RP Data contradicts RBA dwelling price-to-income ratio

By Leith van Onselen

Last year, I published an article, How the RBA undervalued housing, which questioned the Reserve Bank of Australia’s (RBA) official dwelling price-to-income ratio that claimed that Australian capital city home values were only around five times annual household disposable incomes as at June 2010:

Using alternative income data, derived from the the Australian Bureau of Statistics (ABS) Household Income and Income Distribution Survey, I estimated that the RBA’s dwelling price-to-income ratio was understated by between 33% and 50%.

Today, RP Data has released research, derived from the 2011 Census, confirming that the RBA’s dwelling price-to-income ratio is significantly understated. According to RP Data, the national median capital city dwelling price to median household income was 6.3 times in 2011, well above that estimated by the RBA:

Interestingly, RP Data’s calculations also contradict the dwelling price-to-income ratio quoted by its index partner, Rismark International:

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Unconventional Economist
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  1. That looks like a clear difference between the RBA and RP Data numbers. I suspect they’ll tell you the Rismark chart is all of Australia, rather than just capital cities.

  2. Houses are way overpriced considering wages and high cost of living. Avoid debt slavery–don’t buy now.

    • Thanks Ponzi. Couldn’t put it better myself.

      These low interest rates are very tricky for home buyers entering into long term variable rate commitments at ~30 per cent of income. Most look at current monthly repayments and see they can borrow lots and lots. When i rates revert to mean sometime during the lifetime of the loan, they are screwed.

      This feature of current economic settings is quite apart from high and falling land prices and an economy awash with debt.

      Ponzi, please join me for the chorus:

      Don’t Buy Now!

      • We could try harmony!

        The only reason for the RBA to reduce rates is to avoid declines in aggregate debt growth. Sounds nice and they use fuzzy words like ‘support’, mild stimulation etc.

        However, It all boils down to one thing. In aggregate more people choosing to take on more debt rather than extinguish debt. No wonder there is a massed choir of vested interests in housing and retail and government egging on the RBA.

        RBA interest rates policy can be summed up simply as “Bait Rates” designed to hook the unwary and foolish.

        Considering the ultimate objective is to ‘stabilise’ ponzi property pricing, the policy is immoral.

        Don’t borrow now

        Don’t buy now.

        • And dont forget that taking out a loan to buy now is taking out a loan to provide some holier than though lecturer about how younger people dont work hard, have it so easy, and are spoiled, a very good payoff for speculating. A very good payoff for holding you to ransom.

          The RBA is basically about helping baby boomers to economically eat subsequent generations…..as are the MSM, Real estate agents, advertising types, marketing people, communications consultants, the vast bulk of Australia’s journalists etc etc etc….

          Don’t borrow now

          Don’t buy now.

        • I want in on this chorus too: can you guys all say whether you sing lead, tenor, baritone, or bass? I am baritone.
          All together now: classic cadence, key of C:
          DOOOOOOOOON’T (Melody note A, F chord)
          BUUUUUUUUUUUUYYYYY (Melody note B, G7 chord)
          NOOOOOOOOOOOOOOOWWWWWWW (melody note C, C chord)

  3. Aha, so the median house price in Melbourne in 2011 was $460k….so presumably in 2012 (after slight falls) it is now around $430k? REIV is reporting it @ $535k…

    C’mon kids, get a hold of your numbers

    • dumb_non_economist

      Funny about that and in addition on this website and msm Sydney has had a 9 times income, what happened to that?

    • RP Data has been underquoting the affordability of housing for years. The accepted measure used to be median house price to median household income. Another supplier of housing data, Residex is quoting Melbourne’s median house price at $558,408. Median household income is $69,212. Median house price to median household income = $558,408/$69,212 = 8.07. RP Data has always reported dwelling price to income ratio. Dwelling price is considerably lower because it lumps apartments/units in with houses. RP Data also were in the habit of quoting average household income instead of median household income. Average household income is a lot higher than median household income due to massive incomes at the top end of the scale lifting the average. This latest release of data from RP Data is a surprise to me because they are not in the habit of quoting median household incomes. It seems like a slip up from their normal policy and must be an embarrassment to them. It has always amazed me that the RBA seems to favour the data from RP Data / Rizmark which obviously hides the housing affordability problem in Australia.

