Australian house prices remain highly overvalued by international standards and are almost certain to fall sharply as our housing bubble bursts, a new survey of international housing affordability has found.
The report, by United States-based property research firm Demographia, compares median house prices in 265 markets across Australia, Britain, Canada, New Zealand and the United States with median household income levels in those markets to build a measure of affordability.
Historically, median houses prices across these markets have run at around three times median household income. Prices over four times median income are seen as seriously unaffordable, while prices over five times median income are seen as severely unaffordable.
Incredibly, 24 of the 27 markets examined by Demographia fell into the category of severely unaffordable.
In fact, Queensland’s Sunshine Coast market was deemed to be the most unaffordable market across the five nations, with house prices running at 9.6 times median income. The Gold Coast market was third on the list at 8.7 times median income, while Sydney was ranked fifth at 8.3 times median income and the Queensland market of Bundaberg ranked 10th at 7.2 times median income.
Other Australian capital cities to feature on the list include Adelaide (7.1 times), Melbourne (7.1), Perth (6.4), Brisbane (6.3), Hobart (6.2), Darwin (5.9) and Canberra (5.1).
The survey notes that Australian house prices have not fallen as dramatically as those in the US or Britain, but warns this is likely to change.
“It seems likely that, sooner or later, the inherent instability and unsustainability that characterizes bubbles will lead to house price declines in Australia.”
“However, were it possible for Australia to retain its highly over-valued house prices, there would still be a significant cost. Future generations would pay far more for housing than in the past, and Australia’s relative standard of living would decline.”
Economists in Australia remain relatively optimistic about the outlook for Australian house prices this year. While most are predicting falls of between 5-10%, savage falls like those seen in the US and Britain are thought unlikely, mainly because Australia’s steadily-increasing population means demand for new housing is strong.
But the data from Demographia indicates Australia’s prices remain badly out of kilter from a historical and international point of view.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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