RBA wags the dog on housing affordability

By Leith van Onselen

Today, the AFR has run an article by Christopher Joye, director of Rismark, a private company that sells property price indicies, that draws upon a recent speech by the Reserve Bank of Australia (RBA) governor, Glenn Stevens, which argues that Australian housing is not expensive by global standards:

In an unusually sparkling sermon, entitled The Lucky Country, Governor Stevens presented important new research comparing Australia’s “dwelling price-to-income ratio”, which is a common valuation benchmark, to a range of peer countries…

The first take-away from the Governor’s speech was that the price-to-income ratio is currently sitting at around four times…

I’ve also suggested, but never empirically proven, that these levels do not appear unseemly by international standards, while highlighting the difficulties of comparing price-to-income ratios across countries due to differences in data reporting methods and tax regimes…

After tipping his hat to these constraints, the Governor ploughed ahead to formally address this gap. He pulls off the daunting research feat of compiling price-to-income ratios for an array of nations, including Ireland, New Zealand, the UK, Canada, Germany, the US, Japan, France, Italy, the Netherlands and Belgium, all the way back to the early 1980s. Reflecting on this work, the Governor opines:

“To the extent that we can make any meaningful statements about international relativities, the main conclusion would be that Australian dwelling prices, relative to income, are in the pack of comparable countries. In this comparison, the United States seems the outlier.”

Unfortunately for the RBA, their calculated ratio of dwelling prices to disposable income for Australia (4.0 times nationally) does not stand-up to scrutiny.

According to Rismark, the average home price nationally was $447,994 as at June 2010. Given that dwelling prices nationally are down around -6% since peak, we can estimate that the average dwelling price nationally is around $421,114 currently, which suggests that average household disposable income (i.e. after taxes) is around $105,000 according to the RBA’s ratio calculation. This is a ridiculous notion given:

  1. The ABS 2009-10 Household Income and Income Distribution Survey showed that the average after-tax household disposable income was only $74,360.
  2. 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);
  3. Individual average annual earnings (pre-tax) were only $54,600 as at March 2012;
  4. The ATO Taxation Statistics showed that individual average (pre-tax) taxable income was only $66,500 in the 2009-10 financial year; and
  5. The 2011 Census revealed that median annual household income was only $64,168.

Whichever way the data is cut, the RBA’s suggestion that average household income is around $105,000 is very inflated, which throws its whole comparison of Australian dwelling prices-to-income into doubt.

Indeed, only recently RP Data published research confirming that the RBA’s ratio is significantly understated. Using household income figures derived from the 2011 Census, RP Data estimated that the national median capital city dwelling price to median household income was 6.3 times in 2011 (see below table).

Moreover, the calculations used in Glenn Stevens’ speech directly contradicts those of the RBA’s then Head of Research, Anthony Richards, who in 2008 provided 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 also prior to the global house price crash.

Back to the AFR article:

Stevens then points out that on his measures, housing affordability has not been better in over a decade. Indeed, he cheekily queries whether the alleged “affordability crisis” that has been promulgated by the popular media might morph into a purchasing power problem:

“Scaled to measures of income, Australian dwelling prices on a national basis have in fact declined and are now about where they were in 2002. That is, housing has become more ‘affordable’. Four or five years ago we supposedly had a housing affordability ‘crisis’. Now it seems that the problem some people fear is that of housing becoming even more affordable.”

It is interesting that Mr Joye should bring up this point. In his Lucky Country speech, Mr Stevens produced the below chart to argue that housing affordability is the best that it has been for a decade:

As a result of lower house prices and therefore lower loan sizes, somewhat lower interest rates and a good deal of income growth, the repayment on a new loan on a median-priced house as a share of average income is now at its lowest for a decade (except for the ‘emergency’ interest rate period in 2009).

