How does Australian home affordability compare worldwide?

Written by in Buying on September 21, 2017

A person holds the world in their hands

It’s no surprise that housing affordability in our country has declined over the past few decades. In that time, there has been an almost 80% increase in the price to income ratio.

But how does Australia’s housing affordability stack up worldwide?

First of all, house prices vary dramatically depending on where you live in Australia, even between capital cities. A median house price in Adelaide, for instance, is around $485,000, whereas in Sydney the median is $1.1 million, over twice as high.

Moreover, one thing that needs to be taken into account when comparing affordability worldwide is the price to income ratio. Australia’s ratio in this regard is high—and we also have a high price-to-rent ratio to boot.

Demographia’s survey on global house prices suggests that houses that are up to three times the median income are deemed affordable; five times the median income is severely unaffordable.

Sydney housing is at 12.2 times the median income, and although this makes it particularly tough to get into the property market for first home buyers, there are some positives for Aussie home buyers.

Couple Looking At House On Digital Tablet's Screen

A matter of interest rates

Sydney may be unaffordable under that banner – however, to compare house prices here with overseas, we must consider the interest rates on loans, which can vary by large amounts.

For example, in Australia, an average home loan rate is currently around 3 – 4%, and a little higher for investors. Australia’s low, stable RBA interest rate is helping mortgages become more affordable.

Many Australians forget that just one decade ago, the average mortgage interest rate in Australia was around 7.5 – 8%. On a $600,000 mortgage, the interest repayment alone was around $45,000 per year, or $865 per week.

Current rates put the average mortgage interest repayment on a $900,000 property at $36,000, or $692 per week.

So how does this compare globally?

READ MORE: Saving habits can help you cut home costs

In Canada, interest rates are far lower at around 2.95%, though these may begin increasing.

However for truly low interest rates, it seems you can’t beat Japan; a house of around $590,000 would cost you a paltry $6,500 in interest each year, with the borrower benefitting from locking in a 35-year fixed rate loan of just 1.09%. The overall cost of living in Japan is also cheaper – however, their homes are tiny by Australian standards.

Russia is at the other end of the extreme. Once listed on the Mercer Cost of Living Survey as the 9th-most expensive city for foreigners, Moscow is now ranked 50th (St Petersburg has slipped from 35 to 152 on the list).

Luxury real estate prices in Moscow have slumped almost 40 percent since 2015, with average home prices dropping 20%, and a very low median house price of $330,000. It may sound fantastic, but once you factor in the sky-high interest rates – they’ve recently hit a ‘low’ of 9% – the deal becomes far less appealing.

Meanwhile just across the pond in New Zealand, Auckland’s median house price was up 5 per cent on 2016 to reach a median of $865,000 (AU$788,000), whilst mortgages are quite a bit higher, at 5 – 6%.

Not so unaffordable after all?

Though Australian property prices may have reached unsustainable highs in some suburbs, it pays to remember that mortgage interest rates have never been this low.

The idea of taking on a mortgage worth half a million dollars may seem daunting, but the reality is, you will pay less in weekly repayments for this home than you would have paid 10 years ago, on a mortgage worth $500,000.

And if it’s saving a deposit that is holding you back from climbing the property ladder, then perhaps you need to consider the tried and true strategy of rentvesting. With plenty of homes all over Australia selling for less than $300,000, including in the capital cities, there are always opportunities for those who are willing to adopt a creative strategy to get ahead!

READ MORE: How to invest on a low income