If you live in Sydney or have ever thought about investing anywhere in the city, you’ll certainly understand that it is a very pricey real estate market.
In fact, Sydney property is so expensive that it is officially the second most unaffordable city in the entire world.
According to the Demographia International Housing Affordability report, which ranks housing markets based on their median house price divided by their gross median household income, Hong Kong has the world’s most unaffordable housing market, with Sydney coming in second place.
In the report, cities with a ranking above 5, meaning it takes 5 times the median household income to afford a home, are considered severely unaffordable.
Sydney is right up there with other expensive locations such as Vancouver, Los Angeles, Auckland, London and New York – all locations that sit well above 10 on the ranking scale.
Sydney’s median house price hit a record $1.6 million recently according to Domain, and experts believe that it is on track to reach $2 million in a matter of years.
Notably, there are some key differences between Hong Kong and Sydney. Hong Kong is an island, so there is a clear shortage of land to build on. With their population growing rapidly, prices are bound to keep rising. However, in recent years, high interest rates have slowed down that growth.
Sydney is slightly different in that there is room to grow. But only to a point. Sydney is bound by the Blue Mountains, Hawkesbury River and the ocean, so there is not unlimited growth potential.
However, with Australia’s record-high immigration and with most of the new arrivals landing in Sydney and Melbourne, there is always going to be pressure on house prices.
In reality, there is no reason for house prices to ever become affordable again. In many cities like New York, a large portion of the population chooses to rent. They simply don’t have the income to afford to buy in these types of cities.
That’s something we see to an extent in Sydney as well, with a lot of people locked out of buying. The situation is likely to be even more pronounced in places like the Eastern Suburbs.
In this area, there is already a shortage of supply and no more land on which to build. These areas are aspirational for most people, so they are prepared to pay more to live here and it attracts the wealthiest people with the best jobs and biggest businesses.
For that reason, these areas will likely continue to see strong long-term growth which will move prices well above the median income and what is considered affordable.
The good news for investors, though, is that you don’t actually need to pay for the property yourself. That’s what rental income is for. While it won’t cover it all, it will help get you into some of these blue-chip assets so you can capitalise on the growth potential.
There’s never an easy or good time to buy into these blue-chip markets. The best thing to do is to buy when you can afford it, meaning you have the serviceability and equity in place to do so. The sooner you get in the better, as it’s never going to be affordable by most metrics.