Yet, the RBA’s claim is contradicted by its own data, which shows the share of aggregate (economy-wide) household disposable income eaten-up by mortgage interest payments (let alone extra principal payments from higher prices) is nearly double that of a decade ago:

Similarly, the 2011 Census results revealed that the share of median household income devoted to mortgage repayments has increased significantly, from 25.6% in 2001 to 33.7% in 2011 (see below chart):

Clearly, the RBA Governor’s claims about Australian housing affordability do not stand-up to scrutiny. Although affordability is indeed improving, thanks to reduced dwelling prices and lower mortgage interest rates, Australian housing remains expensive.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

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Comments

  1. More evidence Stevens and the RBA are a waste of tax payer dollars. The govt needs to replace the current board as they have proven themselves to be incompetent.

    • Indeed. One must ask, “Is this merely incompetence? Or is it willful deception?”

      Whichever your answer, the conclusion must be that they are not worth the grossly excessive remuneration they receive, nor worthy of the exalted status they enjoy.

      • you would hope that people in those positions are not so analytically incompetent. Which only leaves one possibility.

          • Indeed, I could get behind that movement. It does however pose an interesting question for both Leith and any of the contributors here on MB (both bloggers and commenters), what would you do differently as supreme overlord of the RBA?

          • Mining BoganMEMBER

            “what would you do differently as supreme overlord of the RBA?”

            Give control of the money to the nerds.

            Oh, wait…

          • On the other hand if Stephens — or Joye for that matter — are using data that they believe to be right, no to matter if it contradicts official data — then according to our discussion last week their position is valid (a position I reject).

            i.e. data shows >6 but they believe the number is actually 4 therefore housing is proved to be affordable.

            To me this belief system approach is not analytical but others claimed last week using (make) believed data was a valid approach to circularly arrive at conclusions.

          • i.e. data shows >6 but they believe the number is actually 4 therefore housing is proved to be affordable

            Well then the argument needs to be framed not so much that 4x equals affordable, but the relative price of now compared to previous times.

            If the arbitrary ‘4’ is solid, then all they have to do is satisfy ‘4’.

            Now the modelling they have used to demonstrate ‘4’ now, also showed that in 1981, the ratio was 2.

            Most here argue that it is 6 now, and was then in 1981.

            In both cases, the ratio is twice what it used to be. Thhis is what the framing of the argument should be IMO.

      • Of course it is willful deception. Reserve Bank Governors need to be political players as well as good analysts. The whole point of the spin is to make sure the horses don’t get spooked. The RBA, and indeed the rest of us, have a substantial interest in seeing the bubble deflated gently.

  2. Leith has already found many faults in the spiel from these shortage-deniers.
    Shortage-deniers reject commonsense and resort to statistical quackery.
    Did you know that the income of the average Ferrari buyer is 10 times the cost of the Ferrari? By contrast the price:income ratio of a Toyota proves statistically that the Toyota is less affordable that a Ferrari.
    Can an ordinary family earning ordinary wages afford to buy an ordinary house? In Sydney the answer is no.

    • Forrest GumpMEMBER

      +1 Brilliant comment! Mind if I copy and paste, paste, paste (control V till the cows come home..) Excellent analogy claw

    • Brilliant indeed! Clever, simple explanation of what is happening.

      Now, what would be scarier: if it is done on purpose or if they actually believe their own statistical magic? 🙂

    • “Can an ordinary family earning ordinary wages afford to buy an ordinary house? In Sydney the answer is no.”

      Lift your income or move. Stop whining.

      I was recently offered a base of $250K to move to Sydney ($50K more). I said no unless it comes with a housing allowance.

      • In fact you can buy ordinary houses, just not in Coogee/Randwick. If it ain’t South East inner City I ain’t interested. Is that a shortage? No. That part of Sydney is pretty much built.

        • Claw is correct, you can’t. You miss-represent his position by making the claim ‘eveyone want’s to live in the Eastern Suburbs’, when clearly that isn’t his point at all. An ordinary house in Sydney costs $650k, and that will not be in any particularly amazing location. Even new places on the fringes, 30-40km inland from Coogee or Randwick costs from $400k up, still not affordable for those on moderate to average incomes. the problem of course, is new blocks typically cost $250k, so by the time you add a modest 3 bed house, you’d be lucky to even manage to do it for $400k.

          The Eastern suburbs, Inner West etc, are good examples of a shortage. Sure you can’t add any more quarter acre blocks there, but the restrictive development controls of the local councils are preventing an adequate supply of multi unit developments being built to meet demand.

