Property prices defy gravity as average households priced out

Property prices are defying gravity, despite the average home buyer’s budget being slashed by about 30 per cent over the past two years.

Many of the buyers in the market are earning above average incomes or have large deposits, so they are less reliant on home loans.

Figures this week showed house prices fell modestly in Melbourne in the March quarter but rose in Sydney and all other capitals excluding Darwin over the past three months. House prices are higher in every capital than they were a year ago, Domain data showed.

High prices have left average income earners struggling to save a deposit, especially while paying high rents, or to win at auction, and making compromises such as hunting for smaller or more distant homes as they can no longer afford the average home.

On a separate measure from CoreLogic, Australia’s median dwelling value across houses and apartments is now north of $772,000, and higher in major capital cities.

But for a median income household, assuming they had saved a 20 per cent deposit, they could afford to pay less than $503,000 for a dwelling. That’s a 30.7 per cent fall in the two years since interest rates started rising – when their repayments were lower, the same household could have bought a home worth about $726,000.

Property prices have held up when compared to borrowing capacity.Credit: Nikki Short

CoreLogic head of research Eliza Owen notes that some banks will lend more than this, but says the data shows the disconnect between home values and incomes.

“Housing values have defied gravity in that sense, in that they haven’t been weighed down in the same way borrowing capacity has,” she said.

“The data represents an environment in which home values aren’t tied to borrowing capacity based on income alone.”

Part of the issue is inequality of access, she said.

“You need something else to bridge that gap, which would be a higher deposit, or capital that comes from, presumably, the sale of another asset,” she said.

“If you’re selling property to buy another property then you’ve got a much better chance of keeping up with the market; [or if you have the] bank of mum and dad, if you’ve got parents that can help you out with more to put towards the property.”

Domain chief of research and economics Dr Nicola Powell said there was a similar spate of price rises during the 2000s when the cash rate was rising or high.

“It almost defies logic, if you’ve got slashed borrowing capacity and also the higher cost of debt in the face of high cost of living as well,” she said.

Home buyers in the market now often have high incomes or deposits.Credit: Flavio Brancaleone

“The 2000s were very different economic conditions to today … Both of those periods of time saw really strong rates of population growth and I do think it’s understated, the impact population growth can have.

“We’ve seen strong, strong rates of population growth run headfirst into an undersupply of housing and an extremely tight rental market.”

She also noted that recent buyers were likely to have equity, cash, or family help. The high cost of renting is spurring demand among some tenants to purchase, while the high cost of building new homes diverts demand to the established housing market too, she said.

Jarden chief economist Carlos Cacho said the relationship between borrowing capacity and property prices had a solid correlation for 20 years but has broken down.

“The average household is no longer able to afford the average home, so what you’ve seen is home buyers are skewing much higher income and much higher wealth,” he said.

Almost a third of CBA’s home borrowers now have a combined income north of $200,000, he said, while there’s a shift towards buyers who have larger deposits and a drop in low-deposit buyers.

“A lot of that would be intergenerational wealth transfer,” he said.

But he warned some steam had come out of the property market in recent weeks, and buyers were starting to worry they will not get relief of interest rate cuts for longer than thought.

AMP chief economist Shane Oliver said buyers in the market now depend on other sources of finance than home loans, such as family help or cash. Research from property settlement platform PEXA found 28.5 per cent of residential property sales last year were made in cash, up from 25.6 per cent a year earlier.

“I do find it surprising. You would have expected when interest rates go up two or threefold as they have … you would have thought that would have led to a more significant correction in prices than what we saw in 2022,” he said.

“I do wonder if interest rates stay at these levels indefinitely – even if the housing shortfall continues, which it probably will – whether the buyers who have been propping it up run out.”