Remember this chart? It is taken from page 15 of the RBA Research Discussion Paper: Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study, released in September 2010. As you can see, the RBA chart shows a nationwide dwelling price-to-income ratio of around 4.5.
Senior RBA officials have quoted this ratio in a number of fora. For example, in March this year, the RBA Governor, Glenn Stevens, made the following remarks at a question and answer session at the Australian Business in Europe lunch in London:
“There is quite often quoted very high ratios of price to income for Australia, but I think if you get the broadest measures country-wide prices and country-wide measure of income, the ratio is about four and half and it has not moved much either way for ten years…. That is higher than it used to be but it is actually not exceptional by global standards.”
In a nutshell, the RBA’s measure of household disposable income is taken from the National Accounts and wrongly includes a number of significant items as income that are not actually ‘disposable’, in that they cannot be used to fund current consumption. Key amongst these inclusions are: (1) compulsory superannuation contributions, which are locked away until retirement; and (2) owner-occupied imputed rents, which are the theoretical rental income that an owner-occupier would receive if they rented their home out.
The dwelling price-to-income ratio of 4.5 calculated by the RBA inferred an average household disposable income figure of around $100,000 in mid-2010. However, as noted previously, such a high level of household income was never believable when considered alongside the following facts:
- The 2009 Household, Income and Labour Dynamics (HILDA) Survey estimated that an Australian household only needed to earn over $77,500 after-tax to be classified in the top two income quintiles (i.e. the top 40 per cent of income earners); and
- The average pre-tax full-time total earnings in Australia was only around $68,000 as at August 2010.
If those official releases were not enough to convince you that the dwelling price-to-income ratio of 4.5 quoted by the RBA was way too low, or to put it another way, the National Accounts estimate of average household disposable income (circa $100,000) was way too high, then yesterday’s release of the biennial ABS 2009/10 Household Income and Income Distribution Survey (the Survey) should convince you once and for all.
According to this Survey (my emphasis):
Household income consists of all current receipts, whether monetary or in kind, that are received by the household or by individual members of the household, and which are available for, or intended to support, current consumption.
Income includes receipts from:
- wages and salaries and other receipts from employment (whether from an employer or own incorporated enterprise), including income provided as part of salary sacrifice and/or salary package arrangements
- profit/loss from own unincorporated business (including partnerships)
- net investment income (interest, rent, dividends, royalties)
- government pensions and allowances
- private transfers (e.g. superannuation, workers’ compensation, income from annuities, child support, and financial support received from family members not living in the same household).
For the first time, this survey has also included owner-occupied imputed rents as income, which contributed, on average, an extra $57 to the income of all households.
According to the Survey, the average after-tax household disposable income was only $74,360 (see below extract) – a far cry from the circa $100,000 figure quoted in the National Accounts.
So what can be said about the RBA’s dwelling price-to-income ratio? How much is it understated?
Well, to correctly answer these questions, I require two pieces of information:
- RP Data-Rismark national median dwelling price (all regions); and
- Median household disposable income.
The first piece of data – the national median dwelling price – is provided in the below RP Data-Rismark home value index release, and was $415,000 as at June 2010.
The second data point – the median household disposable income – can be estimated from the 2009-10 ABS Survey via the following steps:
- taking the gross median household income of $1,320 per week;
- estimating the median income tax payable by taking the average income tax rate (15%) and scaling this down by the difference between the median and average gross household incomes (i.e. (1,320/1,688) x 15%) and then multiplying this by the median weekly gross household income (i.e. $1,320 x 12% = $158 per week);
- subtracting 1. from 2. to obtain the median weekly household disposable income (i.e. $1,320 – $155 = $1,165); and
- multiplying $1,165 by 52 to obtain the annual median household disposable income figure of $60,580.
From these two data points, Australia’s Median Multiple (median dwelling price divided by the median household disposable income) as at June 2010 was around 6.8 – 50% higher than the ratio of 4.5 calculated by the RBA.
An inferior dwelling price-to-income ratio can also be calculated by comparing the average dwelling price – $447,994 as at June 2010 according to Rismark – against the average household disposable income figure of $74,360 provided in the ABS Survey. This provides a dwelling price-to-income ratio of 6.0, which is still 33% higher than the ratio of 4.5 calculated by the RBA.
Whichever way you cut the data, it is clear that the RBA’s dwelling price-to-income ratio is understated by a significant margin and that Australian housing is, on the whole, unaffordable.
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