    • Ugh, this analogy is nonsense. Housing is essential to live, Ferrari’s are not, nor is any car.

      You are also cherry picking, what is the average price paid for a new car? What is the average income? You can’t pick outliers and say “see I told you!”

  3. CJ’s and Stevens’ arguments still begs the point, IMHO:

    Even if one accepts their data and interpretation, is having a comparable affordability address the REAL issue that people are enquiring about – is housing historically expensive?

    Else, philosophically, all we might be arguing about is the profile of those in the ICU that are the least to most sick! That is, is nearly everywhere expensive by historical standards, but some less than others?

    The data is actually there is in their own articles to be interpreted as showing housing in all the described nations has become less affordable over time, such that they are now “expensive” is certainly quite reasonable.

    As a result, the contention that we are, indeed, arguing about who is the least and most sick in the ICU is quite apt!

    Australia, therefore, may or may not be the most expensive by current world standards, according to various metrics – but we sure do seem to be “up there”.

    So, then, what is the implication of CJ and Stevens? Are they trying to infer anything in particular? Why publish these articles, then (other than to have journalistic churn)?

    Are CJ and Stevens trying to imply that since Australia is, by some metrics, not the most expensive, and is in fact comparable to the affordability of other small nations, that people should therefore buy houses? That they should “stop” their housing pessimism and “get on with it”? Why publish, indeed?! What are they trying to say, if anything?

    It is up to the potential buyer to determine what “expensive” is, not to be told by economists (at least by implication) what their rough, sometimes poorly framed metrics imply, and therefore what they should do.

    In fact, the data is there from both bull and bear to be easily interpreted to suggest that housing is certainly significantly less affordable now than in the past; and that the label of “expensive”, with the associated implication of “don’t buy” are both quite valid inferences.

    My 2c

    • You raise an interesting point here Stewart: Are they trying to infer anything in particular? Why publish these articles, then (other than to have journalistic churn)?

      I’m a media naivete, but I am wondering if this is part of the RBA’s ongoing OMO – open mouth operations, to talk down and up the market without them having to pull levers. This could partially explain why this article is not behind the paywall at the AFR (where deeper analysis reigns) and free to read.

      • General Disarray

        That would be my guess as well, TP.

        It does seem strange that these types of articles are almost never behind the paywall.

      • Verily I say unto you the mighty RBA warrior Samson Stevens doth slay the Housing Affordability lion by assaulting the beast with the jawbone of an ass.

        I’m sick of this goona, dinkum.

          • ‘Three thousand years ago Samson slew three thousand Philistines with the jawbone of an ass…it remains just as dangerous a weapon today!’

            Sorry I forget the author!

          • bugger it Flawse. I’m itchy n scratchy now I can’t think who uttered that quote.

            Any hows my beef is the efficacy of asses jawbones agin philistines. its overstated these days.

            Philistines is growin’ there own you see. We got a jawbone arms race here.
            Wonder why that don’t get reported in the meejya??

            ooooh hang on….

      • GunnamattaMEMBER

        You have it one, Chief – User pays, and the User wants it in front of the paywall. And if the (little) users arent paying for the product then they probably are the product….

  4. 1) Black is white.
    2) War is peace.
    3) Australian housing is affordable.
    4) Love is hate.
    5) Water is wet.

    Which of these is not like the others?

    • Number 3 Australian housing is affordable!

      Everyone knows that love and hate are the same thing. 😀

  5. tsport100MEMBER

    These RBA speeches are increasingly becoming spruiker efforts to maintain market “CONfidence” with both the buying public and the ratings agencies.

    Just the use of national house prices is misleading as close to 50% of the nations population lives in just two cities.

    In the case of Sydney the Average House Price ($641,037) to median annual household income ($64,168 – 2011 Census) ratio is exactly 10:1.

  6. RBA analysis in 2 words – creative stupidity.

    Looks like RBA has taken the Individual average annual earnings of $54,600 and then multiplied by 2 to come up with ‘$105,000’ (average household income, not individual).

    From 2008 Senate Select Committee Housing Affordability report ‘A Good House is Hard to Find’:
    “the average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s” – that is average earnings x3, not household earnings x7!

