Landsburys News

The Melbourne market peaked in 2001 while Sydney peaked later in 2002.

In both Sydney and Melbourne price growth rates fell dramatically after 2003. Melbourne’s growth rate remained relatively low after 2003 and is now recovering strongly. Sydney’s growth has been negative for a number of years and house prices have only just begun to move in a positive direction, the first time since 2004. Despite this Sydney is now the seventh least affordable city in the world and Melbourne is also considered unaffordable. The chart below shows the percentage of average household income required to meet mortgage payments with the blue line representing an affordable percentage.

According to the chart both Sydney and Melbourne’s average mortgage repayments are above the affordable level. This will create major affordability issues and lead to out-migration of young families also limiting the demand for new homes in the two cities. Several factors have added to homes becoming unaffordable. The graph below depicts infrastructure charges when developing land in outer suburban locations.

As shown in the graph Sydney’s government charges in 2006 are significantly higher than in Melbourne and Brisbane. Infrastructure charges per lot in Sydney have increased by approximately $58,000 in eleven years from 1995. While in Melbourne the charges have only increased by approximately $2,000 over the same time period. This has added significantly to the affordability issues in Sydney as the developer will pass the cost onto the consumer.

As affordability becomes more of an issue building approvals are declining as there is a decrease in demand. The graph below shows private building approvals in NSW and Victoria.

NSW private building approvals have fallen dramatically since 2002 while Victoria’s private building approvals have only declined marginally. This could be as Victoria is more affordable than Sydney as only 32% of household income pays the mortgage instead of 37% in Sydney. Therefore there is greater demand in Victoria as people are more willing to commit to a mortgage.

In areas where affordability is an issue housing finance approvals would be expected to decline as the consumer would be less willing to commit to a mortgage. The graph below depicts the movement of housing finance approvals in NSW and Victoria from 2002.

Housing finance in NSW and Victoria peaked in 2003 then fell rapidly during 2004. Victoria since then has recovered and has been on par with the rest of Australia. However, growth in NSW has not kept pace with housing finance approvals in the rest of Australia. The market has been very sensitive to changes in interest rates because of the high prices in Sydney and lack of affordable option.
The Real Estate Institute of Victoria (REIV) hvas released its rental vacancy figures for the month of June, which show that the Melbourne rental market remains tighter than at any other time in the past 25 years. According to REIV the June vacancy rate for Melbourne was 1.4%. The Real Estate Institute of NSW (REINSW) has also released rental vacancy rates for Sydney which showed a rental vacancy rate of a mere 1.4%. The current level of vacancy rates could be due to affordability. As consumers can no longer afford a mortgage they tend to look for other housing options such as renting.

House prices are always moving which in turn affects affordability, construction, finance approval and rental vacancy rates. After the peak in 2003 and downfall thereafter Melbourne’s property market recovered a lot quicker than Sydney’s. However both cities are feeling the effect of affordability. This issue is more extreme in Sydney which has made construction approvals, rental vacancy rate and finance approvals more challenging in Sydney than in Melbourne.