Blame it on the chicks

Jessica Irvine of the SMH takes on the bubble today and, well…lets down her sisters. According to Irvine:

The basic argument of bubble theorists is that prices must return to their historic average as compared to incomes. On most measures, house price growth has far outstripped growth in incomes.

The crudest way to measure this is to compare the median house price to the average annual wage. So, for instance, the full-time, adult ordinary wage is now $65,300, according to the Bureau of Statistics, while the median Australian home prices is $413,000, according to RP Data-Rismark. Combining the two, house prices are now nearly seven times average income.

This compares to just under four times in mid-1994 (when the average wage was $32,400 and the median house price $125,000). Such analysis delivers something close to Grantham’s claim that Australian house prices cost about 7.5 times average income.

But this crude calculation overstates the deterioration in affordability by ignoring several important developments.

First is the rise of dual income households. That’s right ladies, the fairer sex is partly to blame for rising house prices. The incomes women have earned from going to work has boosted the ability of households to pay for bigger and more expensive housing. It is also the case that households derive income from sources other than wages, such as government transfers, interest on deposits and share dividends.

That is why the Reserve Bank prefers to use household disposable income (i.e. after-tax) when considering movements in affordability. This measure paints a better picture of affordability – with the median house price just over four times the average household income of $95,100 a year.

Irvine goes on to cite the old arguments of freely available credit and supply constraints before concluding on the fence with the new ‘over-valued but not a bubble’ meme.

This blogger is very disappointed at the lack of sharp interrogative effort.

For instance, Irvine simply accepts that the dual income thesis is fair dincum. There is no effort to examine its rigour. I took this blogger five minutes of research at the ABS website to discover that female workforce participation has increased 5.5% since 1995, the majority of which has been in part time positions.

Moreover, over the same period, if you study the chart really hard, you can see women’s percentage of total national income has moved ever so slightly upwards.

Are these rather paltry gains enough to explain house appreciation of roughly 200% over the period? And the swelling of multiples to income she quotes? Not to mention the RBA using household income as its denominator for measuring bubbleness?

Even if we accept Irvine’s line, she might have stopped to ask whether rising female incomes – such as they are – are causal in house price rises. She offers no evidence for this conclusion, only points to a (weak) correlation.

It could just as easily be argued that families are chasing bubble prices higher because they have no other choice if they want to own a home.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.


  1. It is easy enough to check this by looking at the household income figures rather than individual income figure published by the ABS. Further, male participation levels have generally declined and part time work dramatically increased.

    ABS 65230 has household income tables and shows that gross household income rose 41% from 1994-2007.

  2. And then let's consider the personal element which is left out of so many of these stories which concentrate on numbers. In this case the biological clock will be a major factor.

    OK, in recent years there have been reports of 25 year olds deciding to buy a home in lieu of having children. No doubt that decision is arrived at more easily when society is gung ho about property and when the biological clock has a lot of tick left in it.

    But just 5 years into the mortgage repayments and that clock has all the appearances of having sped up dramatically.

    So we have a lot of families doing the "triple 6" – kids into daycare from 6 weeks of age from 6 am to 6 pm. (Anybody thinks that is a rareity or sensationalist, time to talk to some daycare workers.)

    Leaving aside the sociological impacts – which admittedly is a thorny issue – as a stay at home dad, I know it only too well – one also should consider just what are the financial benefits to the family after paying the very high cost of daycare and the loss of "middle class welfare" (the family tax benefits, etc)

    But that marginal income is the difference between making mortgage payments and not, thus the pressure not just for the extra income but for it to be maximised.

    And this pressure is only going to grow over the next few years as the boosters' biological clocks tick.

    Young Aussies have been goaded into pricing their lives for perfection – at these gearing levels they need to either not have children, or delay having them and hope that they beat the increasing odds of consequent problems (in either falling pregnant or in the health of the children), they need to have flawless employment careers, they need to have been lucky enough to purchase properties that do not require major repairs at least in the first decade, and they need to prevent the stress of being so heavily leveraged from impacting their relationships or their health.

    Some will be lucky, many will not…..

  3. David Llewellyn-Smith

    Totally agree. The social implications of the bubble have been completely overlooked.

    For instance, a generation of kids is growing up in childcare from one week old because of the mortgage stress.

    If I had to do that with my bub, it would rip my heart out.

    It's completely sexist of course, but I had hoped Jessica Irvine might have some greater sympathy with such pieces of the puzzle.

  4. As a stay at home dad I don't consider your comment sexist in the least. These are decisions that couples and families are making, not just women. The family can equally decide that the guy takes on the primary carer role (another dry term, but the one in common use so I'll stick with it) as has mine. And while I respect the right of families to decide on priorities, I can't help but feel very strongly that the wrong choices are being made all too frequently…..

  5. Good retort, but so much more could be said of course. I didn't bother because it would have been so far down the fairfax list of comments.

    In her "Average Household income of 95k" arguement, she is comparing Averages (assuming in the first place to be accurate), which I would guess is the mean average, against median home prices. The mean income per head of population is undoubtedly so much higher than the median, especially so for household "incomes" vs "wage" because higher wage people generally have other source of income (ie investments) wheras low wage earners do not.

    Likewise, she doesn't say whether these are national or capital city "averages".