    From 2003 RBA’s own Submission to the Productivity Commission Inquiry on First Home Ownership: http://www.rba.gov.au/publications/submissions/prod-comm-frst-home.html
    “The increase in housing prices since the mid 1990s has been unusually large, both by the standards of Australia’s past and by comparison with experience abroad.

    The household debt-to-income ratio is now relatively high by international standards.

    In the 1980s and early 1990s, this ratio was low by international standards but, after a decade of significantly stronger-than-average debt accumulation, it is now at the top end of the range seen in most other countries (Graph 10).

    In the few countries where the ratio is significantly higher, particularly the Netherlands, this can be largely explained by tax arrangements, in the form of tax-deductibility of home mortgage interest payments for owner-occupiers . . “

    Now RBA wants the gullible ones to believe that average household income equates to average individual earnings against which house price were earlier measured and, in so doing, swallow the large debt bait offered by banks.

  7. Well..well..well.. It seems both CJ and RBA have a very thick skin and have no problem sounding like a broken record regurgitating the same old already debunked statistics.

    • I stopped buying the weekend edition ages ago. Use to be a good summary of the weeks events with balanced opinion pieces (as in differing opinions – you make your own). Sadly, it went down hill into nothing more than a collection of musings with a green shoots chorus line.

  8. GS has a bit of a problem convincing 1000 buyers to cut their throats each weekend…

    The politico housing compelex only needs to pull the wool over the eyes of a handfull of the ‘muppetts’ each w/e to manipulate a steady decline in price.

    All dwellings are owned ALL the time and EXIST ALL of the time and ALL money in existance EXISTS

    The ‘muppetts’ MUST be pacified into controlled losses.

    Because the RBA are CONTROL freaks.
    The RBA likes to control the velocity of ‘the muppetts’ gains/losses

  9. GunnamattaMEMBER

    I work in the media and have just come back to Australia after working abroad for most of the past ten years. (I am actually still working for OS despite now being relocated back to Oz, Geelong as it happens).

    I was asked the other day how I found the media here and I offered the observation that Russia (where I have worked) actually has greater media diversity – it is basically all just marketing ‘no facts there, just plain ol propaganda.’ as you say, and the punters seemingly lap it all up without thinking one iota about it.

    And on no subject more than housing – I was mixing with some migrants on the weekend, all professional, all recent to Australia (last 3-5 years). They all had the same observation about Australia (lovely people, have very expensive houses, with media that doesnt ask questions about house prices)

    • Just got back to Oz hey. Are you worried about permeate in your milk?

      I am.

      Everything in the media is true. It is a great time to buy and rent is dead money.

      • Are you worried about permeate in your milk?

        Should I be? According to the dairy farmers, permeate is a natural ingredient in cow’s milk.

    • We don’t have a media but a “medium” all reporting the same themes and topics. Alarmingly, over past 20 years Turkey has evolved to have a more diverse and robust media than Australia’s which has gone in the opposite direction…

      • GunnamattaMEMBER

        Actually I do work for the Turks as well, and I am damn sure they have a more diverse TV Print and Internet media than Australia.

  10. Why not look at the quality of houses? They are substandard to European housing. I.E much less affordable again…..
    Compare apples with bananas?

  11. maybe the guv should rewrite “how to lie with statistics – through my polished white teeth” – to show his contributions surpass the orignal book.

  12. Not that I agree with RBA’s calculation but isn’t the index based on gross income (per individual) instead of disposable after taxes household income?

    Maybe I’m wrong but either way I think this is often mixed up…

  13. All the percentages are fine, but both partners are working now, and more than ever just to afford housing, put kids through school etc.. Cost of living just keeps going up. This has all been said before, but the RBA needs to seriously take a look at what it’s trying to spruk here.

    Working in the EU, and US I was loads better off than here, so at least my experience says this is a load of cr*p from the RBA.

    They can say and do what they like, but if you’re not in mining, or a permanent well paying job, you must be noticing the squeeze….

