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Six out of eight capital cities deemed ‘affordable markets’

Despite an unprecedented property boom in 2021, new research reveals house prices across most of the country are ‘undervalued’ – suggesting positive signs of housing affordability.

But Sydney and Melbourne house prices have now exceeded the affordability threshold.

The data, compiled by InvestorKit, analysed housing affordability through home loan serviceability – the ability to make repayments on a loan – combined with market pressure analysis. 

InvestorKit founder and Head of Research Arjun Paliwal said the analysis showed most of Australia’s capital cities were still affordable for Australians. 

“However, cash rate hikes would affect housing affordability to a large extent, particularly in the ACT, where a one per cent rate rise would see house prices shift from affordable to unaffordable,” Mr Paliwal said. 

“Fortunately, the RBA recently indicated there would not be a cash rate increase in 2022 – good news for homebuyers planning to enter the market in the coming year.”

Sydney

Sydney house prices are the most overvalued across the country, according to the research.

With the median house price now $1.11 million and the affordable median price at 3.5 per cent interest being $862,000, the Sydney property market is overvalued by 22.3 per cent.

This means that house prices are 22.3 per cent higher than the average household can afford. 

If home loan interest rates were to increase one per cent, to 4.5 per cent, the market would exceed the affordable level by nearly a third.

Melbourne

The median house price in Melbourne – $818,000 – has just exceeded the affordability level by 2.8 per cent at a 3.5 per cent interest rate.

If the interest rate was to rise to 4.5 per cent, the market would be overvalued by 13.9 per cent, with the maximum affordable house price for an average dual-income household being $795,000. 

Brisbane

Brisbane’s median house price is $603,000 – 29.6 per cent lower than the affordable median price at 3.5 per cent interest rate; therefore, it is considered an undervalued market.

If interest rates increased one per cent, Brisbane would still be undervalued, at 14.8 per cent.

Being much more affordable than the two biggest cities, Brisbane and southeast Queensland are quickly gaining popularity, which is evident by interstate migration numbers.

Brisbane’s market pressure is easing for both sales and rental markets, however, are still at high levels, hence a strong 2022 is likely.

Adelaide

Adelaide’s median house price – $526,600 – is significantly lower than the affordability threshold by 42.8 per cent, and by 26.5 per cent if the home loan interest rate increased by one per cent.

The sales market pressure in Adelaide is much higher than a year ago and continues to get stronger.

InvestorKit research suggests a strong 2022 for Adelaide, which may be on track to be a top performer amongst capital markets.

Rental market pressure is also strong in Adelaide as vacancy rates remain well below two per cent. Investors can expect a healthy-level yield of at least four per cent.

Perth

Perth house prices are the most undervalued across the capital cities.

The median house price of $510,000 is 63 per cent cheaper than the maximum price a local household can afford, and 44.7 per cent lower if interest rates rose by one per cent.

Mr Paliwal said the large gap in housing affordability was due to Perth’s high personal income level and the low median house price – the lowest among capital cities.

Market pressure in Perth is high – sales volumes have stabilised and sales listings are also stabilising, which will slow growth rates for 2022.

However, with Perth still experiencing high pressure and a low 10-year price growth of nine per cent, there may still be opportunity for growth. 

Hobart

Hobart’s median house price – $595,000 – is undervalued by 18.3 per cent at an interest rate of 3.5 per cent.

If interest rates increased one per cent, median house prices would be five per cent lower than the affordability threshold.

Although house prices aren’t high to many buyers from the mainland, Hobart has the lowest average personal income among the capital cities, making the city lose its affordability for the locals if lending rates are raised.

Sales market pressure is extremely high, with listings slowly rising while sales volumes decline slightly.

This could keep a strong 10-year performance, with house prices having grown 77 per cent over 10 years.

Darwin

Darwin’s median house price, at $550,000, is 61.3 per cent lower than the affordability level, and by 42.8 per cent if interest rates rose to 4.5 per cent.

Mr Paliwal said the large percentage difference was due to Darwin’s high personal income level and the relatively low house prices. InvestorKit data found Darwin’s sales market was the highest in a decade. 

“The sales market is so active that both listings and sales volume are increasing steadily,” Mr Paliwal said.

“Many are trying to use this booming time to get out, in our opinion, as listings don’t rise at this rate when boom conditions typically occur.”

ACT

With the median house price in the ACT at $826,000, it is 6.6 per cent lower than the affordability threshold, which deems it an undervalued market.

However, if interest rates hiked one per cent, houses would become overvalued by 5.6 per cent – that is, 5.6 per cent higher than the average dual-income household could afford.

Market pressure in Canberra is high in both sales and rental markets, as it remained a very resilient market and local economy during the pandemic.

Now, there are signs of a supply crisis as monthly sales volumes have exceeded the number of listings since early 2021. Although sales volumes are slowing, a low number of listings indicates a healthy 2022 ahead.

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Nicole Madigan

Nicole Madigan is Senior Journalist and Content Producer for Elite Agent.