sydney dark
Sydneysiders are paying beyond what is deemed “affordable”. Image – Canva.
  • Increasing the cash rate could pose threat to affordability, particularly in the ACT, says Arjun Paliwal
  • Sydney is Australia's most unaffordable city with a median price 22.3% above the affordability level
  • Perth is the most undervalued city, 63% below the affordability level, due to high incomes and low median price

The latest research from buyer’s agency InvestorKit has revealed Sydney to be Australia’s most unaffordable capital city.

Famous for its distinctive landmarks and scenic beaches, Sydney holds both titles of Australia’s most expensive and most overvalued city.

Cash rate rise will harm affordability

The InvestorKit research calculated affordability by first deeming an affordable house price for each city.

InvestorKit analysed factors including average local income of a dual-income household and loan affordability of 30% net income.

An affordable house price was then determined by calculating realistic home repayments based on a 3.5% interest rate and a potential cash rate increase to 4.5% interest rate.

The current median price was then compared against the affordable price, and it was determined whether a city was overvalued or undervalued.

Overall, Australian residents are in luck with most capitals in the green zone for affordability with the exclusion of Sydney and Melbourne.

Arjun Paliwal, InvestorKit founder and The Property Tribune contributor, said the data indicates that most of our nation’s capital cities remain affordable for their residents.

“Cash rate hikes would affect housing affordability to a large extent, particularly in the ACT, where a one per cent rate rise would see house prices shift from affordable to unaffordable.”

Arjun Paliwal, InvestorKit

Despite the threat that an increased cash rate poses to affordability, this will be a worry for another time with the Reserve Bank of Australia (RBA) announcing the rate is unlikely to change until 2024.

“Fortunately, the RBA recently indicated that there would not be a cash rate increase in 2022 – good news for homebuyers planning to enter the market in the coming year,” said Mr Paliwal.

Sydney most unaffordable as Melbourne tips over the edge

InvestorKit deemed Sydney to be Australia’s most unaffordable city, with a current median price of $1.1 million while the affordable price sits at $862,000.

Sydney is hence overvalued by 22.3%, meaning residents are stretching their pockets further than what the average household can afford.

Meanwhile, purchasing a house in Melbourne may be significantly cheaper than Sydney but the city has also crossed the threshold of affordability.

The median house price in Melbourne is currently $818,000 while the affordable price is $795,000, exceeding affordability by 2.8%.

However, with an interest rate increase to 4.5%. Melbourne’s affordability would be drastically impacted with overvaluation rising to 13.9%.

Perth most undervalued capital

Recent reports emerged of east coast investors turning to the Perth market for affordability reasons, and it seems this strategy has merit given InvestorKit has determined Perth to be the most affordable capital.

With a median house price of $510,000, the city is 63% cheaper than the affordability price.

The strong affordability of Perth is largely due to the high personal income level of residents, combined with the city maintaining the lowest median price across Australia.

Market pressure remains high in Perth and as listings and sales volume begin to steady, so too should the price growth.

Following closely behind Perth in terms of affordability are Darwin and Adelaide, with median prices below the affordability level at 61.3% and 42.8% respectively.

The Australian Capital Territory is most at risk of falling into unaffordability in the event of an interest rate rise.

While Canberra currently has a median price of $826,000, 6.6% lower than the affordability value, a interest rate increase to 4.5% will see the city overvalued by 5.6%.

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