Sydney Historical House Price Ratio 1970-2016

Discussion in 'Property Market Economics' started by DeanSydney, 15th Mar, 2017.

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  1. DeanSydney

    DeanSydney New Member

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    The graphs said it all. With now Average property prices @ 14 times annual gross income just how much further can prices rise?
     
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  2. Skydome

    Skydome Well-Known Member

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    i wish i was old enough and had the money to buy just before the Olympics.

    Oh well. Maybe one day I'll get my hands on a time traveling machine :p
     
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  3. ORAC

    ORAC Well-Known Member

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    Yes, I always see these graphs and the similar commentary on house price to income ratios, whilst not disputing that the ratio is now very high, I do challenge the assumption of such a simple mathematical equation.

    That is, with such graphs / commentary, people assume the equation is something like:

    y = xb

    where y = house price, x = the property price/income ratio, and b = average income.

    However, I consider the equation should be more like:

    y = a + xb

    where a = average equity / deposit / "value of previous price rise".

    What's happens in a market like Sydney, people are always stepping up, say a person bought a house (PPOR) for $200K many years ago, then sold it for $400K, that person then used the net profit to buy into a $600K house, then they may have sold that for $1m, then they might step-up into a $1.5m house. If they are not stepping up their PPOR, they are using the increased equity to purchase IPs and a similar situation prevails. As people get older usually their incomes improve and we've also had lower interest rates, which means people's borrowing capacities have also increased.

    Anyhow, that's why I think the "y = xb" equation is somewhat flawed, because these graphs don't consider how much equity / deposit people have had before to put into their next purchase after the previous purchase, hence why I consider that a "y = a +xb" equation is more accurate.

    The moral to the story is that getting into the market and getting your first property is hard, but once done, moving through the system becomes easier.

    Hence, for all the Gen-Ys/Zs out there, start off and buy into the western suburbs or further out in Sydney and move through the system with time. Don't start at Bondi or Mosman from day one!
     
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  4. Beelzebub

    Beelzebub Well-Known Member

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    also, to pick this apart.

    -Does not take into account affordability of housing due to low interest rates
    -Does not take into consideration that two incomes are often put towards mortgages these days
    - this is the important one IMO: this tracks house prices and not unit prices. As populations rise the proportion of houses diminishes in well located areas when compared to units. This pushed up the price of housing beyond affordable levels. What this might actually show is a shift to high density unit living for the middle class. Houses will continue to be out of reach for the middle class and continue to become an exclusive asset.
     
    Last edited: 15th Mar, 2017
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  5. highlighter

    highlighter Well-Known Member

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    The typical OECD mean is between 2 and 5 on a 100-year rolling average (this is usually done because property takes quite often decades to cycle through booms and busts so you need a very long period to get a proper trend. The mean of price-to-income ratios like this aren't affected by things like income rises and dual incomes because it's a ratio - it relates property prices to incomes, so the mean is of the relationship between them - which is why so many cities can sit between 2-5 for such a long period of time. Other fundamentals like population growth, income growth and inflation also tend to sit within the same sort of predictable range).

    Sydney has always tended a little on the high side, more around 4-5 which is common for large cities. Almost all cities sit within the 2-5 range, some slightly higher (e.g. New York on 5.7). Australia generally has sat more around the 2-3 range but went through a long period of price depression prior to 1950 (following our last nation-wide housing bubble which burst in 1890).

    Bear in mind this graph appears to be using two scales. They use an average price for their price-to-income ratio (which isn't the same as the median multiple, which uses medians), yet they seem to be using e.g. 'property at 7x wage' which appears to be the corresponding median multiple of the time (I think).

    Another comment: their trend line is really irking me because it's curved (hold something straight up to it). This makes it look like prices haven't deviated too much from the trend line. In fact the trend line has the bubble potentially beginning as early as 2000 (which many commentators argue is the case as it is when prices began to substantially deviate from the long term mean - one of the basic definitions of bubbles). Personally I feel the bubble began more around 2012 which is when investment began to overtake owner-occupier buying, and when most fundamentals turned (e.g. population growth started to slide, incomes dived, starts began to outweigh demand and so on).

    On the curved trend line no no - if you look at the 100 year running average and draw an actual straight trend line, you can really see the natural boom bust cycle of property (you can kind of see this yourself if you use something straight on the graph provided). That's very typical of long term markets. Bubbles happen when prices basically leave that long term trend far behind. The trouble is, the trend is strongly tied to fundamentals. If you overlay things like rental growth, population, incomes, inflation on a similar long term trend they tend to track along with the long term property trend (over the 100 year average). Really makes bubbles stand out like a sore thumb.

    Seriously that curved trend line is making my eye twitch.
     
  6. sash

    sash Well-Known Member

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    Great graph...is shows the 6 year lag in 2003-2009.......this boom has gone longer...so how long will the lag last?
     
  7. Beelzebub

    Beelzebub Well-Known Member

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    It's a ratio of wages to house prices not household incomes to house prices. This is a big difference. The graph would look very different if it accomodated for low interest rates and household income compared to just wages.

