Sydney and Melbourne more affordable than Demographia suggests

Sydney and Melbourne are significantly more affordable than US-based research organisation Demographia claims, according to Property Observer calculations based on the latest available official ABS data.

In its eighth annual global housing affordability report, Demographia ranks Sydney as the third most unaffordable city in the world with house prices 9.2 times higher than the median household income and Melbourne sixth most unaffordable with a median multiple of 8.4.

However, the most recent ABS estimates of median household income and median house prices (respectively, the Household Wealth and Wealth Distribution report for 2009-10 released in October 2011 and the September quarter House Price Index released in November 2011) suggests quite different results.

Using the ABS figures, Sydney has a median multiple of 7.4, which means it drops down the list of most unaffordable locations from third (according to Demographia behind Hong Kong and Vancouver) to equal 10th with the UK’s Plymouth and Devon region.

Using the same ABS data, Melbourne’s median multiple falling from 8.4 to 6.5, with its ranking falling from six to joint 24th most unaffordable city alongside Telford and Shropshire in the UK.

Not all cities become more affordable using the ABS figures – Perth’s median multiple goes from 5.7 to 6.6 because the official ABS figures put the median Perth house price at $500,000 while Demographia says it is $450,000.

Wendell Cox, co-founder of Demographia, tells Property Observer median household income data differences arise because it uses a different Australian Bureau of Statistics (ABS) database while house prices come from real estate industry sources.

“Our median household income estimates start with a base of the ABS 2006 census data for the corresponding capital cities (statistical divisions) as well as the other areas reported upon. These figures are then adjusted based upon the change in earnings per person (using ABS data),” Cox says.

“There are differences between the income data from the census and the Household Wealth and Wealth Distribution report data. For example, the 2005-6 report had a median household income for Sydney approximately 9% higher than the median household income as reported by the 2006 census,” he says.

“Our first choice for estimating median household income data is census data, where it is available (such as Australia, Canada, New Zealand and the United States) because of its virtual universality (more than seven million households nation-wide). The 2009-10 Household Wealth and Wealth Distribution data is from a national sample of 18,000 households (2,245 in Sydney).

“We do not question the Household Wealth and Wealth Distribution report, but consider the census data more appropriate for the comparisons in the Survey. We anticipate updated median household income data from the 2011 census and plan on using that as a base next year.

“The median house prices for the capital cities are from the Real Estate Institute (REIA and state affiliates),” he says.

Demographia as its Australian research sources the following: AMP Banking (Australia), ABS, Australian Property Monitors, Housing Industry Association, Real Estate Institute of Australia and its state institutes, RBA, Residential Property Council (Division of the Property Council of Australia) RP Data (realestate.com.au), and the Urban Development Institute of Australia.

This article first appeared on Property Observer.