Is Brisbane property undervalued? Dwelling price to income ratio tells the story

By: Cameron Black: October 3, 2018, Updated: January 21, 2019

If you are a Brisbane resident or even a non-resident that owns property, you may have noticed that the last five or more years has been a pretty continuous run of negative press when it comes to the property market with headlines citing overpriced property, oversupply issues, falling rental rates, and more. We have been talking for the past 12 months about how the cycle is changing and that Brisbane property has been through its pain (price stagnation or price falls) and is now ready for price appreciation. However, listening to many property commentators you would be surprised by this view. The over the top enthusiasm for Sydney and Melbourne property for the last five years has now been replaced with an overriding pessimism, not only for Sydney and Melbourne but now for the entire Australian property market. One would think listening to the press that the entire Australian market is in free fall. But that’s not the case for Brisbane! Brisbane property is poised for significant growth, and here’s why.

Dwelling Price to Income Ratio

Lets start with the NAB Brisbane Housing Market Update, a good overview of the market we often refer to, and we do so again here. It is prepared by CoreLogic, a respected property research consultancy, so it is a good guide that can generally be relied upon for accurate research. If you are interested in purchasing property in Australia it is well worth the seven minutes to watch the video.

When I was watching this, one slide in particular jumped out at me, which I have included below. It shows the average dwelling price in each capital city compared to the average income. Apologies for the quality.

Dwelling Price to Income Ratio Brisbane

Dwelling Price to Income Ratio Brisbane — NAB Brisbane Housing Market Update, Sept 2018

What is the ratio of dwelling prices to annual household income? CoreLogic calculates it as “Median house, unit and dwelling (ie combined houses and units) prices are compared with median household incomes to provide a ratio of dwelling prices to household income. For example, a dwelling price to income ratio of 5 implies that the typical household will spend five times their annual gross income to purchase the typical dwelling within the same region.” What this ratio indicates for buyers is the affordability of housing in each area and gives them an idea of the disposable income they can expect to have in that city compared to other Australian cities.

As you can see in the graph, Brisbane (with a score of 6) sits below Adelaide and most surprisingly Hobart. As we have explained in previous articles, the average weekly household income for Brisbane is almost exactly the same as Melbourne, and both are far lower than Sydney. So the question we should ask ourselves is why the big difference between Melbourne and Brisbane?

With such a significant difference between Melbourne and Brisbane in particular, common sense and historical data tell us that there has to be a change, a move back to the long-term statistical average. This vast difference in the dwelling to income ratios is simply not sustainable in the medium to long term.

Economists will tell you that inconsistencies such as we can see in this graph will not continue in a perfect market. However, property is most certainly not a perfect market. We have entry and exit fees, not to mention the additional costs associated with moving (eg interstate migration from Melbourne to Brisbane to take advantage of this phenomenon). However even taking into account the costs of selling, physically moving and then buying again, the differential that we can now see between Melbourne and Brisbane is not sustainable.

In this example, we have two variables of course, income and dwelling values. Incomes in Australia continue to grow slowly, with very similar levels in both Queensland and Victoria as evidenced by the Australian Bureau of Statics June data (see below).

Annual Change Wage Price Growth - ABS June 2018

Annual Change Wage Price Growth — ABS June 2018

Therefore, if income levels do not vary greatly in the medium term, the only remaining variable is dwelling values.

We would expect that Melbourne’s dwelling to income ratio will improve over time, whilst Brisbane’s declines, effectively moving the two lines above closer together towards the historical average.

This means of course that either Melbourne’s dwelling values must decline or remain flat, whilst Brisbane’s dwelling values increase.

So what does this mean for buyers?

Over the medium term, these macroeconomic fundamentals will almost always play out as you expect them to. We can already see this occurring in practice, with interstate migration to Queensland growing quickly as people move from Victoria and New South Wales.

With job growth and wage growth effectively the same in all three states, it is reasonable to conclude that this interstate migration is being fueled by exactly this phenomenon. It is simply more affordable to buy a dwelling in Brisbane — by a significant factor (Ratio of 6 to 8.1).

It is therefore very reasonable to conclude that dwelling values in Brisbane will continue to grow, and most likely at a faster rate, whilst Sydney and Melbourne prices decline.