House price to income ratio continues to climb amid property boom and low wage growth

The growing gap between incomes and property prices is likely to worsen before it gets better, experts say, making it harder than ever for first-home buyers to save a deposit.

Property prices across Australia are now more than five times household disposable incomes and set to climb higher still, as the property market booms while wage growth remains sluggish. Houses are now making more money than some of Australia's top paid professionals.

Housing values have gone from less than three times disposable household incomes in the mid-1990s, to more than 5.5 times incomes, modelling from the Reserve Bank shows.

With property prices continuing to rise against a backdrop of low wage growth, the gap between the two was likely to continue to widen, said EY Oceania chief economist Jo Masters.

“Both are part of the equation and in the past year have sort of moved in the wrong direction. House prices have accelerated … and on the other side, wage growth has decelerated. Even in the June quarter when unemployment was falling … there was very anaemic wage growth,” Ms Masters said.

Rapidly rising property prices were not unique to Australia, but a global phenomenon resulting from record-low interest rates and measures to support household balance sheets and reduce labour market scarring during the pandemic.

At the same time, the net wealth of Australians has climbed, Ms Masters said, largely due to dwelling price growth. However, net debt also dropped – reducing the debt to income ratio slightly – with many Australians increasing their savings during lockdowns and putting the money into offset accounts.

With price growth likely to continue, though at a slower rate, the gap between prices and incomes was likely to worsen before it got better, Ms Masters said. Even stabilisation seemed years away, with any future pickup in wage growth expected to be gradual.

“It’s hard to imagine you can pull [the ratio] back down to the levels you saw in previous years,” she said, nothing that even during the peak of the mining boom wages had lifted about 4 per cent each year.

“[Its] likely to get worse, which is a very confronting thing for first-home buyers,” Ms Masters said.

“When house price are rising as fast as they are now it’s hard to even stay on top of what you need for a deposit [let alone save a whole deposit],” she said.

As it is, Sydney’s median house price of about $1.41 million is about 23 times higher than the median employee income in Greater Sydney, Domain modelling shows. The unit median is 13 times higher.

Melbourne house prices are almost 18 times higher than local incomes, with house prices also at least 10 times higher than incomes in Brisbane, Adelaide, Hobart and Canberra.
Economist Saul Eslake feared the gap between incomes and property prices would continue to grow unless governments looked to housing affordability solutions that addressed both the demand and supply side of the housing equation.

By his own modelling, included as part of his submission to the federal government’s inquiry into housing affordability and supply, average capital city property prices are more than 11 times the average disposable income. Up from less than six times disposable income in the early 1990s.

“Some people have been saying for 20 years that the gap [between property prices and incomes] will narrow because it’s unsustainable, and house prices will fall … they’ve been wrong,” he said.

Intervention from the government and the Reserve Bank typically limited price falls, Mr Eslake said. While this was preferable to allowing prices to crash – which made housing cheaper at the expense of the health of the economy – it meant the best first-home buyers could hope for was an extended period of flat property prices or subdued increases that were below income growth.

“We did that before … for at least 20 years after the end of World War II, because we focused on boosting supply rather than inflating demand. Maybe there is a lesson there,” he said.

Home ownership had peaked in the census of 1966 and has been going downhill ever since, Mr Eslake said, as government policies shifted away from boosting supply to inflating demand, through grants for first-home buyers and increasing tax breaks for investors, which both pushed prices higher.

It was hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they failed to achieve their objectives, he said.

“If we want to get out of this hole that we’ve dug ourselves into, we have to stop doing what we’re doing and start doing the opposite,” he said.

Mr Eslake would like to see first-home owner grants scrapped, stamp duty replaced with a broad-based land tax, and an increased supply of private-sector housing and social housing. The capital gains tax discount for investors should also be reduced, and negative gearing scrapped.

Mr Eslake disagreed with arguments that negative gearing helped ensure much needed rental supply, nothing there would be fewer renters in Australia if investors with generous tax breaks weren't driving up prices, and making it harder for first-home buyers to get into the market in the first place.

Having fewer tenants would also reduce competition for rental properties, and result in lower prices, reducing rental stress for those who would never be able to afford to buy, Mr Eslake added.

Ms Masters also felt more needed to be done on the supply side of the equation, nothing existing planning restrictions limited the delivery of new housing supply, driving prices up.

She added first-home buyers schemes were no help when it came to improving housing affordability, as they fuelled first-home buyer demand, also pushing up prices, and simply brought forward purchases that would have occurred anyway.