Relax, housing’s just as affordable as 10 years ago

ScreenHunter_1742 Mar. 20 07.17

By Leith van Onselen

In March 2010, just before Australian house prices peaked, the Sunday Telegraph published an article citing CommSec research showing the sharp deterioration of housing affordability over the past 50 years:

AUSTRALIANS have to work almost three times harder to pay off the average family home than they did 50 years ago.

Figures compiled by CommSec for The Sunday Telegraph reveal homebuyers on the average income now have to work for 19,374 hours to buy the average Australian house with the average mortgage.

Based on an eight-hour day and a five-day working week, that equates to about 10 years of work. In reality, it takes much longer to own a home, because wages must pay for all living expenses, not just housing.

In 1960, it took homebuyers just 7500 hours to pay off the average mortgage.

CommSec chief economist Craig James said that half a century ago, average wage-earners took home the equivalent of $1.08 an hour.

They needed to work 25 hours to meet the monthly mortgage repayment of $25, based on an average five per cent interest rate and a mortgage of $4620.

Today, the average worker earning $30.04 an hour spends 70.7 hours – or almost two weeks of the month – at work to cover the monthly mortgage repayment for an average $283,000 loan at a 6.64 per cent interest rate.

The figures show rising costs and growing property prices have largely outstripped wages and young couples today need to work longer and harder to achieve the great Australian dream of owning their homes.

Whereas homes were once affordable on a single wage, families now realistically need two incomes to fund a mortgage.

Yesterday evening, CommSec back flipped on its previous research, releasing a new report claiming that Australia’s Gen-Y’s have little to complain about, since housing is just as affordable as a decade ago:

Gen Y has no reason to blame parents or grandparents – home affordability hasn’t really budged in the past decade. Home prices may be up, but so are disposable incomes.

Now when you are measuring home prices, you want the best information available. And that is the data from the RP Data/Rismark Home Value index. And if you want to measure income, there is no better source that the Australian Bureau of Statistics. Put the two together and you should have the most accurate measure of home affordability.

The latest figures for the December quarter reveal that the median price of a home, in data taken from all regions across Australia, was $450,000. The ABS national accounts estimate of disposable income was $1007.5 billion. The estimate of the number of households across Australia (from the Housing Industry of Australia) was 9,002,348. And the estimate of disposable income per household was $111,919. Put the data together and Rismark calculates that the median home price was around 4.0 times disposable income in the December quarter.

ScreenHunter_1739 Mar. 20 07.03

That result for housing affordability was up from 3.9 times income in the September quarter 2013 and recent low of 3.7 times income in June quarter 2012 – the latter result being equal to the best result in three years and just above the best (most affordable) result in a decade.

CommSec’s claim that it has used the most accurate measure of housing affordability is bogus. CommSec’s measure of disposable income is an average taken from the quarterly national accounts, which includes a whole bunch of non-disposable measures like compulsory superannuation contributions, as well as owner-occupied imputed rents, neither of which are available to fund current consumption. Accordingly, average incomes have been inflated.

Moreover, CommSec has compared the median dwelling price against average disposable incomes – the wrong approach since average incomes are skewed upwards by the small proportion of very high income earners. Again, this has the effect of skewing the ratio downwards.

The end result is that the 4-times incomes figure is severely understated; although to its credit, it does provide a reasonably accurate depiction of trend changes in affordability over time.

Using proper data on median household disposable incomes, taken from biannual ABS household surveys, would give a dwelling price-to-income ratio of more than 6 times currently (see next chart).

ScreenHunter_1740 Mar. 20 07.06

Back to CommSec:

Over the past year the median home price rose by 5.9 per cent, outpacing the 1.7 per cent lift in income per household. But interestingly over the past decade, the average income per household has risen by 70.6 per cent, outpacing a 66.7 per cent lift in home prices.

What does it mean? Simply, Australians have got richer over time. And, in fact, over the past decade, incomes have grown slightly faster than home prices. But broadly over the decade little has changed in terms of home affordability – it has gone sideways.

Certainly homes are less affordable than 20 years ago, but that is not because income growth has been sluggish, but because wealthier Australians, utilising lower interest rates, and benefitting from more affordable basic necessities like food, clothing and transport, have channelled extra dollars into the family home. Homes are bigger and of higher quality than 20 years ago.

Sure, housing is just as unaffordable as a decade ago. But what if we take a longer view, as CommSec did in its 2010 research (above). Then you find that Australian housing is expensive relative to long-run norms, whether measured against national output (GDP):

ScreenHunter_1743 Mar. 20 07.45

Or when taking Australia’s record low interest rates into account:

ScreenHunter_1744 Mar. 20 07.47

Or when examining the proportion of homes accessible to lower income earners. For example, according to an AHURI investigation, the percentage of affordable dwellings available for low-to-moderate income purchasers worsened materially in Melbourne between the years of 1981 and 2006, as illustrated below (the darker areas are the ‘most’ affordable, whilst the white patches are the least).

ScreenHunter_1252 Feb. 14 09.01

Further, as explained in detail in my latest MB Member’s report, Australia’s economy is on a wildly different trajectory than was the case a decade ago, with the economy facing multiple challenges.