    • Agree, wages in The Netherlands are lower and house prices apparently less affordable than over here (I don’t agree having owned a small home for a measily €75 a week – but oh well) but somehow we were pretty well off on just one income. Over here we couldn’t do it on one income even though we are both in reasonable positions.

      It also depends on expectations. It’s quite easy to be considered a bludger over here for having some expectations…

  14. The average person has one ball and one tit.

    From anecdotal evidence, the mortgages are confined to a group of people who do not have high income growth and have much higher mortgage debt than most could possibly imagine.

    It is the Alen Joyces of this world who are giving themselves pay rises at the expense of the average worker. This is what is pushing up wages.

    If only a third of Australians have a mortgage, but that third have their backs against the wall and the rest of the population (baby boomers) are trying to live of lower cash rates because the mortgaged third have bought over inflated houses of them, then the average doesnt really mean much…

    • Jumping jack flash

      +1

      Can’t use averages to set the policies of a multi speed economy.

      Each speed needs to be analysed separately and multiple policies developed to target each.

      CPI/interest rates is a classic example. If we looked at prices properly, rather than using ill-weighted averages, then interest rates would be around 10% or more to counter the mega-inflation in essentials, utilities, rents, and house prices that’s been happening for the past 5 years.

      But can you imagine this happening? Too many things rely on the CPI being calculated around the target band.

      • “CPI/interest rates is a classic example. If we looked at prices properly, rather than using ill-weighted averages, then interest rates would be around 10% or more to counter the mega-inflation in essentials, utilities, rents, and house prices that’s been happening for the past 5 years.”

        I couldnt agree more, you can ask anyone in the street about the real rises on essential goods and services and they will no doubt echo the same sentiments about price rises.

        In my opinion we need to go back to the model of higher interest rates keeping debt accumulation in check so we dont end up in this unenviable position again.

  15. Jumping jack flash

    “… the share of aggregate (economy-wide) household disposable income eaten-up by mortgage interest payments (let alone extra principal payments from higher prices) is nearly double that of a decade ago …”

    And consider we have near-emergency interest rates.

    Nope, you can’t spend that money you give to the bank every week.

    Yet the RBA and others say this isn’t a problem, while they manipulate interest rates to boost the economy, all the while pleading with the banks to pass cuts on. “Think of the over indebted battlers, wrestling with their debt mountains! They need a few extra dollars to spend at the shops.”

  16. … and at the risk of labouring some points:
    1) look at household HOURS WORKED v mortgage payments. Is housing any more affordable just because the wife is out working? What if we are working overtime to meet mortgage?
    2) does household income exclude child care payments required due to additional income?
    3) affordability ratios that include int rates are MISLEADING. high interest rates also imply high inflation and therefore higher wage rises occur to reduce the real burden a la 80s/early 90s. A 100k mortgage @ 18% is easier than a 300k mortgage @ 6% even if the payments on day one are the same.

  17. What I want to know is “what happened” to Joye after he was one of the main contributors to THIS report: the 2003 Urban task Force:

    http://mrcltd.org.au/research/home-ownership/volume_1.pdf

    There is pages of guff about innovative forms of financing home ownership which would be unnecessary if supply side issues were addressed.
    But on Page 283 (at last….!), the Report gets into the “Supply” Side, and on Page 279 they say:

    “……our basic conclusion is straightforward: the high cost of home
    ownership in Australia appears to be a function of growth in the
    extrinsic value of land. Furthermore, this is a disease that is rapidly
    spreading throughout our largest urban centres. And unless radical
    action is taken, there seems to be no respite in sight……”

    On page 288 they say:

    “……The industry believes believes that the cost of Australian
    housing has been needlessly magnified by three factors:
    1. A 314 percent (420 percent) increase in land (dwelling)
    related taxes over the last decade, which have been levied at
    all levels of government
    2. Ad hoc, inconsistent and highly restrictive planning
    processes that prevent developers from boosting existing
    capacity; and,
    3. Reluctance on the part of municipalities and State
    Governments to release new greenfield and brownfield
    sites, and fund the essential infrastructure necessary to
    service such areas……”

    They discuss some innovative ideas to incentivise local governments to release land and expedite development.

