Housing’s straw man argument

Rismark International’s Joint managing director, Christopher Joye, yesterday posted an interesting comparison of the Australian and UK housing markets, which he cleverly uses to defend Australian housing values. Let’s take a look at some key extracts.

You often hear that Australian housing is more expensive than, say, UK or US housing, if not the dearest in the world…

One country Australia does share strong commonalities with is, naturally, the UK. The UK also has the benefit of very good housing data that is not plagued by “sample selection biases” (i.e., when you only get a fraction of the total population of home sales, as you do with US house price indices).

So today I wanted to address two simple questions.

First, have Australian housing costs risen more rapidly than their UK equivalents during the last couple of decades?

And, second, how far did UK house prices fall during the GFC, given the near complete disintegration of its banking system, with the whole or partial nationalisation of many of its largest lenders? (UK taxpayers ended up owning 100% of Northern Rock, 83% of RBS, and 41% of Lloyds.)

I ask this question because the correspondence between the Aussie and UK banking systems, which are both dominated by a small number of big institutions, and their housing markets (both have near-identical approaches to tax and similar demand and supply fundamentals) makes a study of the UK downturn a credible guide in the event that something – god forbid – catastrophic were to happen here.

That is, it gives us a reasonable indication as to how far Australian house prices might decline if our banking system imploded, the economy careened into an acute recession with soaring unemployment and default rates.

Up until this point, I agree with the way Mr Joye has framed his housing analysis. But that’s where our agreement ends. Back to the article.

For the purposes of this analysis we have taken the broadest possible UK house price measure, which is produced by a group called Academetrics. We then compare this with our standard RP Data-Rismark Hedonic Combined Capital Cities Index.

The results, which are illustrated in the two charts below (click to enlarge), are fascinating.

First, in the 15 or so years before the GFC, UK housing costs actually increased at a substantially greater rate than their Antipodean counterparts.

Of course, the cataclysmic economic and financial collapse subsequently experienced in the UK in 2007-08 resulted in a very significant contraction in UK dwelling prices.

Specifically, on a peak-to-trough basis, UK home values fell by 13.6%. This compares with a smaller 3.9% peak-to-trough decline in Australian dwelling values, which did not have to contend with big increases in unemployment (or arrears).

While it is true that Acadametrics (a.k.a. FT HPI) provides the broadest possible measure of UK home prices, since it comprises all sales lodged with the UK Land Registry, it is debatable that it is the most accurate measure of changes in UK home values. Importantly, the Academetrics price index uses the simple average (not median) price provided by the Land Registry. And because the index is not subject to hedonic regression (i.e. does not measure like-for-like sales), it is affected by changes in the composition of sales. Indeed, Mr Joye has previously questioned the validity of using such simplistic measures of house prices.

There are a range of UK house price measures that can be used (see here), each providing different results (see below chart).

For example, had Mr Joye instead chosen the Halifax Price Series, which measures like-for-like sales via hedonic regression (in the same way RP Data-Rismark do), he would have discovered that UK home prices in fact fell 21% peak-to-trough and are still 19% below their peak. Incidentally, Rismark’s sister organisation, RP Data, has also previously used the Halifax price index to chart changes in UK home values compared with Australia’s (click to view RP Data’s chart).

Further, when the Halifax house price index is compared against the official Australian Bureau of Statistics house price index (sorry, I don’t have access to the RP Data-Rismark time-series), it shows that the growth of Australian house prices has, in fact, eclipsed that of the UK:

Back to the article.

Monetary policy also works differently in Australia, with almost all borrowers on “adjustable rate” loans. In the UK, the split between variable and fixed-rate loans has historically been around 50:50. This makes it harder for the UK central bank to deliver cash-flow relief to borrowers in the event of a crisis.

The circa 14% drop in UK house prices is noteworthy, but perhaps not as big as some might have expected. For example, the Aussie share market (as measured by the ASX/S&P200) has fallen further in the last month or so…

Again, when hedonic regression is applied, as it is with the Halifax index, UK home prices fell by 21% peak-to-trough, not the 14% claimed by Mr Joye.

Further, comparing the fall in house prices against the sharemarket is not particularly useful, since the overwhelming majority of homes are purchased with high levels of leverage, which magnifies such losses.

Again, back to the article.

A more interesting finding speaks to relative value. Because of the much stronger run-up in UK house prices prior to the GFC, the overall change in housing costs over the last 18 years has been virtually identical to Australia’s, notwithstanding the sharp recent correction.

This can be seen in two ways. First, the levels in the charts are similar after accounting for a couple of decades’ worth of value changes. Second, the compound annual growth rates between 1993 and 2011 are statistically indistinguishable (7.3% in the case of Australia, and 7.0% for the UK).

Once again, we’ll have to agree to disagree here. My chart above, along with RP Data’s chart (which also uses Halifax to measure UK house prices), shows that the growth of Australian home prices has eclipsed that of the UK’s.

Back to the article.

As a final test, we can compare house price-to-income ratios. Luckily the economists at ANZ, which happens to have a British CEO, have done this for us (see the third chart below). It turns out that the UK house price-to-income ratio is actually higher than Australia’s, which suggests that Aussie housing may actually be better priced.

