More salty claims on housing affordability

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Leith van Onselen

Comments

  1. “According to a recent study by KPMG, 60 years ago house values in Australia stood at roughly seven times the yearly household income, and today that figure stands at a very close 6.9″.

    Was it even possible for the average John Doe (remembering that in those days, Jane Doe was almost invariabley a homemaker) 60 years ago to secure a loan of such size relative to his income?

    When we applied for a home loan 12 years ago, had we asked for a loan totalling 7 times our income, we would have been swiftly shown the door.

    • I seem to recall that as late as the 70’s regulations stipulated that the maximum amount of a loan repayment could not exceed 33% of the main income earners wages/salary. The secondary income earner wasn’t considered in the application. If the loan exceeded 33% it was seen as predatory lending. In that light it’s hard to see where 7x household income/price was possible. But maybe in 1952, things were different!

      • Even 12 years ago lenders didn’t seem all that keen. We had 2 permanent full-time jobs, no bad credit history and were able to demonstrate an excellent savings record – and we still had to basically scrape and bow to get a relatively small loan.

        The manager of the local BoQ branch even went so far as to give us what felt like a lecture on financial responability! Compare that with the period that began just afterwards.

        But yeah, the assertion that house prices avereged 7 times household income – single income at that – sounds a bit iffy to me.

      • Forrest GumpMEMBER

        Yes things were different. There was no Lenders Mortgage Insurance (LMI)back then. Back then- Banks were held accountable to their own balance sheets. So a level of discernment was required by the banker to manage the risk.

        Now with LMI, that responsibility has gone. Banks can loan out what ever they like since the bank loan (the debt) is insured. Bankers never lose. (Cant say that about the LMI’s though!)

        • Forrest – LMI has been used by the banks in Australia since 1965 when the Federal Government established the Housing Loan Insurance Coropration.Its purpose was to insures loans for lenders at higher LVRs so as to foster home ownership. Interestingly, most loans advanced by banks carry no LMI as they rarely insure loans with an LVR less than 80%.

      • Janet – I was lending on home loans in the late 70s (Still do as a matter of fact) and to my knowledge there was never any regulation dictating a Debt Service Ratio of 33%. Most bank lenders would however use a DSR of 35% on the main wage earner’s income. This was the LMI company’s requirements as well. Of course this was quite discriminatory and wouldl not fly nowdays – refer the National Consumer Credit Code! Also, the DSR was a very blunt instrument and did not take into account other commitments hence lenders moved to a net surplus ratio which factors in other commitments, number of dependents etc.

    • We did a solitary example here in perth.

      Guy I know bought a 3×1 jarrah cottage in Victoria Park, W.A. on 893sqm.

      He bought it off the widow, who moved in 1958.

      She recalled the price components…

      Construction of the house: £2,700

      Cost of land: £96

      The average wage back in W.A. then was approximating £18 p.w.

      So the house was slightly less than 3 years wages

      The land was a bit over 5 weeks wages.

      The widow never engaged in paid vocational activity in her life.

      It was an average house on an average street.

    • All the evidence points to loans, any loan let alone a huge one, being much harder to get back in the 50s, 60s & 70s. I believe there were alternatives to banks, like finance companies, but you still really had to go out of your way to get a loan.

      This is in total contrast to the last 15 to 20 years where the bank & non-bank lenders have been falling over themselves to lend you money. Just checking my online banking (Commonwealth) this morning to pay a bill, I had messages offering me both an overdraft facility & an increase in my credit card limit. I also noticed a poster at the station yesterday, again from the Commonwealth, promoting their re-draw facility on your homeloan, reminding me that the equity maaate loan is still alive and kicking.

      Anyway, it still comes back to the same story, an unlimited supply of credit against a limited supply of housing is only going to drive prices to the moon.

      • Yes, but when are we going to learn, from the example presented by South Korea, that limiting the supply of land for housing development will drive house prices to the moon even WITHOUT any quantifiable “expansion of credit” at all? In fact, in South Korea, national SAVINGS increase as house prices increase, because of all the young people who mostly can’t get any credit at all, busting their guts trying to save MOST of the purchase price of a home. The house prices rise just a little faster than young people can save money, when supply is restricted.

        “Ease of credit” is a red herring. Rationing the supply of land for urban development is straight-out “fiscal child abuse” regardless of what you do with “credit”.

