Sydney now more unaffordable than ever in recorded history, but no bubble: Residex

In case anyone needed someone to say it, Residex’s John Edwards has noted that Sydney is now more unaffordable than ever before recorded, and that prices are still rising.

Yet despite the headlines, he says there is no bubble.

Edwards noted that an affordability measure, based on median household income, is now at historic highs.

Sydney house growth from August 2012 to August 2013 was 9.43%. From August 2013 to August 2014 it was recorded at 16.93%. Over the last quarter, 3.5% growth was recorded, with 1.52% over the month.

Sydney's unit growth from August 2012 to August 2013 was 2.68%. From August 2013 to August 2014 it was recorded at 14.31%. Over the last quarter, 3.64% growth was recorded, with 0.1% over the month.

“It takes about 54% of after tax income to make loan repayments on the median value home of $852,500; it takes close to eight times the annual median income to buy the median Sydney home. These ratios are extraordinarily high based on historical data,” said John Edwards.

However, he noted that fortunately Sydney is slowing down, albeit not as quickly as had been expected.

“Historically, at these levels our markets would fall in value. It is this high level of un-affordability that probably leads many to suggest that we are in a “housing bubble”.

“However, something has changed: The buyers in our markets. Our measure is likely no longer as valid as it once was, because the current buyers are no longer median income families. Median income families living in the median value areas of Sydney are largely renting,” he said.

He noted that house and land buyers are second and third time purchasers with income levels much higher than the median recorded wage, and that median income families are purchasing in the slightly more affordable city fringe.

He notes that the median price is very high, just $147,500 from reaching the $1 million median value mark.

By the first half of 2019, Edwards forecasts that Sydney can be assumed to reach a median value of this amount.

“It is equally clear that there are going to be large numbers of suburbs with a median above $2 million,” he said.

“By the end of 2019 it is estimated that there will be 91 suburbs with a median value in excess of $2 million. This represents about 9.5% of the city. The percentage of the city with median suburb value over $1 million will be approximately 43.25%.”

However, despite this, he maintains there’s no suggestion of a bubble.

He notes that a bubble exists when significant growth in asset values is driven by borrowings.

“In more general terms it is driven by greed and lack of careful thought by both lenders and borrowers. It is excessive bank lending which allows leverage and preparedness by borrowers to pay unreasonable prices for property,” he said.

Nothing suggests we are in this situation, Edwards explains, noting that banks and financial intermediaries, while becoming more aggressive to maintain market share, have acceptable risk policies.

“The driving force behind the growth in values seems to be existing home owners who have reasonable levels of income and assets to support their property purchases which are likely investments.

“In this situation the lenders can be more aggressive due to the capacity of borrowers to meet their obligations,” he said.

{mijopolls 43}