    In their summary on Page 304, they say:

    “…….there is an affordability problem, but it
    has nothing to do with the distribution of income or a dearth of
    exploitable land. Rather, it is the result of oppressive government
    regulations (often imposed with the enthusiastic support of proximate
    communities) that severely constrict the stock of low-cost properties.
    Combined with ever-growing demand, these artificial constraints on
    supply propagate price rises. And so, despite the fact that many
    Australians are increasingly concerned about the costs of home
    ownership, much more intellectual capital needs to be invested in
    fostering supply-side policies. The good news is that we can do so
    without spending a cent of public money…..”

  18. Furthermore, Joye said the following in “The Australian” in August 2003, in an op-ed headed
    “Providing Affordable Housing Must Be A Priority For All Tiers Of Government”:

    “……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…….”

      • I have been following housing affordability issues for so long, that back then I logically regarded Joye as one of world’s the few truly enlightened pioneers of research into this issue, along with Bob Day, Alan Moran, Hugh Pavletich and Owen McShane. In fact, saying what he was in 2003, would make Joye one of the first people to “get it right”.

        I don’t know of anyone else who has been body-snatched by the dark side after being among the enlightened; it is a mystery to me and everyone else among the enlightened, “what happened” to Joye? Shades of Harry Potter characters……

      • They are not independent form either when you view them as one and same (the government and the banks). They are all there to collect money from the peasants.

  19. The Demographia International Housing Affordability Survey ( http://www.demographia.com ) released late January each year and now in its 8th edition, is seen as the “gold standard” on this issue.

    Clearly – Australia is the most expensive in what is loosely termed the English speaking world. Go check out the Schedules of the Demographia Survey. Bear in mind its dealing with respect to Australia with stand alone housing (refer End Notes) with apartments excluded (same with the US).

    Housing today is a very formulaic business since the Levitts got production housing underway following WW11 . On the front page of my website Performance Urban Planning ( http://www.PerformanceUrbanPlanning.org ) is a clear Definition of an Affordable housing market.

    I explained this further within a Sydney Morning Herald article REPORT: HOUSING AFFORDABILITY OUT OF SYNC WITH INCOMES early last year –

    http://news.domain.com.au/domain/home-investor-centre/report-housing-affordability-out-of-sync-with-incomes-20110202-1ad3m.html

    The reality is that there is near $2 trillion of bubble value incorporating about $500 billion of bubble mortgages in the Australian housing market – something clearly Stevens and Joye would prefer to deny by deluding themselves.

    Sadly – Stevens at the RBA and Joye in the AFR are making fools of themselves – and even more importantly – bringing Australia in to disrepute.

    Hugh Pavletich FDIA
    Co author – Annual Demographia International Housing Affordability Survey
    http://www.demographia.com
    Performance Urban Planning
    http://www.PerformanceUrbanPlanning.org
    Christchurch
    New Zealand

    • Thanks for both the info and the effort Hugh even though your words no doubt fall on deaf ears in Canberra.

      Your not the only one to make the argument that Australia property prices are sky high. Everytime I read a report on “The economist” about worldwide housing afforability they echo your sentiments and data with regards to the Australian real estate market.

      The prices are high and no one is going to do anything about because far too many people are invested in the status quo perhaps even the RBA itself.

    • Hugh, I think that one of the biggest worry on the RBAs mind is the amount of mortgages lent to New Zealanders by the Australian banking sector. It is very clear that NZ could easily be our own little Iceland given the state of your current account and the improbability of repayment given the agricultural nature of your economy.

  20. To date the RBA has been a very creditable institution, I personally would think that Leith is more likely to be wrong. These points put the RBA in the realms of the Chinese statistician. I think that they should be allowed to explain. Dont believe everything you read in the press!

    • Bob I’m sure someone from the RBA browses these pages and I’m sure HnH would more than welcome their response.

      • Flawse…I hope they do, but it is very difficult for public institutions to come out and comment.

    • Like Chris Joye, the RBA was also once among the enlightened on housing affordability and the role of land supply. I made a mistake above when I said Joye is the only enlightened one to get body-snatched by the Dark Side: Glenn Stevens has too.