  4. Funny how Joye has more than once derided the Demographia numbers stating they are too high and now we have RP Data come out with figures which suggest their multiple is closer to Demographia’s than those of Joye/Rismark:


    In reality all the different series point to the same unsustainable growth in prices versus incomes e.g.

    2.8x -> 4.5x
    4x -> 6.4x

    Both above sets of numbers represent the same increase in prices relative to incomes.

    Shame RP Data didn’t take their numbers back another 5-10 years to compare with Rismarks.

    • What is also quite worrying is the fact that in spite of the data going all the way back to 2001 for Melbourne it was still 5.0x median household income, even 11 years ago Melbourne was still deeply unaffordable.

      I remember a couple of years ago wondering how long it would be before companies such as RP Data changed their tune and left Joye out in the cold. Now that has finally happend, I wonder how much longer investors can really expect to hold onto their properties in the false hope there will be capital gains to be had. Eventually the bull rush out of property will happen but I think the multi-billion dollar question is when?

  5. The most common, international accepted, measure of housing affordability is “house price to average ‘individual’ earnings”

    Both these measures used by the RBA and RP Data are biased in favour of trying to play down housing affordability.

    Both are using HOUSEHOLD income as the measure of affordability. This conveniently takes advantage of the rise in ABS household income figures due to adult children living with their parents for longer and other multi-income household arrangements that have evolved as a RESULT of severe housing unaffordablity.

    Just one look at the RP household income figures for Sydney over the range is a red flag. Even more ridiculous is the median income increases for Darwin & Canberra, check it out!

    This range is conveniently ‘short’. House prices were ‘affordable’ in 1991. By 2001 they were already extremely unaffordable by any measure, in Sydney especially.

    House price to average individual earnings is the most realistic measure but it certainly won’t be used by those with a pro-bubble political agenda.

    • Is there an analysis of house prices vs. individual income over the past 20-25 years available?

      This would be very interesting to compare with the above figures. I’d imagine an increase in separated parents and people marrying later would modify the index in one direction. But a larger modification in the other direction (as you mentioned) would be children staying at home longer and more share housing.

      • I have run the numbers based on Full Time Adult Total Earnings (FAE). In the ABS data sets this is the biggest number, so if anything it plays down the changes in affordability.

        I ran the data & comparisons from 1970 to 2012.

        1970 was used as a start year because accurate data before then was a bit sketchy….data used was for Melbourne, Sydney & Perth for the same reasons.

        I also ran a Total Cost calculation to determine what the total cost is to a mortgage holder who took out a 20 year P&I, variable loan….this way we could see whether ANZ’s crap analysis/argument of “affordability” due to interest rates could stand… Mortgage payments were also adjusted for inflation, so effectively what we came up with was a Total Real Cost …..it reflects how much it actually costs to buy, as measured by purchasing power AND income.

        Some of the key findings:

        Total Real Cost in 1970:
        >Sydney: 4.98
        >Melbourne: 3.48
        >Perth: 4.87

        Total Real Cost in 1990
        >Sydney: 10.81
        >Melbourne: 7.52
        >Perth: 5.95

        Total Cost 2012

        …by the nature of the calculations this depends on where inflation takes us, as well as what happens with interest rates. I reckon a 20 year mortgage taken out today will probably find an average interest rate around 8.5%, however to be very conservative let’s say it is 7.5%, and inflation is at a moderate 2.8%….

        >Sydney: 13.71
        >Melbourne: 11.59
        >Perth: 9.80

        What’s more, this doesn’t include changes in household dynamics. Since 1970 household size has shrunken from 3.3 to around 2.6 today.

        Effectively this means the PER CAPITA “TOTAL REAL COST” OF HOUSING today is between 3.9 (Perth) and 5.30 (Sydney).

        In 1970 the per capita total real cost was 1.05 in Melbourne, 1.48 in Perth, and 1.51 in Sydney.

        That’s 330% increase in per-capita housing cost for the average Melburnian!

        Inefficient use of resources anyone???

        It’s bloody ridiculous….

        Cheers, JM

        • Inefficient use of resources anyone???

          It’s not a outcome dictated by misallocation.

          It’s an outcome dictated by wealth redistribution.

          Gen Y paying twice a year income to European tourism providers via our baby boomers

    • Yes it does ignore all the single person, and single income households out there. I need to dig into the ABS stats to find out exactly what proportion of the population they represent, but I bet it’s significant.

