Hi,
This post might be a long one so bear with me, but I want to outline a simple thought flow and its logical conclusions which can help inform your decisions as to where to buy in Sydney (or other cities by extension). Let me formulate an argument and conculsion for you and see how it goes.
Assumption 1: Income growth drives long term price and rent appreciation
There has been a lot of debate lately about what drives house price appreciation, but a common conclusion seems to be that income growth correlates with house price appreciation as well as other structural elements which can be isolated. Here's a few links that support this conclusion:
1. Ross Gittins July 2007
2. Greg Hoffman April 2010
3. Chris Joye October 2010
So, income growth is the long term basis for price and rent appreciation. But, structural changes such as interest rates in a low inflation environment can cause a corresponding step change in prices as ultimately interest servicability is a factor of both incomes and the rate interest is charged at. Other structural changes which can cause a step change in prices is the amount of household income brought to bear in servicing mortgages through the propensity to dual income households or pooled purchasing.
Asumption 2: Income Growth is uneven
1. Jessica Irvine October 2008
So, in a strong economy, high income earners increase their incomes at a greater rate than lower income earners. This has a similar reverse effect in hard times where high income earners wages fall faster than low income earners.
Conclusion: High income suburb prices rise faster than low income suburbs.
It follows then, that if house price appreciation is driven predominately by wage appreciation AND that wage appreciation is higher for high income earners THEN house price appreciation should be higher in high income suburbs during the good times.
1. Jessica Irvine October 2010
So, there you have it.
1. Incomes drive house price growth.
2. High income earners have a higher rate of income growth
3. High income suburbs have a higher rate of price appreciation.
Or, for those who like to keep it simple: Follow the money.
QED as they say in academia.
Enjoy...
Cheers,
Michael
This post might be a long one so bear with me, but I want to outline a simple thought flow and its logical conclusions which can help inform your decisions as to where to buy in Sydney (or other cities by extension). Let me formulate an argument and conculsion for you and see how it goes.
Assumption 1: Income growth drives long term price and rent appreciation
There has been a lot of debate lately about what drives house price appreciation, but a common conclusion seems to be that income growth correlates with house price appreciation as well as other structural elements which can be isolated. Here's a few links that support this conclusion:
1. Ross Gittins July 2007
Ross Gittins said:The true problem is that our homes are at the centre of our materialist ambitions. As our incomes grow in real terms over time we want to put much of the increase into our homes.
2. Greg Hoffman April 2010
Greg Hoffman said:Over time, though, you'd expect the earning power of property (the rent it can generate—or save you if you live there) to rise roughly in line with the growth in average wages.
Over the very long term it has to be this way.
3. Chris Joye October 2010
Chris Joye said:The managing director of Rismark International, Christopher Joye, said the disparity in house prices between the east and west reflected the broader disparity of incomes and income growth.
So, income growth is the long term basis for price and rent appreciation. But, structural changes such as interest rates in a low inflation environment can cause a corresponding step change in prices as ultimately interest servicability is a factor of both incomes and the rate interest is charged at. Other structural changes which can cause a step change in prices is the amount of household income brought to bear in servicing mortgages through the propensity to dual income households or pooled purchasing.
Asumption 2: Income Growth is uneven
1. Jessica Irvine October 2008
Jessica Irvine said:From the figures it is possible to derive a ''Mosman-Fairfield'' inequality index which compares average incomes in Sydney's richest and poorest areas. In 2003-04, a worker in Mosman earned 2½ times that of a worker in East Fairfield. By 2007-08 this had risen to 2.9 times.
''The ABS data shows a steady rise in income inequality across the country with average incomes for the top end increasing more than the middle income … that reflects the greater share of the boom time accruing to those already on relatively high incomes.
''And the incomes of the bottom end haven't risen as strongly, despite strong jobs growth for low-skilled workers over that period,'' he said.
So, in a strong economy, high income earners increase their incomes at a greater rate than lower income earners. This has a similar reverse effect in hard times where high income earners wages fall faster than low income earners.
Conclusion: High income suburb prices rise faster than low income suburbs.
It follows then, that if house price appreciation is driven predominately by wage appreciation AND that wage appreciation is higher for high income earners THEN house price appreciation should be higher in high income suburbs during the good times.
1. Jessica Irvine October 2010
Jessica Irvine said:THE median Sydney house price has more than tripled over the past two decades, but prices in the east and inner west have quadrupled, mirroring and compounding a growing income divide across the city.
So, there you have it.
1. Incomes drive house price growth.
2. High income earners have a higher rate of income growth
3. High income suburbs have a higher rate of price appreciation.
Or, for those who like to keep it simple: Follow the money.
QED as they say in academia.
Enjoy...
Cheers,
Michael