Some ideas about measuring the relativity of housing costs

By CoreLogic RP Data on 29 Apr 2015
No Comments yet, your thoughts are very welcome

Measuring the cost of housing and housing affordability is such an abstract idea because it is not a one size fits all measure and there are so many factors which contribute to affordability or unaffordability. Most of the common measures have one or a number of glowing weaknesses which I will cover.

Interest rates
What interest rate do you use when a typical mortgage is 25 to 30 years? Most measures utilise the current mortgage rate and while that may tell you what affordability is like now, affordability is important to analyse throughout the life of the mortgage not just as you purchase. With generational low mortgage rates right now, affordability in many areas looks good but if rates were to normalise affordability would look very different.

Household income
What figure do you use for household income? Much like interest rates household incomes will fluctuate over the 25 to 30 year cycle of a mortgage. Given this, are household income measures appropriate or is it better to assume a single or dual income household? Furthermore, outside of the Census, which is conducted every five years, this data is only published semi-regularly and at a state level. Housing markets and income levels are very different across different regions of the country.

If you are thinking about buying in Sydney but are currently renting in another city, you could be in for a nasty shock when you go to purchase.

International comparisons
Is a home in Australia the same as a home anywhere else in the world? In the sense that it provides shelter it is, however, tax regimes, the cost and scarcity of developable land, the provision of infrastructure and the availability of jobs are all other factors that contribute to the cost of housing. Furthermore, most comparisons are not apples with apples. Australian housing markets are dominated by detached houses whereas markets like Tokyo, Singapore, Hong Kong and Manhattan are largely apartment markets while London for example is predominately attached housing types (what we would call terraces or townhouses). The fact that Australian homes are, at least for the large part, detached and the largest in the world will also contribute to a higher cost.

Ryan Fox and Richard Finlay from the RBA wrote an excellent paper back in 2012 which provides an overview of some of the challenges around blending household income data with housing prices which is available here.

CoreLogic RP Data don’t regularly publish a measurement of housing affordability, however, a different perspective on housing affordability is to look at the cost of renting relative to the price of a home. Using our data on advertised median rental rates and median selling prices of homes we can determine how many years difference there is between the cost of renting and the cost of a home. This analysis focusses on the relative affordability between the two primary means of shelter; renting or owning a home. This analysis doesn’t factor in interest rates or household incomes and doesn’t compare internationally. What it does do is look at the difference between the two forms of housing residents have, to rent or to purchase.
With rental growth at its lowest level in more than a decade, we would expect that the number of years of rent required to purchase a home will rise over the coming year. As a result we may see more residents choosing not to purchase their own home despite the low mortgage rates available.

Photo 1 RPData

Across the combined capital cities, the annual rent for a house is $25,552, for a unit it is $24,013 and for combined houses and units (dwellings) it is $25,311. In comparison, the median house price is $559,000, the median unit price is $470,000 and the median dwelling price is $530,000. Based on this data, to buy a house would take 21.9 years of rental payments, to buy a unit requires 19.6 years of rent and a dwelling would take 20.9 years of rental payments. As the chart shows, the differential has been greater at the end of 2007 and there has been little change over recent years. In saying this, in March 1997, the differential was much lower at 10.8 years for houses and 11.7 years for units.


In Sydney, the cost of a house is equivalent to 24.6 years of rents and the cost of a unit is 21.7 years of rent.


Across Melbourne the median house price is equivalent to 23.8 years of rent while the cost of a unit equates to 21.3 years of rent.


A typical Brisbane house costs 20.9 years’ worth of rent while the typical Brisbane unit costs 17.7 years of rent. Note that the 17.7 years is the lowest since July 2004.


The median house price in Adelaide is equivalent to 22.0 years of rent and the unit price amounts to 20.6 years of rent.


The median Perth house costs 21.0 years’ worth of rent while the median unit costs 19.1 years’ worth of rent.


A typical house in Hobart costs the equivalent of 18.9 years of rent while a unit costs 17.0 years of rent.


A house in Darwin costs 18.4 years’ worth of rent while a unit costs 18.9 years’ worth of rent.


The median house price in Canberra is equivalent to 22.6 years of rent while the median unit price is 19.7 years of rent.


It is also interesting to look at the relativity between cities. The way to read this chart is if you use Sydney as an example, rents are on the left and purchase prices are at the top. Given this, if you rent in Sydney and want to purchase in Sydney it costs 22.4 years of rent, whereas if you live in Sydney but want to purchase in Melbourne it is equivalent to just 16.8 years of your Sydney rent. The table shows that those renting in the more expensive cities would have a much easier time entering into home ownership outside of these cities. On the other hand, if you are thinking about buying in Sydney but are currently renting in another city you could be in for a nasty shock when you go to purchase.

By no means do I think this analysis is a perfect picture of housing affordability however, I do think it is a different way to measure it. It still has the weakness of using medians and of course, very few people purchase the median home and in particular first time buyers should be looking to purchase below the median price. Nevertheless it does show the difference in the cost of renting and housing and potentially provides some food for thought for those looking to enter into home ownership. Considering this analysis is quite different from other studies around the cost of housing, I’d value any feedback that readers may have on this analysis.

About the Author

RP Data is the largest provider of property information, analytics and risk management services in Australia and New Zealand with a database of 220 million property records. RP Data services customers ranging from real estate agents and consumers to banks, mortgage brokers, financial planners and government bodies.

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