A decade ago, Australia’s economy was about to embark on the biggest commodity price and mining investment boom in the nation’s history – a boom that would significantly boost Australian incomes and employment. Now we are coming out the back of that boom, with the economy facing rising unemployment, anaemic income growth, as well as falling labour force participation and rising old aged dependency.

Finally, CommSec’s claim that “homes are bigger and of higher quality than 20 years ago” does not stand-up to scrutiny.

The shift to apartments has been well documented, which are necessarily much smaller than houses (see next chart).

ScreenHunter_1688 Mar. 16 10.57

For those households choosing detached housing, lot sizes have shrunk, showing that Australian house buyers are now paying much more but receiving less in return:

ScreenHunter_1682 Mar. 14 07.55

The fact is, Australian housing still remains unaffordable compared with pre-2000 norms and a typical Australian is required to work much longer and harder to buy a house currently than was the case throughout much of Australia’s history.

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34 Responses to “ “Relax, housing’s just as affordable as 10 years ago”

  1. MickyG says:

    Good analysis.

    • The Patrician says:

      $111, 919 average DISPOSABLE household income!

      This is just garden variety mortgage broker income-boosting fraud on a grand scale.

      “Don’t worry dear, we’ll fill in the form for you”

      Commsec is using the same justification as the RBA. Bogus, fraudulent, misleading and/or deceptive. Take your pick.

      These are the prudent custodians of monetary policy.

      • Rod77 says:

        +1000
        There should be a law against publishing such junk. 100k disposable income my god what a lie . I look forward to the CBA being recapitalized by the future fund. When the shit hits the fan.

      • MrMedved says:

        To be fair it does state that it is an estimate. /sarcasm

        If the ‘average’ disposable income per household is $112k, then how does that line up with ABS statistics for average income per household? My guess without checking is that Commsec are spouting complete and utter bullshit.

      • The Patrician says:

        Guess again Medved, Commsec is just taking its lead from the RBA who use the same bogus number to rationalise their mortgage debt free-for-all and our current house-price inflation explosion.

        All around the country, people are taking their led from the greatest income-boosting mortgage broker of them all, Cap’n Glenn.

        UE: Please steer clear of personal attacks on other commenters

      • flyingfox says:

        @MrMedved

        I think the average (or median I need to look it up) household disposable incomes was ~80K in 2011. The median, if I didn’t s***w up the first number, was lower still.

      • gonderb says:

        @Patrician – looks like you are accusing Peter Fraser of commiting fraud there??? Do you have any evidence to back such a defamatory claim up?

        Personally I think such a comment “crosses the line” – you should retract it immediately.

      • glissom says:

        It’s hard to find figures for median wage the MSM prefers a the mean despite it being less useful.
        But last figure I found I was being paid about median wage.
        My wife and I have a combined Gross income of about $90,000, we can’t be far from the median and our disposable income even if we count everything after tax as disposable is a very long way from 111,919.

      • flyingfox says:

        @gonerb

        Get your answer form the later post by UE?

  2. flyingfox says:

    And the commsec report will be trumpeted all over the MSM.

    And the estimate of disposable income per household was $111,919.

    Jeeeesss….The ABS survey of household incomes from 2011-2012 would but that in at least the top 20% if not higher… You have a problem if your average income is in the top 20% bracket…

    • md says:

      “And the estimate of disposable income per household was $111,919.”

      A lot of people are going to feel quite inadequate when they read that.

  3. ponzoid says:

    Commsec: “housing’s just as affordable as 10 years ago.
    10 years ago, almost to the day (28/03/2004), the Productivity Commission released its First Home Ownership Report:
    http://www.pc.gov.au/__data/assets/pdf_file/0016/56302/housing.pdf
    The report was initiated by the Liberal party thanks to rapidly rising RE prices after introduction of CGT discount and general global easing of lending standards.
    For Commsec to say it is as good a time to buy now as then says nothing other than they are prepared to play the public as fools.
    MSM, in its usual lazy journalist fashion or in a deliberate attempt to obscure the obvious, just feeds the masses misinformation junk food.
    10 years on, and the Laberals have done nothing constructive to address affordability.
    Sell the next generation off to the banks, skim some GST + Stamp Duty in exchange.
    Moral bankruptcy.
    Vote out whichever party is in power.
    Rinse and repeat every 3-4 years.

    • Mitch says:

      + 1 Ponzoid
      Just Google Government Nudge Departments. These Departments specialise in nudging the populous into certain perceptions. They masquerade that they exist to change behaviour traits such as poor eating habits they use MSM and Social Media sites.
      They exist in Britain, USA and Australia. Then Google Chinese Property Investors and guess what they are snapping up properties in UK, USA, Austrlalia and anywhere else the world.
      Let’s nudge the world into believing property property, otherwise collapso !

    • David Barnes says:

      Is it possible the public are played for fools because that’s what they are? When the most popular show on prime time TV is My Kitchen Rules I think it’s a valid question. It’s said we get the pollies we deserve but no ones that deserving. Or are they?

