**2.6. House price-to-income ratio**

The house price-to-income ratio is generally calculated using average income of the whole population. This method of calculating house price may not be appropriate in that a set of buyers whose incomes are above the average income of the wider population, and have the ability to service the loans tend to bid in the auctions there by inflating house prices [28]. Such competition is visible across all capital cities but more so in Sydney, Melbourne, Perth and Canberra than other cities. Figure 16 shows the median change in the house prices across eight capital cities since 2007.

Importance of Risk Analysis and Management –The Case of Australian Real Estate Market 381

**Figure 17.** Owner occupier debt Source: RBA

May-2007

Oct-2007

Mar-2008

Aug-2008

Jan-2009

Jun-2009

Nov-2009

**Annual change, established home price index (percent)**

**Household debt to disposable income**

Apr-2010

Sep-2010

Feb-2011

Jul-2011

Total

Mortgage Personal

0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0

**percent of household disposable inclome**


Dec-2006

Mar-2007

Jun-2007

Sep-2007

Dec-2007


0

10

20

30

40

50

Dec-2006

**Figure 18.** Annual change in established home prices Source: ABS

Mar-2008

Jun-2008

Sep-2008

Dec-2008

Mar-2009

Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra

Jun-2009

Sep-2009

Dec-2009

Mar-2010

Jun-2010

Sep-2010

Dec-2010

Mar-2011

Jun-2011

Sep-2011

Figure 16 shows that the increase in house prices in the major capital cities have been greater than those of other cities. This suggests the increase in house prices in Australia over the past five years was driven mostly by house prices in the most expensive cities, where home buyers tend to be higher income earners. The house price-to-income ratio does not seem to pick up the distributional differences. The household debt to disposable income ratio can provide valuable insights while assessing the vulnerabilities. Therefore, disposable incomes of people need to be considered when assessing the vulnerability of an average mum and dad investor.

**Figure 16.** Dwelling prices in capital cities in Australia Source: ABS

### **2.7. Owner- Occupier debt**

Figure 17 shows the distribution of debt to income since 2006. The data indicates that the debt to income ratios has been fairly high – but consistent around 160% for the total debt, of

**Figure 17.** Owner occupier debt Source: RBA

**2.6. House price-to-income ratio** 

across eight capital cities since 2007.

The house price-to-income ratio is generally calculated using average income of the whole population. This method of calculating house price may not be appropriate in that a set of buyers whose incomes are above the average income of the wider population, and have the ability to service the loans tend to bid in the auctions there by inflating house prices [28]. Such competition is visible across all capital cities but more so in Sydney, Melbourne, Perth and Canberra than other cities. Figure 16 shows the median change in the house prices

Figure 16 shows that the increase in house prices in the major capital cities have been greater than those of other cities. This suggests the increase in house prices in Australia over the past five years was driven mostly by house prices in the most expensive cities, where home buyers tend to be higher income earners. The house price-to-income ratio does not seem to pick up the distributional differences. The household debt to disposable income ratio can provide valuable insights while assessing the vulnerabilities. Therefore, disposable incomes of people need to be

**Median house prices in eight capital cities**

considered when assessing the vulnerability of an average mum and dad investor.

**Figure 16.** Dwelling prices in capital cities in Australia Source: ABS

Figure 17 shows the distribution of debt to income since 2006. The data indicates that the debt to income ratios has been fairly high – but consistent around 160% for the total debt, of

Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra

Feb-2011

Sydney Melbourne Brisbane Adelaide

**2.7. Owner- Occupier debt** 

0.0

Dec-2006

Oct-2007

Aug-2008

Jun-2009

Apr-2010

500.0

**\$'000**

1000.0

**Figure 18.** Annual change in established home prices Source: ABS

which close to 140% is towards the mortgage. An indication to the scale of vulnerability can become salient when the house hold income to debt and the annual change in established home price are compared. Figure 18 shows that there has been a somewhat volatile situation in the housing market in all capital cities during 2006-2011; yet, during the same period, the debt to income ratio seem to be approximately constant over time. The comparison shows the average households are not so vulnerable to at least a change in their income situation given there was volatility in house price changes over time.

Importance of Risk Analysis and Management –The Case of Australian Real Estate Market 383

 foreign exchange rate changes have been favorable, making property purchase in Australia a valuable option; that in turn driving property prices higher. This has changed in 2011-12 when the higher Australian dollar has posed interesting challenges

The findings are in line and relate to that of the Australian housing and urban research

 investors are motivated to invest in the private rental market for a number of reasons such as financial factors, personal goals (retirement or future home for children at

investors use their own measures of quality and personal preference when selecting a

investors perceive property as a long-term, safe and stable investment that is low risk

investors largely expect capital gains from investing rather that rental yield only and

 informality characterizes investor approaches to the housing market where property is considered familiar, relatively easy to invest in when compared to other

In summary, Australian housing industry continues to experience significant housing shortages in major cities due to a rapidly growing population; in particular, the growth has been fueled by strong overseas migration during 2004-2007, but the Australian current government immigration laws suggest that the strong levels of immigration will continue for some time due to the lack of skills in the labor market. The housing demand is further supported by the fact that the size of the Australian household appears to be shrinking adding to the pressure on housing both in rental and investment. The demand of rental housing together with somewhat lower house prices in recent times (buyer marker) has lured many new investors in the market. This aspect, the negative gearing benefits, and the first home ownership schemes supported by significantly lower interest rates have all led to a favorable and stronger real estate market in Australia. All of this has occurred within a framework of a stronger, tightly regulated financial sector that has been more-stricter than most advanced economies including the US. Such a regulated real estate market appears to have kept the mortgage repayment failure and housing related bad debts at a minimum in

*Science Environment Engineering and Technology [ENV], Environmental Futures Centre, Brisbane,* 

university), and household circumstances (proximity to their own dwelling);

dwelling even though they will not be living in the property;

for the Australian investments.

institute's findings [29], which further suggest:

and will produce guaranteed returns;

this is how success is measured; and

investments.

Australia.

*Australia* 

**Author details** 

*Griffith University, Australia* 

Gurudeo Anand Tularam and Gowri Sameera Attili
