Another “affordability” study


Below find the new National Centre for Social And Economic Modeling (NATSEM) report into housing affordability.

The report is both quite good and quite frustrating. It acknowledges the severe unaffordability of the national housing market but never uses the word “bubble”.  As such, it provides some very good overvaluation assessments but fails completely to canvass risk. It describes a really quite depressing scenario for generations following the baby-boomer property lords, yet packs the report with pictures of glowing twenty somethings gleefully moving into shiny dwellings.

Anyways, for your reading pleasure, find the report below:

Houses and Holes
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  1. Oh HnH…sorry mate, but I cant get past the Intro:

    “As our nation grew and prospered through the second half of the 20th century, this dream became a reality for many youngfamilies. Land was cheap, housing was cheap and most of us could afford to buy our very own home.

    Something changed last decade. House prices, not only in Australia, but globally, soared and put the great Australian dream in doubt.Rising prices are seen as a boon for those who already have their own home, but a nightmare for those attempting to get into the market.”

    SOMETHING??? ACCESS TO 100% loans and a bubble mania!!! Just maybe…

    Their failure to note this in the intro and leave it at ‘something’ is insanity!

    • Our house prices are extremely high, many people can’t afford to buy and those that do are taking on large debts…but it’s all going to work out fine.

      “In summary, Australian house prices are simply so high that for many Australians the great Australian dream is just that
      – a dream. For those who do manage to purchase a house, high house prices mean taking on very high levels of debt that will constrain their lifestyle for many years into the future.

      Significant, widespread house price drops appear unlikely in Australia, meaning that housing will remain unaffordable for many years to come.

      Australians have not been deterred though, with new entrants to the property market every day.”

  2. haha AB – awesome!

    Look at this bit you highlighted:

    “Australians have not been deterred though, with new entrants to the property market every day”

    What kind of tripe is that…new entrants? What, because some people are still buying houses this means Australians are not being deterred?

    What about credit growth, population per dwelling, auction clearance rates.

    People are being deterred…massively and hosue prices are falling significantly.

    This is one of the worst pieces I have ever read. I really would like HnH to clarify what he saw as the positives?

    Have we learnt anything…are the sheeple any wiser? No, if anyting this reinforces all the dangerous myths spruiked by Bulls.

    • H&H – I completely agree that this report is far more useful than the usual RBA/Rismark drivel. I’m just laughing at the conclusion which bears no relation to the facts and figures actually in the report.

      I’m also laughing at some other comments from Craig. The last sentence is an absolute classic – I put it up there with “Stock prices have reached what looks like a permanently high plateau.”

      “Although Australia is now one of the most unaffordable developed countries in the world in terms of housing, there are still many people entering the property market or preparing to do so,” Craig Meller, managing director of AMP Financial Services, says.

      “While Australian first-home buyers are under the greatest housing stress, this group is finding ways of achieving their goal in different ways.

      “Many are choosing to save money by living with their parents longer while others are choosing to buy an apartment instead of a house,” Meller says.

      “Our history of determination in the face of adversity is seeing a new generation carve out their financial futures.””

  3. Ouch, don’t show Figure 1 and 2 to the property bulls.

    Or as HandH said – RBA or Rismark.

    I question the use of the orange dotted line legend of “flat house prices” however. I guess “tapering” didnt fit?

    • Indeed. Figure 1 is why i think BIS Shrapnel have lost the plot with their latest predictions. They cite an “increase in real wages” as the reason house prices will continue to grow. This totally ignores what this chart is showing (i.e. an unsustainable increase in prices well aboce the increase in real wages over a period of 10 years)

    • And no-one seems to mention the fact that wages will likely drop if/when our housing bubble pops.

      I’d suggest that our economy depends so heavily on house price growth that things will blow up even if house prices remain flat for an extended period of time.

      • AB,

        Agree with you about the flow-on effects. Seems absolutely clear to me and has a high probability, however most people seem to prefer to not think about these risks.

  4. I wrote about the NATSEM report in my blog today.

    Two decades ago, single income families could easily afford a certain standard of dwelling. Now it requires dual incomes to afford that same standard of dwelling. Houses are less affordable then they used to be, it really is that simple.

    Of course, if you make enough sacrifices, scrimp and save, and take on a massive soul destroying mortgage, then anyone can ‘afford’ to buy. But does that make it affordable? I don’t think so. Housing is not affordable if we’re forced to trade housing for quality of life. If we’re forced to take no holidays, never treat ourselves to any luxury, delay having children, put our children in daycare all week, just so both parents can work 80 hours a week to ‘get on the housing ladder’, then housing is categorically not affordable.

