The Economist vs Macro Investor on house prices

By Leith van Onselen

The Economist has released its annual assessment of global house prices (one week after my own) and the results are pretty close to my research, showing property is still expensive but improving:

The two components that make up the deviation from fundamental value measure (income and rents) have shifted and the average between them has fallen back from 45% overvalued to 36%, which is good news and similar to my own conclusion of rising (if still troubled) affordability.

In terms of straight price gains over the past decade, Australia is still in the top three:

The full interactive tables are available at The Economist.

As mentioned above, in this week’s edition of Macro Investor I also provided an examination of Australian house price values relative to English-speaking  international markets:

Whereas some other housing markets – most notably Ireland, the United States, and the United Kingdom – experienced heavy value losses in the wake of the global financial crisis, Australia’s housing market has remained relatively steadfast, so far avoiding the painful corrections experienced elsewhere.

On its own, however, Australia’s strong house price performance tells us little about the extent to which Australian housing is overvalued, since it does not take into account the growth of incomes and the broader economy over time. It also ignores the returns from housing relative to interest rates and other forms of investment.

One metric commonly used to gauge housing valuations is the Median Multiple, defined as the median dwelling, house or unit price divided by the median household income. RP Data recently released analysis comparing the Median Multiples of Australia’s capital cities across the years 2001, 2005 and 2011. The median house price data came from the RP Data-Rismark database, whereas the median household income was derived from the Census results for those particular years.

According to RP Data, detached house Median Multiples rose by nearly 50% nationally in the 10 years to 2011, with the bulk of this increase occurring between 2001 and 2006. The increases have also not been uniform, with Sydney’s Median Multiple, for example, rising by only 20% over the decade, reflecting the fact that its homes were relatively expensive to begin with.

Comparing Census data on mortgage payments against median household income also confirms that Australian housing has become increasingly expensive over time. For those families with a mortgage, the proportion of average household incomes eaten-up by mortgage payments has increased nationally over the past three Census’, from 26% in 2001 to 34% in 2011. All capitals, with the exception of Sydney, experienced an increased mortgage burden over the five years to 2011.

An examination of Australia’s Median Multiples against those of other English-speaking countries also suggests that Australian homes are expensive by international standards. A chart showing the average Median Multiples of the five largest metropolitan areas in each nation (three largest in New Zealand) is also provided below, which confirms that Australia’s housing is expensive on a price-to-income basis compared with its English-speaking peers.

A similar, albeit less definitive, conclusion is found when the value of the residential housing stock is compared against the gross domestic product (GDP) of each English-speaking nation.

Australia’s ratio of total housing assets to GDP rose by around 50% from the late-1990s on the back of strong house price appreciation that far exceeded growth in the broader economy, peaking at 3.3 times GDP in 2007 and 2010.

Australia’s ratio has since fallen back to around 2.8 times GDP currently, which is similar to New Zealand’s and the United Kingdom’s, but considerably higher than the United States’ and Canada’s.

But, as The Economist points out this week, while Australian homes remain expensive, the combination of declining home prices, lower mortgage rates, and rising incomes has meant that housing affordability has improved significantly in recent years. Australian housing is also becoming more attractive from a value investing perspective, as rents have risen at a faster rate than home prices. Whereas median mortgage payments increased by 38% nationally between the 2006 and 2011 Census’, median rental payments rose by 50%. This is the opposite of what occurred between the 2001 and 2006 Census’, where rental payments rose by 31% compared to 50% growth in mortgage payments over the same period. Similarly, gross rental yields have improved nationally, with house (unit) yields increasing from 4.0% (4.5%) in June 2006 to 4.7% (5.1%) as at June 2012.

Rental returns are also improving for investors purchasing their dwelling outright using savings (i.e. ungeared). Gross rental yields are now in-line with (houses) or slightly above (units) one-year term deposit rates, suggesting that from an income perspective, housing is becoming increasingly attractive when compared against alternative investments. On capital values, however, it remains a steep premium.

Leith van Onselen is the Chief Economist at Macro Investor, Australia’s independent investment newsletter covering stocks, trades, yield and property. This is an excerpt from a special report on Australian housing affordability. It is available as as part of a free 21-day free trial.