The ANZ’s house price-to-income ratio contradicts other reputable reports, which show Australia’s ratio to be higher than the UK’s.

First, the latest Demographia International Housing Affordability Survey calculates a national Median Multiple of 6.1 for Australia versus 5.2 for the UK:


Second, in 2008, the RBA’s Anthony Richards gave a housing presentation that contained the below chart showing “Australia’s median house price to income ratio [to be] quite high by international standards”. Note that the ratios shown for the other nations are prior to the global house price crash. As you can see, Australia’s house price-to-income ratio is above the UK’s:

In any event, I find it curious that Mr Joye has concluded that Australia’s home prices might be better valued than the UK’s based on ANZ’s house price-to-income ratio, given that both he and ANZ are staunch critics of this measure, since it does not account for the structural lowering of interest rates over time, which obviously makes housing more affordable other things equal.

In May last year, Mr Joye wrote a post on his blog, entitled ANZ bursts house price-to-income ratio bubble, in which he lauded ANZ analysis lambasting the price-to-income measure (Mr Joye’s emphasis):

ANZ’s economists, led by Paul Braddick, have burst many of the myths surrounding Australia’s purportedly high house price-to-income ratio. Regular readers will know that I have written a great deal about this in the past. They will also know that Rismark’s produces the most comprehensive dwelling price-to-income ratio index that is available. Unfortunately, this data only begins in 1993 and did not provide a long enough time-series for ANZ to use in their note. Anyways, this is what ANZ had to say:

“International comparisons of house price to income ratios have been widely used to suggest that Australian house prices are significantly overvalued. These analyses are not only dangerously simplistic but explicitly ignore a key component of the housing affordability equation – interest rates.

House price to income ratio: a flawed measure of affordability

Simple house price to income ratios have been widely used to suggest that Australian house prices are significantly overvalued. These arguments centre around the concept of ‘mean reversion’ i.e. elevated house price to income ratios must revert to their long term historical average for ‘affordability’ to be ‘sustainable’.

However, as a measure of housing affordability, house price to income ratios are very misleading as they completely ignore interest rates. Ultimately, housing affordability comes down to debt servicing costs of which interest rates are a key driver. This not only means that house price to income ratios are fundamentally flawed as a measure of housing affordability but also makes intertemporal and cross border comparisons of these ratios next to meaningless.

In Australia, the [capital city] house price to income ratio rose from an average of around 3 in the 1980s to an average around 5 since late 2003.

That is, the median house price in recent years represents 5 times the average household’s annual disposable income compared to 3 times in the 1980s [nb: this compares capital city prices to national, all areas, incomes].

However, the major reason for this has been a structural (read permanent) reduction in interest rates. Mortgage interest rates in Australia in the 1980s averaged around 14%, however, since 2000 the average has been close to 7%. This reduction in mortgage interest rates has effectively been capitalised into house prices.

The halving of mortgage interest rates almost fully explains the measured rise in the house price to income ratio leaving the house price to income ‘mean reversion’ argument appearing myopic at best. Housing affordability and the sustainability (or otherwise) of current house price levels are extremely complex issues and drawing conclusions from simplistic aggregate metrics such as house price to income ratios is very unwise.”

A complete analysis of relative housing valuations also requires a comparison of rental yields. And on this score, Australia again compares unfavourably with the UK.

First, consider Australia’s gross rental yields as measured by RP Data:

Now consider UK gross rental yields as measured by the Association of Residential Letting Agents:

Anyway, back to the article.

Based on the analysis above, residential property in Australia looks to be just as good value as UK housing today. Indeed, with demonstrably superior economic and household income prospects, and faster household formation rates, one might reasonably project superior returns in future.

We’ll have to agree to disagree, Mr Joye. House prices are clearly more overvalued in Australia than in the UK.

[email protected]


Unconventional Economist


  1. This guy is being proven wrong more and more now. I’d say more and more people are realising this. Soon he’ll just be some random bloke making silly noises.

      • He is setting himself up the be the architect of a massive debt for equity swap once the bubble bursts…

        He is smart enough to know he is spruiking rubbish and cunning enough to engineer something like this.

        GReat article Leith!

  2. On the topic of house price-to-income ratio, Mr Joye won’t be able to hide behind the ABS quarterly national accounts figures for too long and arrogantly insist that the ratio is 4.2 – 4.8.
    The 2011 census results are not too far away – so now is the time to repent or forever be damned.

    • All affordable countries should use national accounts as their income measure and then you will see that house price-to-income ratios in those countries will look like 1.2 , 2.1 while Australia will be 4.2

    • But surely we can’t count on the census as the canonical source for income statistics. It uses bands of income range (some were $10-20,000 from memory) and relies on truthful responses. I’m sure at least some paranoid people may have falsified data despite the laws against sharing individual statistics with the ATO.

      • Well, I am going by Dr Joye’s own words – the excuse given by Mr Joye himself for using the ABS national accounts ponzi disposable income figures, was that the previous census figures were dated.
        Going forward, Mr Joye will have to invent a new excuse or go with the 2011 census figures.

  3. Off late there has been some appalling blogs from Mr Joye.

    His blogfest against the RBAs interest rate hold has been a waste of time as RBA has been vindicated with the current unemployment rise.