    I wouldn't be investing in Sydney, I think the graph adds to the sentiment that the growth in Sydney is coming to an end. But I wouldnt be calling a bubble

    I think there are sound structual economic and demographic shifts that underpin the graph. When these shifts are taken into consideration I dont think the graph can lead to a conclusion that there is a bubble
     
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  8. fols

    fols Well-Known Member

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    ^ agree with household income comment. Two incomes in many Sydney family households these days- Almost the norm, especially where I live in Inner West Sydney. The expansion of dual income households + credit expansion. None of these can be repeated, hence why future growth will be far different than past growth. Good bye to property doubling every 7 -10 years.
     
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  9. Gockie

    Gockie Life is good ☺️ Premium Member

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    There's still money coming in from elsewhere in the world... I think we'll see more apartments going forward and houses on land will be more expensive. At some point in time Sydney will have 10 million people....
     
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  10. Stoffo

    Stoffo Well-Known Member

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    Just goes to show doesnt it o_O
    That far to much focus is on housing affordability :rolleyes:
    Being the cost of a house/home .......

    Yet wages growth has for many gone backwards :(
    Sure, averaged out with James Packer or Gina Rheinharts income the "average" isnt what my average wage actually is :mad:

    Yes, something has to give :eek:
     
  11. big max

    big max Well-Known Member

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    Ok. And now plot prices vs % of value compared to interest payment required to service a mortgage. On that metric you might see something quite different.
     
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  12. Scott No Mates

    Scott No Mates Well-Known Member

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    upload_2017-3-15_20-27-23.png

    I just replotted it on a logarithmic scale, nothing to see here, the increase is level pegging over the last 36 years.
     
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  13. highlighter

    highlighter Well-Known Member

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    That's not how price to income ratios work though - if you add say another income to a household, it doesn't skew the ratio because it's a ratio - it's the relationship between household income and house prices. If incomes rise, house prices do rise too, but the relationship between them stays relatively stable through the years. You'd always expect house prices to go up as incomes increase - that's just basic inflation. What matters though is the separation between them - that's the measure of affordability.

    e.g. if everyone starts off with a median of $10000 a year (say 50 years ago), and median priced houses cost $30000, your ratio is 3. If way down the track in modern day you've increased those incomes and added a second income, we might see median incomes now at $100000. But to maintain that median multiple of 3 house prices would have to cost $300000. There's no economic reason for them to cost more, and certainly not the $1m plus we're seeing in Sydney.

    Dual incomes and higher incomes have no effect on the median multiple. Dual incomes help an individual family over a single income family, but they don't give families a greater purchasing power across society because most families have that double income - so the median family can still only compete for the median house (when everyone has more money, no one does). Incomes go up, prices go up. So we could go back to single incomes, or a part-time dominated economy, or what have you and it wouldn't on its own matter. This is true with all economic goods in the long term. If your pay goes up you might be able to afford a second meat pie for lunch, but if everyone's pay goes up the price of pies goes up to compensate.

    The only way the median multiple (or other house price ratios) rise is by house prices and incomes becoming either cheaper or more expensive relative to one another.

    On the median multiple too by the way - it is more typical than the average wages ratio, and the median multiple also shows a bubble. The mean is 2-5, Sydney is on 12.2. Not as impressive as 14, but a bubble absolutely.
     
    Last edited: 15th Mar, 2017
  14. ORAC

    ORAC Well-Known Member

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    So perhaps there is some merit in my equation!
     
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  15. Hodor

    Hodor Well-Known Member

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    You need to adjust for record low interest rates. % of the average income required to service the average priced house is actually within long term limits.
     
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  16. House

    House Well-Known Member

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    1989 Sydney median was $171k and Interest Rates were 18%, repayments =$31k pa. Adjusted for inflation is $64k pa in today's dollars.

    2016 Sydney median $1.2m and Interest Rates are 4%. Repayments= $48k pa.

    Looks like it was more unaffordable 30 years ago o_O

    Also, any chance there's a correlation to household savings decreasing and "unaffordablity" increasing?
    IMG_6702.JPG

    One of my favorite graphs to show on this subject;

    % of income going towards mortgage
    IMG_2764.JPG

     
    Last edited: 15th Mar, 2017
  17. big max

    big max Well-Known Member

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    Exactly.

    And then now also plot prices against Chinese currency. You might see, for Chinese buyers at least, that prices have actaully fallen. :)
     
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  18. MTR

    MTR Well-Known Member

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    there's I'll be other boom cycles, just make sure you diversify and follow rising trends in Oz
     
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  19. Perthguy

    Perthguy Well-Known Member

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    Correlation doesn't prove causation ;)
     
  20. Perthguy

    Perthguy Well-Known Member

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    I'm still not convinced it's a bubble and not a boom. Just because there is a housing boom doesn't mean there is a bubble. I think bubble is the trendy way to mean boom.
     
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