  1. Great analysis Leith
    You refer to the Economists “average % overvalued” measure for Oz falling from 45% to 36%.
    Where did you get the 45% figure from?

  2. BS… It’s cherry picking data to start in 2001 when the rise departed from long term trend started in the early to mid 90s.

      • Thanks. So, if we assumed an average effective tax rate of, say, 20-25%, we’re talking anywhere from 42 to 45% of post-tax income going on mortgage payments. Would that be correct?

        That is just horrific, in anyone’s book, that you could be spending nearly half your take-home pay on your mortgage.

        And you’re doing this for 20 years.

        If that is not slavery, what is?

      • Forgot to note that the estimate above is based on the statistic in the article that 34% of average household income (i.e. pre-tax income) in 2011 was spent on mortgage payments.

      • Hm but you get rich because your house doubles in price every seven years. ‘It’s just a fact’
        If you don’t get on the RE ladder well that’s your own stupid fault!!!

        (Don’t jump on me Ron…sarcasm normally isn’t my forte but this whole thing is so out of whack i couldn’t help myself!)

      • Mining BoganMEMBER


        The answer is greed. No matter how much we bag the media and the spruikers and the RE industry wrecking ball, it always come back to greed. If the average punter out there doesn’t think that they are going to make a kiling out of buying a property, then they won’t buy. Deep down they think they’re on the path to riches.

        I await the slings and arrows of the bleeding hearts.

      • The answer is greed. No matter how much we bag the media and the spruikers and the RE industry wrecking ball, it always come back to greed. If the average punter out there doesn’t think that they are going to make a kiling out of buying a property, then they won’t buy. Deep down they think they’re on the path to riches.

        I disagree. I think there are a whole swathe (heck, a whole generation) of people out there who aren’t trying to “get rich”, per se, but have just bought into their parents advice of buy a house, then after a while you’ll be able to upgrade, etc, etc.

        Most people would not consider that “getting rich” or “greedy”.

  3. Can I ask
    What is the common denominator of english speaking economies, other than language? particularly the US seems from another planet to me with its dollar hegemony, massive discounts achieved due to the size of it’s market (never mind political dependencies), greater liberalisation etc

    I’m thinking maybe a geographical grouping of bigger SE Asian and Oceanian countries might help Australian analysis more? or maybe grouping with selected countries of similar GDP/capita, funding dependencies, banking policies etc

      • Similar laws and cultures… yeah, sort of, I dont know. The Commonwealth maybe.

        But they have different economic dependencies, cost of living, banking polices and most importantly different appetites to intervene when they see a bubble about to burst.

        Anyway, it’s complicated…

      • Phil the engineer

        What about south africa? If I put Spain and Ireland on that chart starting at 1990 their boom is far more pronounced than Australia, and they’re back to about where we are now. Sweden, France, Denmark are all in a ballpark with Australia, if a bit lower.

      • UE, basically I’m just trying to stress the importance of little differences between countries. Getting off topic a little bit, but I have an interesting story on that.

        We all know about the financial disaster in Greece. Their housing bubble popped back in 2008 and since then banks are surviving on Govt handouts, mortgage funding is frozen, median income is down, unemployment through the roof, housing stock through the roof, selling activity down 90%, new construction practically zero. Based on these things alone you would’ve thought that house prices must have dropped 80% or something. Well no, they have dropped 20% from the top of the bubble 4 years ago which, all things considered, is an incredibly slow melt. What’s been keeping prices up? They have a law over there that says you cant foreclose a family property (with some exceptions). You can confiscate everything else, take them to court, the court will determine a viable repayment schedule for them, but you cant kick a family out of their home no matter what. IMF has been trying to lift that regulation but no Govt has the balls to do it. Considering house ownership over there is ~65%, that makes the majority of mortgaged homes. Further, “property ladder” type investment was never very popular, property investors were mostly corporates that made such huge profits in the bubble period (house prices doubled in 8 years, construction cost flat) that can afford to wait another 10 years “for the crisis to go away”. There are literally whole vacant neighbourhoods in the outer suburbs, newly built. Rates over there are embedded in the electricity bill, therefore cost of ownership is near zero.

