My house is my castle – but is it worth it?
Working out if a house is good value for money can be difficult. But as the eZonomics video Are houses expensive or cheap? explains, the average house price to average wage ratio might help weigh up if houses are overvalued, priced suitably or are good value. The ratio is calculated by dividing the average house price by the average wage. The result shows how many years of average wages it would take to buy the average house. The higher the ratio, the more expensive houses are in relative terms. A story in the Sydney Morning Herald today said a Demographia International Housing Affordability Survey of 325 markets found Hong Kong and Sydney had the highest ratios at 11.4 and 9.6 respectively.
House prices cannot move to far from wages
The house price ratio taps into the theory that house prices cannot move too far from people’s ability to pay. If they do, the theory goes, the market is likely to ultimately “correct”. Or put simply, if prices reach unsustainably high levels, the theory goes that prices are likely to fall.
Do your homework
In the housing video, ING Commercial Banking senior economist Ian Bright urges potential home owners to do some basic comparisons and be aware of the risks of investing in real estate before deciding whether to buy. As Bright says in the video: “One thing is clear, it can be financially dangerous to buy a property just because prices have increased over the past few years.”