    • One the most perverse aspects of the great Australian housing Ponzi scheme is that when the economy is stagnating and vacancy rates are ‘at all time lows’ no one is talking about doing something to encourage the construction of desperately needed new housing because it might reduce the Ponzi values of existing houses.

      Sure Melbourne seems to have a heap of units in the pipeline near the CBD but until vacancy rates hit the long terms average of 3% across the board they should keep building.

      Cut the local government red tape, the state government highway robbery taxes and fees on new housing and the NIMBY set’s influence and let the building industry build new low cost houses where people want to live.

      That will create jobs, give families lower cost housing. lower mortgage commitments and help the retail and services sector.

      If the red tape/front loaded and excessive taxes are removed I doubt it will be necessary for any active ‘stimulation’ by the government but in terms of make work schemes building NEW houses would have to rank well ahead of most of the dope schemes govts of both sides have come up with over the last 20 years.

      When rental vacancy rates reach 3% (the long term average)the Australian housing market is likely to be a lot more healthy and sustainable than it looks now.

      • A 3% vacancy is no longer relevant.

        Its a structural downshift.

        Internet advertising means rental properties are far more ‘liquid’ and able to reaching the eyes of all possible tenants.

        • Good point about the internet but has there been any research to back up your claim that it has resulted in a down shift in the vacancy rate?

          I assume it could be done by reviewing data on number of rental properties per capital, average time vacant etc. That would give some indication whether the market is now so efficient that a new lower long term vacancy rate is appropriate as a measure of whether it is a hard or soft market for landlords.

          What is the new downshifted normal vacancy rate?

      • LandDeveloper

        “no one is talking about doing something to encourage the construction of desperately needed new housing” – actually I’ve been in WA recently and the State Govt there is doing some pretty interesting things to tackle affordability. Its embryonic at the moment, but it certainly has potential.

    • “Two decades ago, single income families could easily afford a certain standard of dwelling. Now it requires dual incomes to afford that same standard of dwelling. Houses are less affordable then they used to be, it really is that simple.”

      In 1991 repayments as a percentage of the single average wage(for any LVR) on a median house were very much the same as repayments as a percentage of the single average wage (for the same LVR) on a median house today.

      That indicates that affordability was similar to today. Repayments were higher in 1989/90 than today as a percentage of a single wage for a median house.

      Data: Stapledon – median house 1991 – $137,690, SVRs from RBA table F5, AWE from RBA table G6.

      • Suzi
        It is people like you that manipulate statistics to put up foolish arguments that have no weight, I am sure we all know that in 1989/90/91 interest rates were at all very high nominal rates. Didn’t they peak at 17% or something. Maybe lets use longer term normal levels to get an ACCURATE assessment.
        Readers of MB are not that stupid and can read graphs and see through statistics !!!!

        • To indo:
          Affordability (as measured by repayments as a % of median house) is a little better now than in 2007 and quite a bit better than in 2008. AWE have risen at least as fast as house prices since then and interest rates were higher then. There’s a RBA chart of affordability, not quite up to date but it does illustrate the long periods in the past when affordability was worse than now:

          To romish:
          I was replying to a myth postulated by Different here that affordability is now twice as bad as it was two decades ago. it is better if such myths are exposed – decisions are best made in the knowledge of the facts rather than wishful thinking. I’m sorry if the truth annoys you and maybe you come here with some confidence that you’ll not be exposed to non-bearish facts. I manipulated nothing. The high interest rates of two decades ago were real, as was the high level of unemployment. Imagining that people had it easier 2 decades ago than they have it now is fanciful self-deception.

          • edit to above post:
            “as a % of median house”
            “as a % of average wage for a median house”

          • Suzy

            I don’t think borrowers necessarily had it easier 2 decades ago but their risk was considerably less than today’s borrower. Affordability being a measure of principal and interest does have the problem of equalising affordability without taking into account the amount of principal and the risk of interest rate change.
            So you are manipulating statistics if you just compare affordability levels

          • Yes I am aware of that it is because of interest payments went down in 2009. We are now in a position where RBA wants to hike but cant hike because it will bring the whole thing crashing down. So interest rates are not at the point they ought to be , unfortunately proving your point.

            If house prices have to rise from here to the detriment that interest rates have to keep going down then we are not having a healthy growth in house prices.

          • DT “don’t think borrowers necessarily had it easier 2 decades ago but their risk was considerably less than today’s borrower.”