        Anyway I got carried away, I just thought it was an interesting story to share 🙂

    • What is the common denominator of english speaking economies, other than language?


      This has led to set of countries with similar cultural, economic, and legal backgrounds. There are differences, to be sure, but the fundamental common factor between all the Anglo countries is Blighty.

  4. Lighter FluidMEMBER

    I wonder, when did the Economist methodology/MacroInvestor methodologies suggest house prices were at fair value?

    Was there a point in time at which housing went from under-valued to over-valued?

    My guess is some time in the early 1990’s, but I’m curious from a mean-reversion perspective I guess.

    • In a similar fashion, can we be sure that a ratio at previous time represents fair value today?

      Just because house prices previously averaged 3 or 4 times income in the past doesn’t necessarily mean that 6 times is unaffordable now. Many factors influence affordability, interest rates, buying houses later when more established, wealth transfers from parents to children to buy homes, double income families, less families with children, a decline in the cost of other necessities relative to income, and so on.

      I’m not saying that house prices aren’t over-valued, it’s just that the commonly used ratio is a very blunt tool.

      What I’d like to see is data from mortgage lenders on LVRs and debt serviceability on new home loans. Dodgy applications aside, that should provide a clear picture as to whether people can service the loans they are taking out. Does that exist?

      • Here is a couple of realities to chew on.

        Back when interest rates were high, and house prices were low, inflation was also high. So your pay usually increased relative to your debt, as long as inflation persisted.

        Futhermore, inflation and hence interest rates were tamed eventually, so mortgages dating back to the high interest rate era tend to have been re-financed at a lower interest rate.

        Q: does the current generation taking out very large mortgages at low interest rates, have a similar chance of being so lucky with the trends for the next 20-30 years?

        BTW I owe this insight to a comment Cameron Murray made months ago.

      • Whatever that measurement for fair value is, if an average family is using >40% take home pay to repay the mortgage for an average house, that means the price is expensive. Even though the cost of other necessities may drop a little bit due to people having less disposable income after the mortgage repayment.

      • pconners
        You’ve made a good point.

        Just looking at it from one direction a big contributor to current affordability is currently low interest rates. However one would ask the question are these realistically low interest rates or are they based on either a false premise.

        Our inflation is low because we import an increasing quantity of cheap goods. So we have low interest rates…round and round. So we run a CAD. So are our low interest rates real?

        How sustainable are they? Should we be using this low point in interest rate cycles to calculate affordability – simple answer is ‘what the hell else should we use?’
        However that does not alter the fact that in using these extraordinarily low interest rates that we are presenting a false long-term picture.

    • I would also like to see a comparison t o the decline of manafacturing. It may be that housing investment was drawn to the city centres where whitecolar salries kick started the bubble that then rippled out to the burbs.

  5. UE as usual excellent and sober analysis.

    You will have noticed when this was published on SMH their headline is “Glimmer of hope for housing bulls” which refers to the one, sort of positive, comment in your article, rather than the 25 real negatives.

    Dunno about you but that drives me crazy!

  6. UE, great work as always.

    Have to take issue with this statement you made: “housing is becoming increasingly attractive when compared against alternative investments”.

    Firstly, I know you know this, but gross yields are irrelevant. Knock 30% of the gross yield and your talking 3.3% cash distribution.

    What alternative investment offers such a poor return? Term Deposits, which still offer the gov guarantee on amounts less than 250k (and therefore is far less risky) offer returns more than 100bp above that. On top of that, you dont have to stuff around with all the administration headaches with a TD.

    In addition what retail investor has a lazy 500k+ in cash to put into a resi property anyway? Most need to gear into it, which means they are underwater day 1. If you did have those liquid funds, you could stick into a million other investments throwing off 6%+ yields.

    Resi investment is laughable, it has only taken off because the average Australian has very poor financial literacy.

  7. If overvalued houses is a bad thing, why do we keep calling it “strong house price performance” instead of “the rising housing cost”?

    What do we prefer for ourselves, cheap housing or the option of a “safe, profitable, family friendly investment”?

    (even if the latter proves to be a delusion every couple of generations or so)

    At the end of the day what are most people, net borrowers or net investors?