Trusted property analyst Michael Matusik uses household income to forecast where house prices may settle in a property cycle in any given location.
More specifically, he assumes that the median house price could be calculated by multiplying the household income by 6, in any given location, to work out where the median might sit.
Applying this method of calculation we find that overall, prices in Australia are around 11% too high. Specifically, Sydney and Melbourne are 21% and 18% overcooked respectively, where Perth 33%, Adelaide 7% and Brisbane 5% are undervalued.
I prefer to look at the mortgage affordability index as a percentage of household income to guage whether a location is overvalued. This takes into account; interest rates, median house price and average income. Typically mortgage affordability caps out at around 60% of house income.
Sydney is currently sitting at over 60% where Perth is hovering around 24%. Perth hasn’t been at this level of affordability since around the year 2000.
From 2000 to 2008, Perth’s affordability index rose from 25% to 59%.
By reflecting on past statistics, we can try and estimate how high prices can go before we hit our affordability ceiling. Based on this metric, we can assume that there is plenty of upside potential for median house price increases in Perth. Regardless of where interest rates end up in the medium term.
Will there be a time when the market conditions in Perth won’t be ideal for purchasing property? Yes, but I don’t think we are quite there yet.