    His blog about affordability due to structurally lower interest rates has been debunked by Cameron Murray

    also he needs to mention the FHOG when he talks about incredible price jumps in 2009 . It was not just the lower interest rates that helped.

    ..and now this.

  4. The rebuking of price/income and price/rent ratios is highly suspect; these are basic value calculations used by bond and equity desks alike.

    Investment in rental accommodations in Australia makes no sense compared to other investments out there without perpetual capital gains. That’s all I need to know.

  5. Let’s take a look at the home mortgage rate at the moment in UK.


    To prop up the housing market, some of the loans are starting at less than 2% for the first 2 years. That is the only thing that prevent UK’s house prices from going over the cliff right now.

    And Mr Joyce is urging for an interest rate increase from the RBA?

    • yes and then it increase. Australia cannot go to ZIRP maybe upto 2%. Add 2.5 on top to get the mortgage rates 4.5%. I feel that is the minimum that nominal mortgage rates can go to. Mortgage rates are at 6.5 – 7. So we are not so far away from lowest possible rates!

      • I am interested in why Australia cant go to ZIRP…I am not being sarcastic, I really would like to know?

        Is it because our currency would crash?

        Cheers Indo

        • Our banks gets a lot of their funding from offshore, and the interest on the offshore funding becomes a ‘floor’ for mortgage interest rates. 3% is about as low as the RBA can go, and going lower will be pointless.

          • what if an economic environment was so bad to require zero rates and encouraged people to save more therefore reduce offshore lending? is it feasible? or would saving just show up in paying off debt?

      • Because according to the bullhawks, the consensus economists etc, “No… No… That’s not true… That’s impossible!”

        No one (in the places that matter) is counting on ZIRP or debt deflation of any kind as part of any policy response.

  6. Jumping Jack Flash

    To know what income is we need look no further than the carbon tax relief thresholds and that little argument about “well off” a few months ago.

    Household income, above average, and deemed well off was, what, 100k? 120k?

    What then is average household income? 70k? 80k?

    Compare with house prices in your average suburb in your nearest capital city. Average, not below average. Below average houses and suburbs are for those with below average household incomes. Those who receive carbon tax relief.

    Calculate ratios.

    End of argument.

    • According to the ABS figures for 2007-2008 the median gross household income was $67,003 a year.

      The median earnings of all workers is $44,146

  7. Joye’s analysis is sophistry, nothing else. I don’t quite understand because he writes well and appears intelligent. He is setting himself up for a major fall and must know that.

    • It wouldn’t be the first time that a smart person has strongly adopted a self serving argument during a time of plenty and then been forced towards increasingly absurd positions via a thousand small steps to sustain the original argument.

      It’s usually only the smart people, who can be convincing enough in the first place, that find themselves in such a predicament.

  8. Not a "true believer"

    Advancing any intellectual structure to support our housing market is tentamount to arguing scientifically that the Sun revolves around earth.
    Just count the ever growing listings of unsold properties… everything else is an exercise in self delusion !

    • Would you ‘Truly believe’ …The simple old crow argues,that,…
      A Straw Man can shoot himself in the foot as consistently as he likes…cause
      “He ain’t all there ,is-he Boy”

      Thanks UE…cheers JR

  9. It is dissappointing to see respected commentators being what appears to be intentionally misleading.

    It can’t be satisfying to see yourself trending away from intellegent commentary and towards blatent spruiking.

  10. One of my indicators is RE Agents going belly up. The Raine and Horne office at Moruya, where I spoke to a salesman in 2008 is empty except for a photo wall and is up for lease.

  11. Housing in Australia is INSANE. Is Mr Joye seriously suggesting that 8 or 9 times your annual income is a reasonable price to pay when the historical average is around 4. I know many people who are in chronic mortgage stress already and yet Mr Joye seems to be saying there’s plenty of capacity to push prices even higher. I know someone on $50,000 p/a with a $400K mortgage and she’s been getting food from St Vinnies because she can’t afford to go shopping. What a great lifestyle! The irony is that she’s got an interest-only loan so she’s never going to own her house anyway…

    • Im sorry, but at some point you have to question peoples intelligence if they get themselves into situations like this. 50k and a 400k interest only mortgage!!! That is crazy.

      • Not all all crazy when you are bombarded 24×7 by a compliant mainstream media and your baby boomer parents, that $400k mortgage for a shoe-box is the “new” normal, the first rung on the property ladder, , blah,blah, blah.

        • You’ve hit the nail on the head there, Mav. I’ve been getting a lot of pressure myself from my own parents to buy something (anything) but I’m just not in a position to do that right now and even if I was I wouldn’t buy in Melbourne because of the prohibitive expense. People who find themselves in really deep don’t do that delibrately but I also agree with others here (Jimbo below) that nobody knows how to budget or be frugal anymore.

          • Depends on who you are. Both my fiance and I have saved a significant deposit – some people just cannot save.

        • But it depends on your willingness to question things…I think its a cop out to say these FHBers were forced into it…the ones I spoke to all wanted to get in and hope that prices rise further – therefore – they are just like any other participants in a ponzi and deserve to get crushed when it collapses

    • It’s about time the likes of Vinnies and other charities start means testing people.