      It would also be interesting to know how much working adults still living at home distort that household income figure, as I agree with you that comparing house prices against individual incomes is a much better indicator of affordability, as it removes these effects. (Adults still living with their parents generally are not contributing directly to the mortgage – if there still is one). It’s a bit like the circular argument that because kids are staying at home longer, more share houses are forming etc, therefore household size is growing, is “proof” of no housing shortage.

      • (Adults still living with their parents generally are not contributing directly to the mortgage – if there still is one)

        This is true – however, the average household income figures are skewed by this – but on the other hand I can’t imagine it’s a high proportion. For that matter, owner-occupiers with mortgages only make up 30-something percent of all homes.

      • It’s a bit like the circular argument that because kids are staying at home longer, more share houses are forming etc, therefore household size is growing, is “proof” of no housing shortage.
        Shortage-deniers are shameless in their denial.

    • This HOUSEHOLD is a damn lie. A lot of young people live in shared accommodation, like a friend of mine is sharing a house with two other guys. All three of them are 35+ males and professionals and such “household” combined income distorts a whole picture a lot.

  6. Don’t lend now! Stuff your cash in a safety box or offshore. The more us prudent types put into bank accounts the greater the base to help leverage the debt pie. Bank run anyone?

    On a serious note, there is only so much of this borrow/speculate/bubble system I can take. After a number of years watching the impacts this bubble is taking on society I am inclined to take my money and run abroad. If you have some skills other countries have jobs, this isn’t the only place where you can get a job…despite what The Gitt says.

    • You mean imputed rent? Joye apparently stripped that out, as per his own article


      The second chart below seeks to remove one of the main “non-cash” items that is captured in the ABS’s disposable household income series: “imputed” owner-occupied rents, or the rents you effectively save by buying a home rather than renting it. As you can see, this boosts the dwelling price-to-income ratio to about four and a half times.

      I thought you followed his stuff religiously.

      PS: I think the title of this blog post should read “RP Data contradicts their index partner Chris Joye’s price-to-income ratio”

      • How did RP Data get $63,960 for median income?
        The gross income figures I see is $1,234/week, which is $64,168.
        Not much I know, but just curious to know what the difference is

        • You can go over to RPData blog and ask Tim Lawless or Cameron Kusher.

          Unlike CJ, the RPData folks allow comments on their blog and answer questions from us ordinary plebs.

  7. Brett Edgerton

    Quick straw poll (if I may) – absent a bank funding crisis, what is the probability of Australian mortgage rates getting into double figures in the next 5 years???

    My answer is that the probability is less than 10%…

    To the extent that RBA maintains control over interest rates, and it is their impact on demand rather than their absolute level that the RBA is concerned with (acknowledging that it will use recent past history as a rolling guide on where is “neutral”), the level of household indebtedness suggests to me that interest rates are going to remain low compared to the last 30-40 years until deleveraging and income growth dilutes the impact of small moves in rates…

    I’d be interested to learn others’ views…

    • Maybe, maybe not. I’d suggest that if lower interest rates are because our economic growth is struggling it’s not going to be a great outcome. Homeowners might (though the prism of strange economics that ANZ seem to be using) see it as a good thing.

      Something that the ANZ argument (low interest rates = increased debt serviceability = upward support of prices) seems to forget is that most loans are P&I. As we’ve seen on a global scale with the printing of money, spurring on inflation to de-value your debt can actually be helpful….

      Also let’s not forget that interest rates haven’t actually been all that bad. Sure there was a period of hyper-inflation from the late 80’s & early 90’s, but wages growth also chased inflation, so on balance it actually worked out as a free kick to some

      Then again that’s just my take on it 🙂

      • fewlishMEMBER

        Agreed. All to often I’m reminded not to complain, as life was more scary ‘when rates were 16%’ only to reply that 10% wage increases seemed to follow….

    • Japan had low interest rates for the last 20 years, the US for the last 5 years – a fat lot of good that did to them. In a debt deflation or a balance sheet recession scenario, level of interest rates does not seem to matter.

    • How can income grow when the developing world offers labour at bargain basement prices? The debt and relative income need to be inflated away, so for interest rates to remain low, inflation must be high.

      That’s in theory. In practice we will probably have a deflationary recession/depression despite the RBAs insistence on inflation.