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In 20 Years The Average House Price In Sydney And Melbourne Could Exceed $6 Million

by The Advantage

Clearly, the Australian dream of home ownership for the next generation is fading.

Housing affordability is currently a key issue of discussion in Australia and, while there are a number of factors at play, the main price driver is that demand for houses is exceeding supply.

Population growth, a trend to smaller households (and so more homes needed relative to the population), and demand for homes not only from first-home buyers but also from downsizers, overseas buyers, local investors, and self-managed super funds and trusts are all fuelling price rises.

While Australia’s current annual population growth of 1.4 percent may seem modest, this adds almost 340,000 to our population each year, which is one new Darwin every 20 weeks or a new Tasmania every 18 months.

Sydney is growing much faster than this, averaging 1.8 percent per annum for the past five years. It will add almost two million to its population by 2037, which is the equivalent of adding a new Perth into Sydney.

Melbourne is currently Australia’s fastest-growing city and, based on the current growth trends, it will overtake Sydney to become the nation’s largest city around the middle of this century. Unsurprisingly, where population growth is strongest, house price rises are the highest.

In just 20 years, the average Sydney house price has increased more than fivefold from $233,250 in 1997 to $1,190,390 today, while in Melbourne prices over the same period have increased by more than six times from $142,000 to $943,100 today.

While it’s true that wages have increased over this time, earnings growth has not kept up with house price growth. In 20 years, average annual full-time earnings have not quite doubled from $42,010 in 1997 to $82,784 today.

The impact of growing demand on house prices is most evident when prices are compared to average earnings. Twenty years ago, the average Sydney house was 5.6 times average annual earnings, while in Melbourne it was an affordable 3.4 times annual earnings. Today, Sydney homes are more than 14 times average earnings, and in Melbourne more than 11 times annual earnings.

While the maxim that house prices double every 10 years is not always the case and growth fluctuates, since 1997 Sydney prices have, in effect, doubled every eight years while Melbourne has managed this every six years.

If the growth metrics over the past two decades play out over the next two, the average home in both Sydney and Melbourne in 2037 will exceed $6 million. Clearly, the Australian dream of home ownership for the next generation is fading. Young people today need almost three times the purchasing power that their parents needed to buy the average house, so even double incomes will not quite do it.

Additionally, today’s new households are starting their earnings years later than their parents, having spent longer in tertiary studies, and they begin their economic life not with zero savings like their parents, but well into the negative, with interest-accumulating study debts to pay off.

Even if today’s emerging generations start saving harder and earlier and live with their parents longer, home ownership is still not a given.

Policy settings around migration and baby bonuses have grown the population and policies around property tax incentives, self-managed superannuation and investment provisions have fuelled property demand, therefore policy support will be required to bring the great Australian dream a little bit closer to reality.

Published
14 March, 2017

Publisher
www.huffingtonpost.com.au

Author
Mark McCrindle