      Granted there are those who have genuinely hit hard times through ill health, job loss etc. But there appear to be more and more cases of ‘everyday’ working families who continue to run McMansions, two gas guzzlers, 6 plasmas and a few iPhones, regularly holding their hands out. Many made a choice to immediately mortgage stress themselves at low interest rates, on easy credit they should never have had access to. They must take responsibility rather than lump on those that may be genuinely needy.

      Prime example was a couple on TT who were going to be ‘saved’ by the bloke from Refund Home Loans. Couldn’t make ends meet, new home, spanking new Territory and Impreza in the driveway.

      Calls for interest rate cuts are just a further request for charity. Not only will the stimulatory impact further add to inflation, the same people will be calling for more handouts in two years when they wonder why their 2.5% payrises aren’t making a dent on the true cost of living increases. ZIRP here we come.

      • +1

        Indeed! I’m going to rethink my charity tactics after reading that.

        I have no qualms giving to the needy. An overextended Wildebeeste with a greed streak is not needy.

  12. UE, you are good…

    Joye is actually incorrect on his comparison of tax regimes. The UK does not have negative gearing.

    Also, UK house prices are heavily influenced by the south east (London and surrounds). I’m not claiming that it’s different there, but the south east of England is home to one of the world’s major hubs and is a gateway to the UK and Europe. By comparison, Australia is, well, predominantly ‘Houses and Holes’.

    And UK property is still too expensive, even at 19% off peak prices. At one stage the banks had to confirm that they wouldn’t be paying interst to borrowers if the rate on their base-rate-linked mortgages went negative…

    Also, generally speaking in the UK, rental income typically covers much (if not all) of interest liabilities on mortgages. Interest only mortgages are also much more common over there.

  13. “In any event, I find it curious that Mr Joye has concluded that Australia’s home prices might be better valued than the UK’s …”
    Ha! Admit it Leith, you’re not that surprised he’s taken that approach. Joye choice of a relatively unknown UK housing index (which just happens to suit his argument the best) for his comparison isn’t a surprise, it’s exactly what’s expected of him. Still, considering this debate’s to be carried out with gloves on then playing the man’s out of the question.

    Even more than usual Joye’s argument crumbles easily under scrutiny. Good work there Leith.

  14. The last sentence of the article effectively invalidates the title of the article. Joye challenged a clearly held view – thus no strawman.

    The adoption of Halifax data is laughable. The Halifax is the number one outlier amongst the UK house data suppliers. Check the table at the bottom of this:

    PS. Who are the “we” in the penultimate sentence?

    • How is Joye’s use of a simple average measure of UK house price growth more appropriate than a hedonic index Suzi? Funny how RP Data has also chosen to use Halifax in their comparison chart. Care to comment why?

    • “Suzi Wong” is also “Sally Periwinkle” or “strindberg” on another housing forum (the choice of random female names is a curiosity, though). If you read their responses to sound articles, their MO is to find some tiny point they can attack or nit pick, and act as if it discredits the whole article.

      The above post is no different, and neither is some of their previous posts around here. It’s annoying, as they bring a different viewpoint which is good, but petty fault finding like above is tiring.

  15. Couldn’t have been debunked by a better person UE.

    I call bollocks on Joyes claim about UK price-to-income ratios being higher than Aus. I just spent 4 years there and this is not the case at all.

    Living costs are also substantially lower than Aus.

    • I currently live in London and I can attest from my experience that cost of living is substantially less than in Melbourne.

      Is the UK’s housing market also supported by the fact that many people opt to buy leasehold as oppose to freehold? Would the concept of buying leasehold ever work in Australia?

  16. re: structurally lower interest rates, and the dismissal of price-income ratios…

    I would have thought the dismissal was very shallow indeed.

    For, wouldn’t lower interest rates encourage higher house prices, and, from the flow-on of debt-money into the real economy, wouldn’t wages also rise?

    Is a sense, i wonder if the ratios would stay much the same from an isolated hypothetical consideration of SIMPLY LOWERING INTEREST RATES.

    Just quickly, it seems to me that, therefore, explosions in the price-income ratios would, therefore, genuinely reflect a degradation in affordability.

    Hope that makes sense.

    My 2c

  17. What Joye did reminds me of a case from my previous professional life as an academic. One day a medical researcher paid me a visit, showed some data and asked if I can recommend a statistical method that can confirm his hypothesis.

  18. Leith, you say…

    > “The ANZ’s house price-to-income ratio contradicts other reputable reports, which show Australia’s ratio to be higher than the UK’s. First, the latest Demographia International Housing Affordability Survey”

    But Demographia is not particularly reputable. For example, they claim Sydney gross household income is only $66K (far too low) and they claim the Sydney median home price $634K (far too high). So they are dramatically overstating the house price to income ratio for Australia. More here…

    Demographia Debunked

    If Demographia’s figures are wrong for Australia, they are likely to be wrong for the other countries too, and both the magnitude and direction of their wrongness is probably all over the place.

    That renders the whole survey meaningless. Their survey tells us absolutely nothing about the relative affordability of Australia compared to other countries.



      • Hard to say what it’s comparing really – it says ‘various combinations of median and mean measures of house price and income used depending on availability’. I’d say that’s equally as useless as the Demographia comparison.