          • Sorry, my claim relates to the period 1980-1990. During that period, savings increased rather than debt, for the reasons I am describing.

            KIM (1993) “Housing Prices, Affordability and Government Policy In Korea”

            http://www.springerlink.com/content/q588721h88413u6j/

            Hannah, Kim and Mills (1993): “Land Use Controls and Housing Prices in Korea”

            http://usj.sagepub.com/content/30/1/147.full.pdf

            GREEN, MALPEZZI and VANDELL,

            ” Urban Regulations and the Price of Land and Housing in Korea” (1993)

            http://ideas.repec.org/p/wop/wisule/93-01.html

            For RECENT Korean experience, see:

            http://www.globalpropertyguide.es/Asia/South-Korea/Price-History

            The government tweaks mortgage loan-to-value requirement ratios from 50% to 60% and back, according to boom/bust conditions, and they STILL have volatile property price trends…..

            So the people who constantly blame profligate banks lending 100% and more, and central bank looseness, are really obscuring the real underlying problem.

            And my point still stands: you can keep credit in the official sector as tight as you like, but if housing supply is distorted and prices inflated, people will seek out any and every source of finance. Precisely what “controls” on credit can anyone credibly advocate, that will stop house prices ballooning to unaffordable levels, when an underlying “supply” problem exists? Ban lending against property altogether?

          • Phil, do you have any links to info that doesn’t require a paid download, even a graph of historical price to income ratio would help there.

            About all I can glean from them is a fair bit of govt demand side stimulus as a response, not to mention the added complication of a society that has undergone incredibly rapid urbanisation post Korean war. So it’s hard for me to compare it to the experience of Australian and other developed countries.

            Just wanting to see if it was anything like Sydney, which has always been relatively expensive, but prices shot to the moon when lending standards were relaxed. IE, a price to income ratio of say 4:1 which is I believe what Sydney tended to be, a bit on the pricey side, but not horrific, but a 9:1 ratio is hopeless. (single median full time income)

      • it still comes back to the same story, an unlimited supply of credit..

        When is MB going to update the blogging software, so commenters can have Signatures?

        This will be mine –

        Ban usury. Again. Problem solved. No carrot. And no stick either.

        • Ban lending against property, period. Nothing else will stop prices ballooning if there is a “supply” of urban land problem.

          What stands in the way of opening up “supply”, the only real solution?

          Loony post-rational nonsense about land scarcity and resource consumption; and vested interests.

          Sounds like a pretty solid case against reform to me (NOT).

          • Or stop using market price to regulate property usage. Use a ballot instead.
            Imagine some NIMBY boomers receiving a letter telling them that due to the shortage of housing they would be moving out and a young family would be moving in for a couple of years.

    • Was it even possible for the average John Doe (remembering that in those days, Jane Doe was almost invariabley a homemaker) 60 years ago to secure a loan of such size relative to his income?
      60 years ago it wouldn’t have mattered what Jane Doe was (extraordinary situations aside). The mortgage was calculated based solely on the husband’s income.

      Heck, *40* years ago that was still true.

  2. And these articles have all appeared, just in time for the Spring selling season! What a mighty coincidence…..

    • Yes – the housing complex have noses more acute than truffle sniffing porkers when it comes to the faintest whiff of a meme to tempt the unwary.

      Every week they dig deeper into their bags of tricks – with apologies to Felix.

      • I’m not sure I’m the Felix you were referring too, but no offense taken. On the contrary, I too have been amazed at the level of spin in September.

        As for the article generally, as a FHB that is holding out, it is precisely this unequal equation that stays my hand. As much as I’d like to have the security of a continued occupation, and freedom to hang pictures where I like, the sense that I would be taking on a level of debt which is unprecedented scares the hell out of me.

    • One after another, people in Australia who were contributing usefully to the argument on housing affordability, have been captured by “the dark side”. Chris Joye (yes, he was talking VERY good sense back in 2003); Glenn Stevens of the RBA (was talking good sense until 2009); and now Bernard Salt.

      WHO is getting to these people? I sincerely hope the MB team does not succumb – or Alan Moran, Bob Day, Ross Elliott, Tony Recsei, Joe Flood, John Muscat, Patrick Troy, Ray Brindle…..

      Australia is well endowed with people who talk sense on housing affordability. But what is it that makes some of Australia’s good men turn traitor to reason, objectivity, morality, the young, the poor, and the national long-term interest? Are they and their families subject to death threats from vested interests, or something?

