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Why Australia is in the biggest housing bubble in the world

Living in Australia is amazing. We’ve got some of the best transport systems in the world; the economy is rock solid and politically we’ve got a free and open market. But with all the good news, there’s some bad news too.

Wages has barely kept up with inflation for over a decade. In November 2010 the average wage per week was $1,327.80. In November 2020, the wage increased to $1,757.20, an increase of ~32%. According to the RBA inflation calculator, wages should’ve increased to $1,604.14 per week. At first glance, this looks amazing. But looks can be deceiving. At the same time, the personal income tax rate has pretty much been stable at around 37%. So realised gross income per week is closer to around $1,201 per week before expenses.

Median house prices in 2010 for the Sydney region, was approximately $620,000. By December 2020, this has increased to an eye watering $1,211,488. That’s an increase of about 195% in a decade. A property investor’s dream! Again, according to the RBA inflation calculator, house prices should’ve been around $749,032, if house prices kept in line with inflation. But such is the beast of supply and demand.

According to a recent study by Aussie home loans, the average Sydneysider will need to dedicate ~185% of their gross annual income just to save 20% in order to be approved for a home loan. It’s fairly obvious to see why the gig economy has mushroomed in the last few years. As more people need to find ways to save more money. According to the Australian Bureau of Statistics the cost of living in Australia has increased by ~23%, which is slightly lower than wage increases.

Rent in Sydney has also increased to a median weekly rate to around $500. So let’s assume you earn the average wage in Australia and after tax, you’re left with $1,201. After rent, you’re left with around $700. The average shopping basket for a 2 adults and 1 child is around $200 per week. That leaves you with around $500 to save for a house. Assuming you need to save 20% for a house with a median price of $1,211,488, you’ll need to save around $250,000 excluding any taxes and duties! Barring any other expenses, families on a single income will need to save for around 500 weeks or almost 10 years. But at the trend of housing prices of around 195% per decade, it’s a hopeless situation.

It doesn’t take a brain surgeon for someone to see that there’s trouble brewing. Houses are too expensive while realised wages are barely keeping up with the cost of living. Personal debt per person has surged to over 200% of nett income according to Finder by 2019, Australia’s appetite for debt is alarmingly greater than ever and increasing.

So where does this leave us? I think it’s safe to say that at this moment, only those with top incomes are able to get into the property market and if something isn’t done to stem the increase of house prices or to increase wage growth, our children will never have the privilege to own a home in Australia. The boom is over.

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