            No, their risk was at least as high if not greater. Nobody at the time knew that 17% was the peak of rates. Even after they began to fall nobody knew they would not immediately go up again. We only know it was the peak with hindsight. Keating had already scared people with calls of a banana republic. Banana republics have interest rates much higher than 17%.
            I suspect if you look at the interest rate markets at that time you’ll see the odds of rises and falls were similar to today.

          • Suzi, perhaps you can give us some context on how the affordability index is calculated?

            It’s not very useful when expressed as a percentage of the deviation from the long-run average with no other information.

          • Suzi
            In what way is Different here stipulating a myth??? He did not say that that affordability is twice as bad as 2 decades ago. All he said is that dual incomes are now required to pay off a mortgage in many cases. Whereas before it was more affordable so families one a single income could pay off a mortgage . Dual incomes does not necessarily mean double a single income. Some couples earn different amounts, one may work part time etc. Another example of your ignorance.

            Different here should not have compared dwellings as the average home is now much bigger and expectation is greater. As highlighted by Alex Heyworth
            Also the first home buyer for example is buying different housing than from before. Maybe a unit instead of a house. So we aren’t necessarily comparing apples with apples.

            a great article from the ABS in regards to this

  [email protected]/Lookup/4102.0Chapter9102008

            explaining that housing is becoming more unaffordable!!!

            All this ever gets back to is an affordability issue. It is getting worse and to pluck figures from convenient years in isolation shows even more ignorance.

            Regarding Risk, I am stumped at how you believe that the risks were greater in 1990 than today. Households had much less debt compared to today. Higher debt ratios mean that households are more sensitive to interest rate movements. ie a higher interest rate risk. So i dont know how you think downside risks were greater then. Just because interest rates were higher doesn’t mean the risks were greater.

            this financial ignorance is why so many people are conned into this ponzi scheme that is the australian dream. spruiked by RE agents and the media in general. Feeding the demand side and ignoring the supply side. Hence artificially rises prices to unsustainable levels.

            We have got too wrapped up in our houses viewing them as investments not homes. When we start looking at them as homes again maybe we will all be happier.

      • Hi Suzi. I haven’t checked your figures, but I will just add that from 1990 to 1993 mortgage interest rates collapsed from 17% to 8.5%, and real house prices fell slightly (5-15% in most cities), with prices taking around 7 years to recover.

        Graphs of mortgage interest rates, interest as % of household income, and real prices here

        So clearly the 1991 situation was unsustainable and not a good comparison to make if your point is that the market does not have massive downside risks.

    • Vested interests will always try to stangulate supply or boost demand thru various means, but the system will always go back to equilibrium. Only problem is that it takes time and the new equilibrium may be lopsided.
      Take for example, delaying having children because couples are working. This will delay future demand.
      Or take the case of banks stangulating supply by denying loans to developers if they don’t achieve pre-sales of 75%. This forced the developers to raise debt from other sources or go look for overseas (*psst* Chinese) customers. This will lead to an oversupply, because the local demand/supply equation has been broken!!

  5. Wendell Cox and the writer are the co authos of the Demographia Surveys……imcidentally.

    I updated my website yesterday – highlighting the construction industry entrepreneurs William (Bill) and Alfred Levitt – who figured out how to supply SINGLE EARNER households on $US3,800 a year with new starter homes of $US8,000 – following World War Two.

    And on these SINGLE EARNER annual household incomes, the mortgages worked out at 18%. Go figure!

    The real question is – how come they had it figured out 60 years ago, how to supply affordable housing – but somehow today we have “forgotten”??????

    Note on the Performance Urban Planning website, a new sectio has been added “IMPORTANT ACADEMIC RESEARCH”.

    Further suggestions / comments are welcome from MacroBusiness readers, on important papers we have no doubt overlooked. This Section will be corrected / updated in the next 2 to 3 weeks.

    My contact email is on the website.

    • Alex Heyworth

      “The real question is – how come they had it figured out 60 years ago, how to supply affordable housing – but somehow today we have “forgotten”??????”

      A big difference in expectations for a new house between 60 years ago and today. Both in size and in appointments. You would think, however, that the reduction in average block sizes would more than compensate.

      • Alex Hayworth – with respect, I suggest you research this thoroughly first – then comment.

        The inability to supply affordable housing is a nonsense issue.

        We know clearly what the problems and solutions are. The “problem” is attitudinal / political, in the sense sadly, that too many are remaining in denial – as the evidence is staring them in the face.

