Average Brisbane house prices are 6.6 times the average household income, meaning Brisbane house prices are broadly comparable to those in London, which are 7.2 times the average household income. In affordable housing markets, such as Nashville in Tennessee, the ratio of house prices to average incomes is no more than 3.
In a new report by Demographia, a US consultancy, Brisbane is described as having a “severely unaffordable” housing market, placing us in the same category as London, New York, and Hong Kong. Other Australian cities in the severely unaffordable category are Sydney, Melbourne, and Adelaide, which are all less affordable than Brisbane, and Perth. The report is available here:
The report’s findings aren’t all that surprising and simply add to the accumulating evidence that Australian house prices are much higher than you’d expect based on average earnings. If there is another major recession in Australia similar to the early nineties recession, it’s possible that housing prices would experience sharp falls, as many unemployed home purchasers would end up defaulting and the banks would have a big stock of properties to sell off.
If the economy keeps avoiding recession, it’s possible the relatively high housing prices could persist, owing to the underlying fundamentals of the Australian housing market – i.e. solid growth in demand, driven by population growth, compared with sluggish growth in supply due to the limited availability of new land. For an excellent discussion of the economics of the Australian housing market, read this book:
While the underlying economics of the property market are sound, the Demographia finding that our housing markets are “severely unaffordable” should warn investors not to expect the large capital gains that housing has provided in the past. This is especially so when one considers that baby boomers have started turning 65 from this year, and will no longer be earning large amounts of income which they can plough into the property market. Many baby boomers will also sell their houses in the city to move to coastal or hinterland areas, meaning there will be an influx of new supply, putting downward pressure on prices.