So
yesterday’s housing finance figures will put more pressure on interest
rates? The great Australian dream has become the worry that keeps us
awake. More and more of us are concerned whether we can buy into the
housing market – or service our mortgages.

Interest rates won
John Howard the last election. Yes, “who do you trust to keep interest
rates lower” might have been shorthand for “Mark Latham’s mad”, but
rates are still a touchstone issue – one that is shorthand for a whole
range of economic management criteria.

The Government staked its economic credibility on the issue – which makes the information at the American website Demographia
very interesting indeed. Guess which city comes in at Number 4 on its
“Severely unaffordable markets” list for housing? Sydney. It says that
in Sydney it takes 8.8 years of median household income to purchase a
median priced home, compared with 2.7 years for the US boomtown of
Houston. Melbourne’s Number 9. Amazing, Adelaide and Hobart come in
next, at 12 and 13. Brisbane’s 15. Canberra’s 20 and Perth’s 21.

And
the site has some interesting commentary: “All of the Australian
markets except for Darwin are rated as ‘Severely Unaffordable’.
Moreover, the rate of housing affordability loss in the major
Australian markets has been stunning. In the first few years of this
decade, the house price multiple has risen 40% or more in Adelaide,
Brisbane, Perth and Sydney…

The following example illustrates
the seriousness of the housing affordability crisis. Home ownership
rates in Australia, Canada, New Zealand and the United States are all
above 65%. At a 3.0 house price multiple, approximately 60% of US
households could qualify for a mortgage on the median priced home.
Above the 8.5 house price multiples now being witnessed in California
and Sydney, fewer than 25% of households could qualify to purchase such
a home. There’s a country-by-country analysis here . The ratio of median-house-price to median-household-income is:

Australia: 6.1
New Zealand: 5.1
United States: 3.9
Canada: 3.6

Australian housing may be more unaffordable than these figures suggest.
Our interest rates are higher than the US and Canada, our personal
income tax rates are higher than the US, Canada and NZ and mortgage
interest on the principal residence is tax deductible in the US. See
how housing meshes into a whole range of other policy debates – like
tax? The government hasn’t just made a rod for its own back. It’s made
a cat o’ nine tails.

Peter Fray

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