning or how it is measured.

Why the term is so often used, or rather misused, has a lot to do with the fact that journalists face extremely tight deadlines, especially in today’s Internet age, and of course scary headlines have immense selling power. But this is for another discussion. For now, let’s explore the issue of affordability in greater detail to uncover the real truth behind it.

So, what does housing affordability mean exactly? While there is no universal definition, the term generally refers to a measurement of the ratio between the price of houses and income, using median figures for both. It is often used as part of an argument that house prices in Australia are overvalued when compared to other countries and that affordability is dramatically declining. 

But in fact, housing affordability measurements are some of the most distorted figures published in Australia. What many people do not realise is that that the ratios often quoted are based on comparing median house prices with the average income of an individual. Why this is flawed is that most households now have two incomes, so the figures are not reflecting a true picture of today’s homebuyers. 

Clearly, a better measure would be comparing household income with house prices. And when this is done, the calculations show that this ratio has actually stayed the same over the past 6 years or even improved. According to Rismark (National Dwelling Price-to-Income Index), over the past six years house prices have held pretty steady at around 3.7 times disposable incomes and 4.3 times incomes. Since the end of 2003, household disposable income rose 44% while the median house price has lifted 41%. This means that in December 2003, Australian dwelling prices were effectively where they remain today.

This suggests that the common belief that Australian housing has become dramatically less affordable in recent years is nothing but a myth. Also, consider this. If housing affordability was so bad, why do we have such low mortgage default rates, rising house prices, and internationally high rate of home ownership?

And even if affordability does decline over time, it doesn’t necessarily mean that Australian housing is fundamentally overvalued. You will always be able to find a country that has more affordable housing, but is this a like-for-like comparison? Every country is different, especially in terms of the size and quality of its housing, which greatly complicates any international comparison.

Maybe it’s the patriot in me, but I believe this country is a far more appealing place to live than many others around the world. Think about the education and employment opportunities that are available to us, our relatively stable political environment and progressive economy, the high standard of living we enjoy, our great climate and abundant natural resources... I could go on and on. My point is that any over-simplified international comparisons of housing affordability are largely useless because they don’t take into account the true ‘value’ of the housing.

Here’s another point worth mentioning. With a rapidly growing population and expanding economy, does anyone really expect housing to become more affordable over time? This question is especially relevant when considering our capital cities. All you have to do is look at any of the big cities of the world to realise that over time fewer and fewer people can afford to buy property in central locations and renting becomes the norm. Some may think this is unfair, but it’s just part of a natural progression that leads to populated cities and greater regional development.   

In closing, I would like to encourage readers to delve beneath the sensationalist headlines and take the time to grasp a true understanding of the issues at hand. That way we can stop perpetuating the common myths and over-simplifications that end up creating more confusion than clarity. For those who constantly complain that they can’t afford to buy a home in Australia, perhaps it’s time to face the realisation that the situation isn’t as bad as you think and redirect your energies into finding ways to reach your goals. It won’t necessarily be easy, but with the right plan and support, getting a foot on the property ladder is within most people’s reach.  

Momentum Wealth and its affiliated entities are not Accountants or Financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all matters regarding investing, taxation and superannuation.

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