      • Alex Heyworth

        Hugh Pavletich, with respect, I suggest you spell my name right if you want to respond to my comment – especially if you’re going to be rude.

        I fully agree with you, BTW, and suspect you totally misunderstood my comment.

        • Alex,

          I think you’re probably OK. Hugh is somewhat short with people after he has spent 7 years lobbying and explaining and people still don’t get it.

          The point you need to understand is that historically, house prices have been roughly 2 to 3 times annual incomes. People do tend to cut their cloth to suit their incomes. So as incomes rise, as they have in developed economies, of course houses can get bigger and more well appointed, and still stay 2 to 3 times annual incomes.

          When houses are 9 times annual incomes, whether in Mumbai or Sydney, you have a problem that is invariably the result of distortions in “supply”. In Mumbai the problem is heavy handed regulations and corrupt officials. In Sydney the problem is similar even if the corruption of the officials is not exactly a problem. The effects of what they do, mean they might as well be running a racket in urban land.

          The concern for “the environment” and “local effects” and “CO2 abatement”, etc etc etc; is just a facade for what is effectively a racket.

          • I know all that. Hugh misread my comment and got snappy. I was pointing out that, although houses 60 years ago were smaller and less well appointed (which might account for some of the difference in affordability) that should be more than offset by smaller block sizes these days.

        • Alex Heyworth – my apologies for spelling your name incorrectly and unintentionally being rude. Direct or blunt was the intention!

          There is a very clear structural Definition of an Affordable Housing Market on my website. It is simply a matter of using this as a template and the Median Household Incomes from the Demographia Surveys, to assess what new starter stock should be going in for, in your particular city / metro area.

          The overoding important rule to remember, is that all forms of real estate value, should be a reflection of the underlying incomes supporting them.

          I just dont know how much clearer the Demographia Surveys have to be in illustrating that if a market exceeds 3 times incomes (Median Multiple), there are structural impediments that need to be dealt with.

          Because the “3 times income measure” still appears to be confusing some people (particularly certain economists!) I thought it necessary in the recent upgrade of The Performance Urban Planning website, to highlight the “Levitt Story”.

          In highlighting the Levitt Story, it does I hope illustrate to you and other readers, why I consider housing affordability / housing bubbles “nonsense issues”.

          I would like to think this evidence is staring us in the face – and importantly, that the problems and solutions are blindingly obvious.

          Housing bubbles should be clearly seen by economists ( the professional market experts supposedly) as a serious economic cancer, that must be dealt with.

  6. Figure 6 is interesting. If housing affordability was to go back to levels of a decade ago, house prices would roughly need to halve in most states – Assuming wages remain the same.

    • Microtrader – Its easy enough to work out – Housing should not exceed 3 times household incomes or 1.5 times Gross National / State / Meto Product.

      Anything above that is “bubble value”.

      That suggest there is something in the order of $A2 trillion of bubble housing value in Australia – some $NZ300 billion in New Zealand.

      Its just a matter of studing the consequences of these bubble values being wiped out in places such as California, Arizona, Nevada, Florida, Ireland, Spain, the UK and NZ, as some current examples. Plus the historical ones as well.

      By definition, housing bubbles are unsustainable. The only difficulty really is predicting when they will collapse. Real estate transaction volumes and months of supply are the best measures though.

  7. This is a really good thread. Some really good contributions above. More and more people are starting to understand the issues.

    Here is my favourite item to contribute to discussions like this: check the graph on page 5 of THIS:

    Notice the levels of “discretionary income” in low price Houston compared with high price Los Angeles. Which city has an economic future?

    Has high urban land price Australia, got an economic future?

    The people thinking about this issue in terms of future discretionary spending by households, are 100% on the nail.

  8. I just noticed that the lead researcher from NATSEM, Ben Phillips, was previously the house price forecaster for HIA.

    Here’s what he managed to put out there on Lateline Business:

    “It will take about 10 years for housing to become affordable, and it’s actually more likely that house prices will probably continue to rise, although at a very limited rate compared to previous times.

    So perhaps it will be even longer than 10 years before housing becomes affordable, so it’s a fairly dire story there for those trying to get into the market.”

    None of what he said is supported by the NATSEM report. The original report didn’t predict a decade of flat house prices. It merely said that it would take a decade for house prices to become affordable should house prices stay flat and incomes increase at the average rate. I wonder why he believes that house prices will probably continue to rise when they are falling already? It certainly wasn’t contained in the report. Is it really a “dire story for those trying to get into the market” or is a dire story for those over-levered into a falling market?

    Who is funding this “research”?