My apologies. The report to which your post was actually making reference, including the 43% fall observation, was actually UBS Warburg's Australian Economic Perspectives, dated 30 September 2002.
Interesting from that report, UBS Warburg used a P/E based approach to arrive at their view of the housing market, and why Melbourne, but not Sydney, was in the midst of a housing bubble.
More interesting to note was UBS Warburg's observation that Sydney housing prices would need to fall by 16% (but Melbourne, by 35%) in order to return housing prices to their long-run, historically normal P/E ratios.
However, upon closely examining the charts, the following was of more interest: 1) Sydney's inflation adjusted P/E ratio for housing has peaked at 35 or above, 4x since 1973. 2) Melbourne's inflation adjusted P/E ration for housing has peaked above 35 once, but above 30, twice, since 1973. 3) In 1974, the Sydney IA-P/E ratio peaked @37, dipped to 25 in 1977, rose back to 35 in 1981 (and continuously above 31 between 1978 and 1983), fell away to 22 in 1985, peaked out at 31 in 1987, before rising to 38 in 1989, then over the next 4 years fell all the way back to 22, before rising again to 27 in 1995, dipping under 26 in 1996, and again breaking through the 27x mark in 1997, before rising to the end 2001 peak of 37.
4) In 1973, the Melbourne IA-P/E ratio rose from below 20, to 26 in 1974, before peaking @30 in 1975. By 1977, Melbourne's P/E ratio was back to 25 (same as for Sydney). It then fell away to 21 in 1978, before rising back to 23 in 1981, and topping out twice @25 in 1982 and again in 1983.
By 1985, Melbourne's P/E ratio was down below 17, before rising again to 24 in 1987. It then dipped in 1988 to 21, before finishing out the 1980s in stable 25x ratio.
By 1993, the P/E ratio was down to 16 and, on a sustained basis, rose back above 20 in June 1997. From there it rose to 25x P/E in 2000, before continuing on to the end 2001 P/E ratio of ~37x.
5) In the last 28 years, the average IA P/E ratio for Sydney has exceeded a 30x average for >14 years; exceeded a >27x average for 18+ years; and exceeded a >23x average for ~26 years out of the last 28.
6) By way of contrast, the average IA P/E ratio for Melbourne has exceeded a 30x average for ~2 years (out of 28), all since 1998; exceeded a >27x average for ~6 years out of the last 28; and exceeded a >23x average for ~18 years out of the last 28.
7) Overall, the IA P/E ratio for Sydney approximates 30x, and for Melbourne, 22x.
Overall, I realise that you make statistics support whatever contention you want to propose, but what is clear from UBS Warburg's analysis is that: 1) Sydney has always been relatively more expensive than Melbourne, even though the wage differential between the 2 cities is much smaller; 2) even now, Melbourne is only nearing Sydney's P/E ratio of 37x and only rose above 35x for the first time during 2001 (whereas Sydney has visited and exceeded this peak 4x since 1973; 3) approximately 50% more in terms of household income is required on average to service loan repayments in Sydney (where the percentage is above 40%), thn in Melbourne (where the percentage is closer to 28%); 4) Melbourne's housing recovery boom has been ridden harder than in Sydney, coming off the June 1993 dip of 16x, through to the 2001 peak of 37x; and 5) Sydney's housing boom has (overall) been more modest, rising from 22x in June 1993, to the current 37x (in 2001).
Overall, however, there is more that goes into determining the rise and fall of housing prices than the sheer growth momentum attaching to their historic earnings (or savings equivalent) potential. Whereas Melbourne has come off a low historic base compared to Sydney, wage levels in both cities approximate each other, whilst the cost of living (ex-housing costs) is marginally in Melbourne's favour. However, once adjusted for housing affordability, it is clear that a greater (and continuing) proportion of the average Sydneysider's pay packet is required in order to continuing servicing their home loan than is the case for the average Melbournite.
It may well be that Melbourne's housing prices will eventually come off the buy, but when they do, the resulting improved housing affordability will just go to exacerbate the growing divide between Sydney and Melbourne.
It can truly be said, therefore, that Sydney is fast becoming an international (or global) city, with its housing prices, rental rates, and broad-based cost of living far exceeding the equivalent values found in Melbourne, and then in turn, throughout the rest of Australia.
A more broad-based economic analysis of the socio-economic situation in Sydney, compared to Melbourne, would find Sydney at greater risk of a housing collapse than is the case in Melbourne.
In Melbourne, housing prices may dip, with a minor collapse to follow, but the market will still be there. In Sydney, however, the affordability factor is such that a fall in housing prices will simply not sustain the market going forward, and the overall housing market may simply shrink in size altogether.
If this occurs, this suggests that Sydney may well transform itself into a rental culture faster (and more so, out of necessity) than will be the equivalent case for Melbourne.
So, where to next?
Maybe, like the rest of Australia, increased internal migration to south-eastern Queensland, or perhaps (just maybe) back to Melbourne.