        I’m not saying Australian house prices aren’t high. They are high, but housing is an expensive item everywhere regardless of country.

        I think affordability in Australia is pretty similar to most other comparable countries.

        As I’ve said before, hundreds of thousands of people buy a home every year, we build the biggest homes in the world, and we have very low mortgage default rates.

        Would that be the case if homes were unaffordable?

        • Okay, lets do a back-of-the-envelope calculation. The 2007/08 national (Sydney) median weekly pre-tax disposable household income according to the ABS Household Income and Income Distribution Survey was $1,285 ($1,435). When annualised, adjusted for tax, and extrapolated by growth in the ABS Labour Price Index, these incomes equate to around $63,800 ($69,900) as at March 2011.

          Now, lets compare these incomes to the latest RP Data Rismark dwelling prices: National = $420,000; Sydney = $515,000.

          Combining both of these figures gives a dwelling price-to-income ratio of around 6.6 nationally and 7.4 for Sydney. This is well above the figures quoted by both ANZ and the RBA.

          • So you get 7.4x for Sydney. In my blog, I get between 6.4x and 7.0x depending on the measure I use for Sydney household income.

            Here’s a few more ways to estimate Sydney household income…


            From here… http://www.cityofsydney.nsw.gov.au/aboutsydney/CityResearch/AtAGlance.asp

            Sydney median single income = $56,570

            From here… http://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6523.02007-08?OpenDocument

            Average number of employed persons per household = 1.32

            The figure of 1.32 employed persons per household is national. I would guess it is probably higher in Sydney, but let’s use 1.32

            $56,570 x 1.32 = $75K


            Or we could do it this way…

            NSW government figures for Sydney median household income in 2005-2006.


            So we have…

            2005-2006 Sydney Mean Household Income = 1559 pw
            2005-2006 Sydney Median Household Income = 1259 pw

            Now, if you look here… http://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6302.0Aug%202010?OpenDocument

            You can find data for the NSW total Male & Female earnings. Income increased by 19.2% between 2005 and August 2010. Obviously they would have gone up a bit more by the end of 2010 but the data only goes up to August.

            So taking the 2005/2006 Median Sydney Income times 19.2% growth we have a 2010 income figure of just over $78K.


            Or we could use the ABCDiamond calculation of $82K from here…



            Anyway, we both agree Demographia is wrong. If they’re wrong about Sydney, what else are they wrong about?

            Sure, the ANZ data may be understating the ratio a bit, but they’re much closer than Demographia’s dodgy figures.

          • Shadow, you can quote all the figures in the world. I will continue to use the ABS Household Income Survey, which is the official survey relating to household disposable incomes and only counts income available for current consumption. As you and I both know, the figures quoted by both the RBA and banks wrongly count imputed rents and compulsory superannuation contributions (amongst other measures), which are not disposable income.

            Correct me if I am wrong, but don’t you also use gross incomes in your calculation? If so, this is incorrect as tax needs to be deducted.

          • This discussion began when I pointed out that the Demographia survey is not particularly reputable. Demographia use a house price to GROSS income ratio, and I pointed out that their GROSS income figure for Sydney was wrong.

            You responded with a DISPOSABLE income estimate for Sydney.

            I then responded with two GROSS income calculations for Sydney.

            Demographia use GROSS income, my examples use GROSS income to show that Demographia is wrong.

            I’m not sure why you’re using disposable income. That’s comparing apples with oranges.

            Disposable income is a better measure of affordability in general, but my initial comment was about the accuracy of the Demographia figures, so we need to stick with GROSS income in this case.

            Anyway, I calculate the house price to GROSS income ratio for Sydney is about 6.4X, and you calculate the house price to DISPOSABLE income ratio for Sydney is about 7.4X. Our figures are not necessarily inconsistent – they just measure different things.

            Is the ANZ chart based on gross or disposable income? It doesn’t say.

            We need to ensure we compare apples with apples here. You can’t prove a house price to gross income ratio wrong by referring to a house price to disposable income ratio.

          • House prices fall every two or three years in various cities.

            Invariably then have then risen again to levels higher than the previous peak.

            Were they falling all those times in the past because they were unaffordable, and if so, what does that mean when they rose again to higher levels than the previously ‘unaffordable’ level?

            The price of milk has fallen in Coles. Milk wasn’t unaffordable before it fell in price.

            Things rise and fall in price regardless of how affordable they were in the first place.

        • “we build the biggest homes in the world”.
          Another myth Shadow. Australian home sizes include attached garages in the calculation whereas these are deliberately excluded from home size calculations in North America (where they are based on heating area).

          Also, you ignore the fact that land sizes are shrinking in both new estates and in pre-existing areas (via sub-division), which offsets the increase in house sizes and building costs.

          • Block size is irrelevant. If houses were unaffordable we would build smaller ones, not bigger and bigger ones, regardless of the block size.

          • If housing is affordable why has mortgage debt out paced GDP growth?

            If housing is affordable why are prices falling?

            If housing is affordable why are real interest rates falling (so that people can afford to pay those mortgages)?

        • >I think affordability in Australia is pretty similar to most other comparable countries.

          Affordable doesn’t equal “I should buy this” Shadow.

          Affordable can mean – I’ve saved what would have been a 20% or 30% deposit if houses were priced correctly, but to afford this house, I’ll need to borrow 90% of the market value of the house.

