Anyone thinking that it is somewhat harder to buy a house today than it used to be would be right.
According to recently released Australian Bureau of Statistics figures (ABS), over the last ten years the average wage has gone up 54.5 percent. On the face of it this doesn’t sound too bad. Over ten years that works out to annual increments of about 4.5 percent. Not a bad linear annual increment really as we shake off the damage of the Global Financial Crisis.
However one problem is that the cost of the ‘average’ mortgage has gone up by 115 percent in those 10 years—which is more than double the average wage increase.
Typically, well for at least the last 70 or so years up until around 1990, the cost of the average mortgage in Australia has more or less stayed in lock-step with the average wage increments. In short bursts here and there it zoomed ahead by 5 or 10 percent, but then usually the balance got restored in the following years.
Since about 1990 this ‘balance’ has been torn apart.
The view of economists is that in a healthy economy the median house price should be around three times the average income. Up until the late 80s the median house price in Australia more or less maintained this magical ratio.
Since then the real estate market in Australia has become ‘unhealthy’ with the median house now costing somewhere between 6.0 and 6.5 times the average wage.
According to the ABS the average wage in November 2012 was $81, 321.60.
The average house price in Perth is bumping up against the $500,000 level.
This gives multiplier of 6.15.
This is one of the things the Reserve Bank has been very worried about as it brought the cash rate down over the last 18 months in an attempt to try and stimulate other parts of the economy. It was desperate not to fan the flames under the housing market. The last thing they wanted to see was the wages to house price multiple becoming even more ‘unhealthy’.
In a perfect world the Reserve would like to see this multiplier come back much closer to the magical 3. But I fear those days are a long way off unless something totally unexpected happens to the real estate market or the Australian economy in general.
Australia has the second highest property prices relative to income coming in behind Hong Kong. The snippet links to the article at PerthNow.