Fluctuations in Price to Earnings RatiosInterest rates play a role in the affordability of Australian housing, and can experience a variety of ups and downs over the span of a 30-year loan. This is important to remember when you're deciding whether or not to invest. The ratio of house prices to household earnings has increased 2.5 times since 1970, with the biggest increase seen in the early 2000s. The ratio doubled during that period, even with more houses having two income earners. According to figures published by The Motley Fool, the average first home loan has gone up from $75,000 20 years ago to nearly $300,000 today. This doesn't match the corresponding rise in income. The average first home loan was 3.1 times the average income in 1994, but it is now 5.6 times the average household earnings, putting first-time homebuyers further into debt.
Average house prices in many Australian cities have continued to increase over the past several years. According to a survey conducted by Demographia, Sydney is the third-least affordable city in the world when price to earnings ratios are taken into account. Figures from the Australian Bureau of Statistics show that house prices rose in 5 out of 8 of Australia's major cities between September 2011 and September 2012. Prices climbed by 8.2% in Darwin and 4.4% in Perth, while they fell 1.1% in Adelaide. This indicates that now may be a good time to find property in Adelaide with Homesales or other listings services, while it may be better to hold off in Perth.
Is Australia in a Property Bubble?There is debate as to whether or not Australia is in the midst of a property bubble. The Reserve Bank of Australia doesn't believe that any bubble exists, as housing price growth has slowed across much of the country. While prices may still be climbing higher in cities, they are not climbing at the same rate any longer and the ratios between price and earnings are growing smaller as a result. Although Sydney's property prices rose 1.3% in the past year, Melbourne real estate declined by 2.3%.
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Recent housing bubbles in the USA, UK, Spain, and Japan all exhibited a sudden rise in the house price to earnings ratio, followed immediately by a sharp fall as the bubble collapsed. Yet in Australia, the market has behaved differently. Although Australia experienced a spike in its price to earnings ratio in the early 2000s, it peaked in 2003 and has remained fairly consistent since then. Because there hasn't been a sharp fall of this ratio in the past decade, this may indicate that there is no property bubble.
A bit of caution is still needed, as it's impossible to predict the future. Investment from China has been slowing and interest rates will continue to fluctuate. Although the overall housing price to household income ratio remains high, those wishing to invest in Australian property can reasonably expect that their home will hold its value over time.
*Full disclosure: This is a sponsored post meaning I was paid to place it on Retirement Investing Today. I posted it because it presents a different viewpoint to my own on a topic that is close to many readers (including myself). I am currently bearish on UK (and Australian) property and present arguments for this regularly. I walk this talk by remaining out of the market. This post while providing a note of caution is bullish in comparison. Only time will which viewpoint was correct. As a valued reader I’d be interested in hearing if you are bullish or bearish and why?