          Of course houses are affordable, if the politico-housing complex makes it so. Lower than inflation interest rates by the RBA, exorbitant stimulus packages and tax breaks and a culture of borrow now, inflate along the way and pay off later.

          As for your quote – of the comparable countries, which are not suffering a recession, or had to hock up to the eyeballs in public debt because banks made housing “affordable for all”, as values revert to the true intrinsic value?

          Ireland? UK? USA? Spain? Italy? NZ?

          • > “Of course houses are affordable, if the politico-housing complex makes it so. Lower than inflation interest rates by the RBA, exorbitant stimulus packages and tax breaks and a culture of borrow now, inflate along the way and pay off later.”

            Correct, they are affordable now, given those and other fundamental factors.

            Sure, stuff might happen in the future to make them unaffordable, but the fact is that right now people are buying homes as they always have done, building bigger and bigger homes, and generally not defaulting on their loans.

          • “…but the fact is that right now people are buying homes as they always have done, building bigger and bigger homes, and generally not defaulting on their loans.”

            No Shadow, the facts are:
            – Default rates rising to most in a decade
            – Credit growth lowest in decades
            – Clearance rates less than 50% nationwide
            – Stock is 22% up on this time last year
            – Unemployment now ticking up, with Roy Morgan polls suggesting this is going to keep rising

            You say ‘people are still buying homes’ – yes they are Shadow, but nowhere near as many that have been during the boom.

            House prices are falling – that is the final clear signal that prices are unaffordable.

            Dont waste your time with this bloke – he just said block sizes are irrelevant…

            Explain that to me again Shadow.

            How is it irrelevant if block sizes are shrinking? They make up most of the cost of buying an established home…and they are shrinking – thus further adding to the lack of value that the modern day Australian home buyer is receiving.

            You can quote all the graphs you want – but you can never compete in a straight forward argument using common sense.

        • As a follow up to that, read Stocklands (SGP) latest earnings release and the graph showing the change to smaller lot sizes and now a reversion in house sizes, which they fully admit is necessary, because they can’t find anyone to sell these “biggest homes in the world”.

          • I think we need some Keen intervention. The problem is debt. Most of that debt is in housing. Housing is too expensive. Show my anyone who doesn’t agree and I’ll show you a 25 year old fly in fly out truck driver on turning down $190k pa because it’s not enough…

          • Not sure that the decrease in lot size is making anything more affordable to be honest. A small town planning consultancy I know well (a subbie to companies like Stockland) has doubled in size over the last 6 years, but the number of lots they get approval for has remained stagnant – ie the effort to negotiate the bureaucracy around this process has effectively doubled, as has the price of course. Lot size is irrelevant against that backdrop, it does not change the effort required to get it approved.

        • “…and we have very low mortgage default rates.”

          The only reason we have low default rates at this time is because most people are using their credit cards and refinancing tricks to hold onto their unaffordable houses. Give it another 6 months at which time they will have used up every last possible source of credit and you will see what people can’t really afford.

  19. Good to read that Suzi Wong has again completely missed the point of the article.

    On a positive note, I am pleased Suzi got a laugh out of the use of the Halifax data. I am not quite sure why it is funny though.

  20. I think we need some Keen intervention. The problem is debt. Most of that debt is in housing. Housing is too expensive. Show me anyone who doesn’t agree and I’ll show you a 25 year old fly in fly out truck driver turning down $190k pa because it’s not enough…

  21. I really do think there are some personal insults being thrown around here. I have seen MB delete some really offensive comments, but some just slips through.

    Although I have seen Joye and Rory make some ad hominem attacks on Steve Keen, not making a justification , just an observation.

      • Appreciate the fact that the MB team do moderate and I note in the past I have been moderated. (Link to Google Spam with the so ‘called links’ on the AHF)

        Upon reflection fair enough.

        Thank you for keeping it objective.


  22. Reproducing my comment on the same article appearing in BS:
    I would say the author reverses the cause and effect – to stop house prices from falling, the UK taxpayers had to step in and nationalise nearly all of the banks. Whereas, the author tries to paint a rosy picture of prices not falling too much inspite of the banking crisis.
    Also, here in Australia, since there is a bipartisan agreement to return the budget to surplus and voter anger towards the big four banks after their Melbourne cup rate increases, I don’t think there will be a taxpayer takeover of banks.

  23. Leith Van Onselen is turning into the world’s best blogger on housing bubbles. And coming from me, he knows that is praise indeed.

    For example, DrHousingBubble in the USA is good on some points and utterly floundering on others. I know of no-one as good all round as Australia’s Unconventional Economist – Australia is lucky to have someone of his calibre showing up its local spruikers and spinners of the truth.

      • I have to agree…Leith is a grea blogger, no doubt about it. When this all blows up – you will get the praise you deserve for being one of the few dissenting voices.

        I dont think its an overstatement to say that you and your articles have probably saves hundres of people from making a very poor financial decision and potentially ruining their life.

        That is something to be very proud of mate!

