I like to think about most things in life in a probabilistic and fundamental way. This is my take:
- Wage growth is at all time lows. Wages are at similar levels now to what they were in 2013.
- House prices in Sydney grew 70% in the 5-year period to December 2016, 40% in Melbourne and 41.4% in Australia overall.
- Wages grew 13.2%
I cannot be bothered finding more recent or statistics over a longer time-period and I don't know them off the top of my head.
The point is that mathematically, this increase in housing prices relative to wage growth is unsustainable. Not in a 'it will be unfair to millennials' kind of way, but literally impossible.
Let me put it in context. Most average Joes assume that their house will double in value every 7 to 10 years. The current Median house price in Melbourne (just using Melbourne as an example - please apply it to anywhere) is $880k.
According to the people I overhear on the train, this means that in 7-10 years (say, by 2027), their house will be worth $1.76 million. Meanwhile, wages may increase 2.5 % per year if we're lucky. Compounding this growth in wages over 10 years will result in a 28% increase in wages.
Hmmm, so a 100% increase in house prices vs. a 28% increase in wages? Seems logical..
Let's take it further. Assuming again that house prices double in value every 7-10 years (let's use 10 again), that means in 2037 the Median house price in Melbourne would be $3.52 million.
That means from 2017, house prices would have increased 300%, whilst wages would have increase 64%. Who would be able to afford a $3.52 million house on an income of $90k? No one.
My conclusion: house prices stagnate or increase very slowly until wages catch up (which I can't see happening given that this nation is built on iron ore and scammy education exports). Let's pray productivity increases a heap.