      • md says:

        We don’t get a choice. You either vote for a housing bubble or you vote for a housing bubble, and all the policies that go to maintain it.

      • balkanghost says:

        +1 MSM is guilty of classic conditioning, just keep repeating again and again…..

  4. Dave_Comments says:

    They seem to be getting more desperate for FHBs lately… Good luck with that :)

  5. Pfh007 says:

    Nice work

    It would appear that the Merchants of Debt have detected a disturbance in the force.

    There are too many rebels attacking the centrality of debt and zero reserve private banks in the economy.

    They are unleashing the reality distortion devices known as the research departments.

    “Listen to our analysts, ‘debt is good for you and the nation, debt is affordable, debt makes you manly’ – do not read other analysts…..you’re under”.

    You know the stuff – just like Coca Cola reassures as that they supply ‘fun’ foods that are not dangerous if consumed in moderation as part of a balanced diet that includes regular intensive exercise.

    Cue a public speech by the banking mothership – the RBA – in the next few weeks that will also offer further reassurance that debt is within operating parameters, asset prices are sound and all is well.

  6. evilsync says:

    FHB’s don’t buy it.

  7. hamish says:

    It wasn’t affordable 10 years ago either…

    My TV is bigger, better and cheaper than 10 years ago, same with cars and most other products. The claim that the same phenomenon with houses justifies higher prices is a red herring.

    What an appalling piece by Commsec, it’s just the old ‘in my day’ argument being trotted out.

    • Gunnamatta says:

      Exactly

      All the report is arguing is that Australia has been able to sustain having house prices at nosebleed levels since the early 2000s – with a mining boom and debt boom fed into that.

      All they need to do now is establish that nosebleed real estate is sustainable during a mining capex wind down or slowing China with a profoundly uncompetitive economy.

  8. yogiman says:

    Very good article. I would add that ten years ago Australian workers were earning low salaries compared to those doing comparable jobs in other OECD countries, so there was plenty of scope for both salaries and home prices to rise. Today, the opposite is true.

  9. marked64 says:

    They might be bigger, but quality?

    My uncle was the first one into a new subdivision about 10 years ago. His SIL built his house and when done they sat back and watched as a combo of rough work and sketchy materials built the houses around him.

    Went for a visit recently. The warping blueboard and cracked render around him doesn’t make a pretty sight, but virtually all his neighbours are doctors and instead of fixing anything they just move to the next new shitty builds in town.

    • davel says:

      Right. And on less land.

      And why should we expect houses to be any different from cars, computers, clothes etc all of which are more functional AND cheaper than 10, 20 years ago.

      What a crock.

    • drsmithy says:

      They might be bigger, but quality?

      I struggle with bigger.

      My wife and I have a combined income comfortably more than twice either of our parents’, in real terms.

      In our mid-30s, we are yet to live in a house as big as the ones we grew up in – that our parents bought in their late 20s – and have spent most of our adult lives living in apartments.

      We rent one that’s close (a bedroom or so short), but could not (responsibly) afford to buy it.

      As for quality… I wouldn’t buy a house built within the last 20-odd years unless I knew the builder personally.

  10. moderate mouse says:

    Commsec – you just got owned. Good work UE.

    It’s amazing how the MSM will take analysis by the Big 4 Mortgage Companies as somehow intellectually pure and impartial. Let’s see which wally picks this up and runs with it.

    Like a report from Exxon Mobil saying electric vehicles have no future.

  11. Bluebird says:

    What utter criminals.

    There has to be a better way to measure the average house price.

    1. A unit is not a house.

    2. Just because you can buy a house in some god awful suburb for $400k this should not count towards the measure of housing affordability.

    The general consensus is that in Sydney, a reasonable house is $1m and a unit $600k.

    Furthermore a house that satisfactorily rewards 30-40 years of highly skilled work is around $1.5-2m.

    Other cities are anywhere from 10-30% lower than that.

    Maybe it’s just me but I don’t ever see NAB, ANZ or other big financial institutions with the gall to insult Australians like this.

    CBA, stfu.

  12. Wing Nut says:

    I call bullshit on the one! If this is what’s being passed of as considered unbiased reasearch ( Commsec owned by Comm Bank, Aust largest mortgage holder and issuer) imagine the crap Commsec will churn out one FOFA gets through.

  13. General Disarray says:

    Commsec is just protecting the family profits. Nothing to see here, except some fairly transparent, and shameless, propaganda.

  14. simon89 says:

    Big news 50 cent surcharge for rude coffee customers. If this takes off it Could mean a 11% increase in NSW GDP. Brace yourself for another property boom.

  15. Explorer says:

    And remember, household income in the 50′s and 60′s was much more likely to be a single income.

    Basically wives have been working to pay more for existing property than their parents did.

    For a while, the second income helped a dual income family get ahead, now it is required otherwise you can’t keep up with your mortgage payments.

  16. glissom says:

    I especially love this part:
    “Gen Y has no reason to blame parents or grandparents – home affordability hasn’t really budged in the past decade”

    If Gen Y’s parents are only ten years older than them I think we have bigger problems than housing prices.