      There is surely a gripping, edge-of-seat saga to be told one day on all this if all the facts could be dug out out. “What happened” to Joye and the RBA? I am deeply distressed that Australia HAD a window of opportunity some years ago to get the land supply aspect right and reverse their bubble so that it did not get to California proportions. When the US meltdown became obvious in 2008, Australia already had enough good solid analysis to know what to do, including the “former” Chris Joye’s very good work in 2003. Some “influence”/”interest”, somewhere, utterly “BLEW” all this for all Australians. A faint hope I do have, is that there are “powers that be” in Australia who have worked out a very very clever way out of this trap, that no-one anywhere else on the planet yet has. I find it inexplicable otherwise, that people who were as clear as Glenn Stevens was once, and Chris Joye before him, would have suddenly become so blase about the obvious bubble they DID see once.

  21. hm Bernanke, at one of his appearances before Congress demonstrated that the ’cause’ of the housing bubble was not the fault of the Fed but indeed was due to terh Current Account Deficit. He ‘proved’ this by the close correlation between house prices and CAD’s. (It’s a pity members of Congress don’t seem to even have a fundamnetal grasp of stats)

    The graph above, of dwelling price to income ratio, shows the correlation.
    (I stored the Fed’s graph somewhere and can possibly find it if anyone wants it)

  22. Alex Heyworth has it right-the RBA is trying to manage a bubble and keep the offshore funders of our banking system “relaxed”. Too bad that the facts got murdered in the process.

    • Terry McFadgen…….Do they really think the rest of the world is that stupid?

      And / or….have economists given up on markets and switched to conedy instead?

      There is a great story here in how these guys got (diplomatically) “confused”.

      • Alan W. Evans, that great urban economist, said in his classic 2004 book “Economics and Land Use Planning”:

        “…..few economists have any interest whatsoever in planning. Their whole training leads them to ignore matters related to land and location, so they tend to consider only those factors conventionally considered “economic” – investment, training, labour relations, management, etc…..”

        Nevertheless, one would have thought they MIGHT have learned by NOW……but the “experts” still merrily advise their speculator clients to pile into one property bubble market after another all round the globe, no matter how many times it ends in tears.

        Western Civ definitely is in its decadent, decline-and-fall phase, and this is just one obvious sign.

  23. “Whichever way the data is cut, the RBA’s suggestion that average household income is around $105,000 is very inflated, which throws its whole comparison of Australian dwelling prices-to-income into doubt.”

    Leith, why are you so soft in your critic? RBA has vested interests and it is obvious that it lies, or makes politics. My son is an academic and even he is far below RBA average disposable income, which shows how RBA is absolutely ridiculous and highly incompetent. I have very good idea what is the ratio in USA. It is many times lower than the Australian one. With a salary of IT professional (exactly the RBA figure of $105000) one can pay comfortably his mortgage and look after the kids with his wife staying at home and have a wonderful life in one of the financial center in USA. One can never dream that in Australia, what about Sydney?

    Shame for RBA.

  24. The only thing CJ’s own graph shows there, is a doubling in the real price of Australian houses in the last 30 years. That other countries may have also doubled in price as well, is hardly justification for our high prices, it just means they have execessively expensive houses as well.

    • Yes, and the Physiocrats had warned Louis long and hard how to stay attached to his head. But the triumphant revolutionaries wouldn’t cut taxes and capture land rent either, and France still remains as big a basket case today as any of the ‘democracies’ in the thrall of the rentier class.

  25. Do you think he’s aware that the whole quote from Donald Horne was:

    “Australia is a lucky country, run by second-rate people who share its luck”?

  26. He is a big fan of Malcolm Turnbull.
    He is also behind the push to get the government to lessen the cost of borrowing particularly for small institutions (YBR)by having the government borrow and onsell the debt at a lower margin to the institution.

    • Which begs the obvious question, why not have the govt cut out the middle-man and lend directly, and make it even cheaper? I mean it’s not like competance is required, if the emerging ausprime lending fiasco is any reflection on the private institutions – just shovel the debt out the door to anyone who can fog a mirror..