  24. By the way, is this really the same Christopher Joye who in 2003 helped author the PM’s Home Ownership Taskforce Report, and that said the following in “The Australian” in August 2003:

    “……there is an affordability problem in Australia, but it has nothing to do with income levels, interest rates or a dearth of exploitable land. Rather, it is the result of oppressive local and State government regulations (often imposed with the enthusiastic support of proximate communities) that severely constrict the stock of low-cost properties and, when combined with ever-growing demand, artificially inflate the price of housing……

    “…….. we believe that several innovative steps can be taken to improve the availability of housing without resorting to subsidies, and which would contribute to a striking reduction in the costs of home ownership right across the country. The overall objective here is to accelerate the approval and land release process so as to promote private-sector investment in the production of affordable housing…….”

    Which Christopher Joye should we regard as the most credible one, the one who says that undersupply propping prices up is good, or the one who says that undersupply pushing prices up is bad?

    What the H. is this guy’s GAME? Is he busily “shorting” everything in sight behind the scenes, and standing to make a killing like Steve Eisman, John Paulson, et al did in 2008, when the bubble he has been talking up, bursts? Or what? Who knows the guy? Who can enlighten me?

  25. What this is also missing is the big point that the only reason the UK market hasn’t crashed is that interest rates have been held incredibly low so there has been no push to sell. There was an article in today’s Guardian about how close many households are to foreclosure, and it is only a matter of time when interest rates go up and the cookie crumbles.

    Also, my experience of the rent to price ratio is that London is much more expensive to rent in than Sydney, and that buying makes more sense in London because of it. The figures here suggest only a minor difference, but my experience has been otherwise, Sydney is much cheaper to rent than in London.

  26. CJ’s reply http://christopherjoye.blogspot.com/2011/08/leith-van-onselen-makes-mistakes-again.html

    Apparently a sampling problem with the Halifax data. I’m not sure whether this is a bigger concern than comparing a hedonic regression result against an average, but hey.

    I also seems that CJ is happy to use the adjustment to low interest rates argument to justify Australia’s house price growth

    (which I have argued only explains only a portion of the price increases http://ckmurray.blogspot.com/2011/07/housing-markets-once-off-adjustment.html)

    but not so keen to use the interest rate explanation to demonstrate that UK prices are affordable. UK mortgage rates are currently between 4 and 5%, while Australian mortgage rates are between 7 and 8%.

    Also, UK yields are approximately the same as the mortgage rate, while Aussie yields are about 60-70% of the mortgage rate.

  27. Dumb_Non_Economist

    Maybe I’m missing the point and if so please feel free to point it out, but CJ is not trying to out-chart you guys, his work is solely for the media and the 90% of people who read the MSM, he is just trying to calm the spooked horses. Those who have bought and those who are thinking of buying. It’s a plain media campaign and I’m damn sure he knows his “work” is BS. The media will spread it and unfortunately hardly anyone will read this blog refuting it. When it more than likely comes undone there will be someone to blame and most people don’t know his name anyway, he’s just a talking suit head who tells them interesting “stuff” about their housing “investment”. End of story.

  28. Absolutely terrific Leith. Mr consistant (UE) takes on Mr flip-flop (Joye).

    Of strawmen, statistics and economics:
    to paraphrase Churchill- Statistics are like a drunk with a lampost: used more for support than illumination.W. Churchill.

    UE seeks illumination whilst Joye seeks support.

    Most people occasionally stumble over the truth, but most pick themselves up and continue on as if nothing ever happened.Winston Churchill. ET tu Joye?

    “It is better to debate a question without settling it than to settle a question without debating it.” French moralist Joseph Joubert (1754-1824).

  29. Suzi’s Mr Joye’s non-response (this time without any direct personal attack on Leith):
    ” Leith van Onselen makes mistakes again
    LvO goes to tremendous lengths over at MacroBusiness to criticise my use of the highly regarded Acadametrics house price index in the UK, and queries why I did not use the Halifax measure. As with most of LvO’s attacks, this one is baseless. As we explained years ago, Acadametrics uses 100% of all UK sales whereas Halifax only captures about 10-15% of the market, and that is biased towards Halifax borrowers. So while, yes, Halifax has a better index methodology (this is actually debatable because Acadametrics use several methods), its sample selection biases are far too extreme to make it better than Acadametrics. Perhaps LvO could point that out to his readers, although that may be asking too much.”

    • Here are Mr Joye’s own words on the efficacy of using simple measures to gauge house price growth. Although he discusses medians here, his comments apply equally, if not more so, to the use of averages:

      There is a universal gauge: the median is simply the middle sales observation. Medians are not very useful for measuring house price growth rates because the median is affected by a range of biases:

      * Different buyer types who happen to be dominating the market (first timers vs. upgraders);

      * Changes in the types of homes built over time (if we build bigger (smaller) homes over time the median may rise (fall) suggesting house prices have appreciated (declined), when in fact they may have not);

      * Renovations (if homes are renovated this can push the median up when capital growth rates have actually been unchanged); and

      * The liquidity of different geographies (if more West Sydney homes trade than East Sydney homes, the median may fall when house prices could have been rising).

