Future capital growth predicted to come from middle quartiles of the market

Residex's July 2010 market wrap has warned that affordability is putting a brake on property markets in Sydney and Melbourne.

Residex chief executive John Edwards has calculated that more than 60% of the gross after-tax take-home pay of a typical household in both Melbourne and Sydney would currently be used to purchase a median valued home, assuming current home loan interest rates and a deposit of 20% of the property's value. This, Edwards argues, is constraining markets.

He adds that rentals are constrained by affordability too, and that at these levels there will be pressure on those renting to either reduce expenditure and increase people density in rented properties, or move to more affordable areas.

"All of this points to growth being more likely and of lower risk in the middle to second quartile of the market," said Edwards. "It also suggests that probably the best total and balanced returns are more likely to come from units, which are significantly more affordable in both rental and capital cost terms."

"Last financial year started well and finished on a very positive note. I am looking forward to an equally positive year, but do expect it to provide slightly poorer results", Edwards said.

Note I spoke to John to clarify exactly what he meant by "middle to second" quartile of the market. He clarified that he was referring to not the top or the bottom quartiles but the middle two quartiles. Particularly the second quartile from the top as there have been signs of weakness in the lower middle quartile of the market. Probably driven by first home buyer mortgage stress.