  27. This conjunction of an immense banking establishment and a large financial services industry is new in the Australian experience. The total influence — economic, political, even spiritual — is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

    In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the militaryindustrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

    We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge banking and financial sector infrastructure with our social goals, so that democracy and liberty may prosper together.

    Akin to, and largely responsible for the sweeping changes in our industrial-banking posture, has been the ideological revolution during recent decades.

    In this revolution, deregulation has become central; it also becomes an activity infinitely more opaque, complex. A steadily increasing share of activity is conducted for, by, or at the direction of, those stakeholders with the narrowest of interests – their short-term profit.

    Today, the solitary inventor, tinkering in his shop, has been overshadowed by vast forces of bankers and traders throughout the world. In the same fashion, the free press, historically the fountainhead of free ideas and discovery of corruption, has experienced a revolution in the conduct of investigation. Partly because of the huge costs involved, an advertising contract becomes virtually a substitute for intellectual curiosity. For every old journalist there are now hundreds of eager propagandists.

    The prospect of domination of the nation’s scholars by employment in the sector, funding allocations, and the power of money is ever present and is gravely to be regarded.

    Yet, in holding journalistic integrity, scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a banking elite.

    It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new and old, within the principles of our democratic system — ever aiming toward the supreme goals of our free society.

    Another factor in maintaining balance involves the element of time. As we peer into society’s future, we — you and I, and our government — must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

    With apologies to Dwight D Eisenhower.

  28. $105,000 household disposable income. Huh. Even if that’s true, does anyone factor in the cost of earning disposable income at that level, as someone pointed out earlier (eg. child care, etc)? After all that, you have precious little left, and to have to pour that little down the mortgage maw is truly galling.

    It’ll be a cold day in hell before I buy a house in Australia at these price levels and enslave myself for the next 20 years. I wonder sometimes what the people at the top are smoking.

    • TheRedEconomistMEMBER

      With this slow bleed… The Specuvestors out there…. will soon realise.. it is cheaper smoking $50 Bills….

    • Graph 7: Repayments on New Housing Loans.

      Given that we are very much an average-earning household who were lucky enough to have bought just before the house price boom started to emerge, and given that I know how much of our disposable income we pay to service our mortgage – the RBA’s chart is suggeting that the average house is selling these days for around $150k.

      This is clearly nonsensical and bears no relationship to reality.

      • Correct, it bears no relation to reality at all. I’m starting to wonder – what do the people at the top think WE’RE smoking, to think we’ll al ljust swallow this garbage without question?!

  29. ceteris paribus

    UE, you have raised a very significant matter here.

    It is too important to let it stop here.

    Macrobusiness should at least formally write to the Governor of the Reserve Bank and invite him to reply to your article, perferably in Macrobusiness.

    Just because he has independence in setting monetary rates doesn’t mean he is totally unaccountable for his research.

    You really must at least request him to respond. Congrats

  30. To me the level of manipulation that seem possible with price to income ratios means it may not be the best measure to use. Interesting yes, valuable yes, but not the best.

    The best measure is rental yield. As you have stated before, rents tend to track with incomes, so as incomes rise, so do rents. People don’t pay rent hoping for capital gains, they pay it for a place to live. Therefore rents control for income and yield measures value.

    Fact is, rental yields are through the floor, meaning people aren’t willing to pay more simply for a place to live and price rises are either because the emotional value of owning our own home is huge, or people are paying way too much for property.

    • A disparity between house prices and rental yields is just another classic symptom of a bubble. It is like the P/E ratio in the share market being way out of line.

      Wise people do NOT buy their first home late in a bubble – they rent, and wait for the crash.

      Often, the mania works the other way after the crash – the people “buying in to the market for the first time”, which the market really depends on, hold off amd hold off because they see prices having potential to go lower yet. The opposite of “buy before they go up even more”.

  31. PolarBearMEMBER

    The PolarBear has come out from hibernation and it is peeved (my first post on MB). As a scientist and engineer I can’t believe how much the “Reserve Bank of Australia” gets involved with manipulating statistics and (trying) to cheer-lead public sentiment. Just a complete breach of public trust. If this analysis was the design for a bridge, it would fall down – that is criminal negligence. At least the physical world has a certain honesty to it – one reason why I favour a gold standard.