Worsening global housing affordability crisis presents major risks to Australians

Australia’s housing market is at a crossroads, as new affordability figures signal a nationwide housing crisis exacerbated by international factors.

The Demographia International Housing Affordability Report, released by California’s Chapman University in May, paints a stark picture of the affordability crisis sweeping the globe.

The report analysed 95 markets across eight countries, delivering sobering results for Australians.

Sydney ranked 94th for affordability, ahead of only Hong Kong, which is currently undergoing a market correction after home prices peaked in late 2021.

Melbourne, Brisbane, Perth and Adelaide trailed not far behind, outranking international heavyweights such as New York, London or Chicago and cementing Australia’s position as one of the most unaffordable economically developed countries in the world.

The Demographia report calculates affordability using the median multiple, a price-to-income ratio that divides the median house price by the median household income.

To be deemed affordable, a market must have a median multiple of 3x or below. Today, not even one of the 95 markets analysed meets this criterion.

Australia’s current median multiple according to the recently released report is 9.7x, a figure that has more than tripled since the late 1980s. Housing in Australia is now twice as expensive as the US, and still significantly above the UK’s median multiple of 5.6x.

In short, Australians are paying more, borrowing more and sacrificing more to access home ownership than ever before.

With talks of a potential housing market correction on the horizon as the government looks to tackle affordability issues, investors are tasked with navigating a new high-risk, high-stakes market.

So, is Australia’s housing market set to fall or do the current conditions signal new opportunities?

Australia’s bubble risk is real but manageable

While Australia’s housing affordability is one of the worst among developed markets, the key takeaway from Demographia’s latest report is that we’re not alone.

With not one of the markets surveyed achieving the affordable threshold, this signals a global shift in the accessibility of housing and points to factors far beyond our shores.

Worldwide affordability pressures are creating new housing trends, all of which will shape our markets and force investors to adapt.

With prices growing increasingly disconnected from incomes, speculation that Australia has entered a housing bubble has inevitably arisen.

In a housing market downturn, borrowers could find themselves at risk of owing more than their property is worth.

But while the risk is real, it isn’t unmanageable.

Even if prices were to take a dramatic fall of 30 per cent, the Reserve Bank of Australia notes that only 10 per cent of borrowers would fall into negative equity.

More than 30 per cent of Australian households own their home outright according to the last nationwide census, granting them complete immunity from this risk. 

Smart investors will diversify and adapt

Success in a high-risk market is all about resilience and adaptability.

For investors looking to preserve growth in their real estate assets during a time when affordability is increasingly constrained, the key lies in focusing on the long-term fundamentals.

With renters under increasing strain, properties that offer value, convenience and security are likely to perform better over time.

Assets such as townhouses, apartments and build-to-rent developments are more likely to appeal to renters under affordability constraints, maintaining more consistent occupancy.

While we can’t ignore the warning signs of a housing market downturn, with affordability metrics deteriorating and capital cities stretched to their limits, these risks don’t necessarily spell doom for property assets.

Investors who invest and diversify smartly, and prioritise the longstanding fundamentals of property will stand the best chance at weathering whatever the market brings next. 

In any market cycle – up or down – making strategic decisions with the guidance of the correct advisors and partners is essential to your success.