      However, the median is useful if you want to simply know what the middle sales observation in, say, Melbourne was over the past, say, quarter. This gives you a quick and easy-to-understand (at least for most) guide for the price of the homes being purchased in the market. That is why RP Data-Rismark continue to report the simple medians alongside our hedonic index. It is really to satisfy the media’s needs. Median prices are also useful when seeking to address research questions that are targeted at identifying a ‘representative’ price at any particular point in time…

      If investors want to work out bona fide capital growth rates, they should not use unadjusted median price data. They should try and rely on more sophisticated index methods that overcome the simple median price biases, such as those that have been reviewed above. Our preferred approach is the hedonic method.

      Let’s not forget that RP Data, in its June 2010 Market Update, also used the Halifax hedonic index to chart the growth of UK home values. This RP Data chart also showed that Australia’s home values had grown more than the UK’s, contrary to Mr Joye’s article.

      Finally, how Mr Joye can justify charting the hedonic RP Data-Rismark Australian home price index against the Acadametrics average UK index is beyond me. I would have thought hedonic vs hedonic – as RP Data have done – would be more consistent.

    • The Land Registry does not capture 100% of the sales in the UK – just in England and Wales. Scotland has it’s own Register… not sure about NI. Halifax lends throughout the UK by the way.

  30. The most overlooked fact in recent years when comparing housing price to income ratio is that the measure used is total income for household, not very long ago the only income used in calculating the amount a bank would loan on a mortgage was the income earned by the main breadwinner in the family. When this distortion is included it makes the current situation even more insane.

    • yes, and at least here in NZ, but I’m sure in Aus too, a significant proportion of the second income earner’s after tax income often goes to day care / after school care.
      So again this implies that the situation is perhaps even worse than it would first appear eg. a ratio of 4:1, back in the day, off one income, didn’t incur day care costs etc. eating away at the income side of the ratio

      • You are correct Matt, plus the second income erner needing a car and probably take away meals. I know many families who if they were to do realistic budget costings that the second income and more is spent just being at work.

  31. the great christopher joye keeps telling us that our housing is relatively cheap. All well and good, got that Dr Joye, and don’t need to hear the same old shit again.

    The only thing I want to hear from him is an hedonic assessment, pricing the point at which he thinks Australian houses enter over valued status.

    Given that is what we are all talking about it behoves him to tell us what he thinks over valued is.

    Come on Joye, when do or houses become over valued in your wonderful opinion?

    • It would depend which Chris Joye answers the question.

      In 2003, Mr Joye acknowledged Australia’s housing affordability problem and made some fantastic policy proposals to improve affordability, particularly fixing the supply-side (which I 100% suppport):

      “…there is an affordability problem in Australia, but it has nothing to do with income levels, interest rates or a dearth of exploitable land. Rather, it is the result of oppressive local and State government regulations (often imposed with the enthusiastic support of proximate communities) that severely constrict the stock of low-cost properties and, when combined with ever-growing demand, artificially inflate the price of housing….”

      But then there’s the other Chris Joye who claims that Australian homes are affordable. For example:

      “It pays to remember that the price of Australian homes is only around 4.1 times disposable household incomes, which has been unchanged since September 2003. This tells us that over the last six years Australian house price have very closely tracked changes in household incomes. Contrary to popular myth, Australia’s house price-to-income ratio is not unusually high, nor has it risen in recent times”..

  32. Good analysis – the ‘house price income ratio’ (HPIR) is a bit like the mythical unemployment figures that have been ‘politically’ adjusted to suppressed the numbers.

    The same observation of manipulation can be made of the HPIR as it is somewhat disingenuous by many commentators to use total income of a household to judge housing affordability.

    In the past a home could be purchased with a single income. Now we generally require two incomes and this alone masks affordability and the extent of the bubble.

    In the end history and the reality of the situation will debunk Joye’s smoke and mirrors with words and graphs. A bit like King Canute of housing trends.

  33. The purpose for getting the Annual Demographia Housing Affordability Surveys underway back in early 2005, was to illustrate clearly to Kiwis and Aussies, just how much the political and commercial establishment, are taking them to the cleaners with artificially inflated house prices.

    None of this is “rocket science” and the Median Multiple is by far and away the best measure in assessing degrees of housing stress in individual housing markets. A clear (cant be any clearer!) Definition of an Affordable Housing Market is available on my website http://www.PerformanceUrbanPlanning.org .

    If housing exceeds 3 times household income or 1.5 times Gross Metro / State / Domestic Product, it is no longer ranked as “affordable”.

    The Annual Demographia Surveys without fail infuriate Mr Joye early each year, when they are released.

    We are indeed blessed to have Mr Joye as an adversary.

  34. CJ can bang on about it as much as he likes but I can’t afford a house yet and I could in 1995 when I bought in Manchester UK. I now earn twice what I used to then. You can massage those multiples until the cows come home Joye and it won’t make any difference to what we all know, you bounder.

  35. The cost of housing in Australia is an absolute disgrace. And don’t for a minute think that the argument “no-one wants to live in the desert” holds any water. Because if that IS your argument then I can claim the first 1/4 acre that is not used and it’s only fair to note that I have identified numerous suitable building blocks within Brisbane CBD and that is BEFORE I even try!

    On a side note I have enjoyed a nice holiday in central Queensland over the past couple of days. Want to know what concerns those that produce our food? They are VERY concerned about miners resuming the land that they (farmers). And here I was thinking that the idea of buying real estate is that you own it :rolleyes: