New study finds housing affordability in Sydney, Melbourne, Brisbane & Adelaide now worse than New York

Housing affordability in Australia is among the worst in the world, with Sydney ranked number 2 for least affordable housing markets internationally – only behind Hong Kong – and several Australian cities featuring as top 20 ‘least affordable’ places to live in a new global report.

Rising house prices have become a matter of increasing concern for those hoping to own a little piece of the Australian dream. House prices across the country rose by an astonishing 24.5% in the year to December 30, 2021, and Australia’s hot property market has yet to show any meaningful signs of cooling.

The 2022 Demographia International Housing Affordability report was released this week, and you may not be surprised to learn that several of our major cities are among the world’s least affordable.

The report used a cost versus income ratio to assess house prices for 92 major markets across Australia, Canada, China, Ireland, New Zealand, Singapore, the UK and the US, and the results paint a picture of a challenging domestic housing market. So what did it find?

Sydney now the second-least affordable city in the world

On the topic of housing affordability in Australia, the report found Sydney, Melbourne, Adelaide, Brisbane and Perth are among the top 20 least affordable cities in the world. It claims housing affordability in Sydney is the second worst in the world, with prices over 15 times its measure of middle-income housing affordability, worked out using median house prices divided by gross median household incomes for the third quarter of 2021.

This puts Sydney second only to Hong Kong, where prices are 23.2 times the average annual income, as the least affordable market. Housing affordability in Melbourne puts it in the number five spot for least affordable housing markets, with prices there a little over 12 times the average annual gross median household income.

Adelaide sits in the number 14 spot, Brisbane at number 17 and Perth at number 20. New York is in the number 19 spot, equal with Perth, meaning that relative to median household income, houses are now less affordable in many Aussie capitals than they are in “The Big Apple”, America’s most populous city.

The 20 least affordable cities to buy a house

According to Demographia’s report, the least affordable cities (listed below with the median multiple of house prices relative to income) are:

1. Hong Kong, China (23.2)
2. Sydney, NSW, Australia (15.3)
3. Vancouver, British Columbia, Canada (13.3)
4. San Jose, California, US (12.6)
5. Melbourne, Australia (12.1)
6. Honolulu, Hawaii, US (12)
7.  San Francisco, California, US (11.8)
8. Auckland, New Zealand (11.2)
9. Los Angeles, California, US (10.7)
10. Toronto, Ontario, Canada (10.5)
11. San Diego, California, US (10.1)
12. Miami, Florida, US (8.1)
13. London, UK (8)
14. Adelaide, SA, Australia (8)
15. Seattle, Washington, US (7.5)
16. Riverside-San Bernadino, California, US (7.4)
17. Brisbane, QLD, Australia (7.4)
18. Denver, Colorado, US (7.2)
19. New York, New York, US (7.1)
20. Perth, WA, Australia (7.1)

“Pandemic demand shock” and the squeezing out of the middle class

Demographia’s report reiterates what many Aussies in the property market have likely observed themselves over the past year – the pandemic and its resulting “demand shock” have led to an unprecedented deterioration in housing affordability, and squeezing of many people out of the housing market.

Here in Australia, the Reserve Bank has held the cash rate at what some commentators have called an ‘artificially low’ 0.10% since November of 2020, as an attempt to mitigate the economic effects of the pandemic. This, coupled with an exodus of people from Sydney and Melbourne to once-affordable cities like Brisbane, has driven house prices up.

A recent OECD report into “the squeezed middle-class” found that the cost of housing now poses a threat to the middle-income standard of living in many places around the world, saying that the survival of the middle-class is being “threatened” as affordable housing becomes more and more out of reach.

“[The cost] of essential parts of the middle-class lifestyle have increased faster than inflation; house prices have been growing three times faster than household median income over the last two decades,” said the report’s authors, noting that housing has been the main driver of rising middle-class expenditure in recent decades.

What could rising interest rates mean for Aussies?

The RBA was originally tipped to raise the cash rate in 2024, but recent developments have some speculating that it could rise sooner. Canstar’s finance expert Steve Mickenbecker has warned that when it does some Aussies could find themselves in a situation of mortgage stress.

Mickenbecker warned that if the RBA was to hike the cash rate by 0.25 percentage points and lenders passed this on in full, a residential borrower with a $1 million mortgage on a variable rate of 3.09% would see their monthly loan repayments rise by $137 to reach $4,402.

If the RBA was to increase the cash rate by a full percentage point, then the average borrower with that same mortgage would see their monthly repayments rise by $561 to $4,826. This amount could be a stretch for the average Aussie homeowner, and a rise like this could lead to stress in other areas of household finance.

The news is not all doom and gloom though. In a recent piece for Canstar, CoreLogic’s Tim Lawless considered when and if a housing market peak could occur, and the necessary policy, market and economic factors that would lead to a peak.

There are signs that the extraordinary growth in Aussie house prices may be slowing in most capital cities, but for those currently looking to purchase a home, 2022 may well be a case of wait and see.