  3. Saw a good comment on Twitter last night in relation to negative gearing being discussed on qanda

    “Property lobby shifts to DEFCON 1”

    Seems apt!

  4. UE brilliant as usual. It winds me up as it’s not true in the first instance, and if you look at it in the context of real cost of living it’s worse. As usual these sprukers have an agenda. As a family we’re always on the back foot and we don’t lead an extravagant lifestyle. I’m sure others here know what we’re seeing.

      • When was the last time you saw CommSec’s Craig James and Savanth Sebastian spruiking shares? They must have got over-riding instructions from the CBA head office to spruik property instead.

        • I guess share traders are not as easily fooled as house traders. One can go broke quickly in share trading if foolish.

      • From the post “Perhaps this is why Commsec published research in 2010 arguing that households are having to work nearly three times as many hours to pay-off the family home as compared to those in 1960.”

  5. Chan Naylor are spruikers tied to the “property is the way to riches theme”. They say purchasing property should be treated like a business transaction & young buyers should rent the property (ala negative gearing will build your wealth!). Never seem to then say woops the yield is very low & you actually loose money when negative gearing. Same old same old. Squark Squark

      • Then you can pay your maintance bills ;). At the end of the day, as a highly leveraged punter your only going to make money on Those increased cash flows provided the next punter is willing (and able) to purchase the asset from you on the same or higher multiples….. And is that probable in anything but a high credit, low supply, low unemployment, low interest rate (or booming household income) enviroment? i would er on the side of no

        Meanwhile your builder, Realestate agent and property flogging accountant have already earnt 100% of their returns upfront and your lender will continue to earn theirs.

  6. God this pains me.

    Why this nonsense is peddled as information evades me, it is detrimental to society.

    Stock = Outright cost = x

    Flow (1st derivative) = Outright cost over time. It is best expressed as Price/Income ratio = f(x).

    As humans are not immortal, this equation determines how much of their lifetime productivity goes towards shelter.

    Rate of flow (2nd derivative) = Outright cost/marginal cost attribute of time, the cost attribute is the compensation lenders desire. it is best expressed as P&I repayments = f”(x)

    Just because f”(x) is the same in 2012 as it is in 1986, it does not mean a human dedicates the same proportion of their lifetime productivity towards shelter.

    • Excellent, Rusty. But Joe Public needs that explanation in English. Basically, it is “large principal, low interest rate” costs you a lot more over a lifetime than “small principal, high interest rate”.

      FURTHERMORE; in conditions of small principal, high interest rate, the mortgaged party has historically always had the following working in their favour. 1) Inflation is high, and the value of the “principal” relative to incomes gets steadily inflated away.
      2) Interest rates fall, leaving them with the best of all worlds; small principal, even smaller relative to inflated incomes; AND low interest rates via refinancing.

      This is NOT going to happen to the abused and swindled young first home buyer of the modern era. SHEESH, can’t any of this basic stuff get spelled out once a week in all daily media until some sense is finally allowed to prevail?

      • Phil agree with you on the high rates low principal being overall much cheaper than the reverse. Easy to prove to yourself with one of those online mortgage calculators. The ideal would be low prices and low rates.

        I think of it as ‘serviceability does not equal affordability’, otherwise we could all “afford” Ferraris if the interest rates were low enough, and the loan term was long enough. Everything hangs off price.

        • The ideal would be low prices and low rates.

          Well that’s ‘ideal’ when you have rational investing.

          Australia has bogans!

          Tax cuts and handouts under Howard just meant people were willing to pay more for the same house.

          I mean seriously, being gifetd once in a century incomes and low interest rates, and the bogan fell for a property ponzi.

          This is when MMT says to tax more, not less.

          • Particularly when the low interest rates are based solely on our ability to import goods at constant prices due to a rising A$.
            Both these things are coming to an end. Certainly the end point is passed for ever cheaper goods out of Asia. Then for how long can the A$ keep rising at 10% per year!

            Now I realise that we are going to opt for runaway inflation rather than high interest rates but….
            If people aren’t afraid they damned well ought to be.

        • “…..The ideal would be low prices AND low rates…..”

          As I say in another comment on this thread, this is precisely what they DO have right now in the affordable cities of the USA (which number around 200 out of 260 cities).

          California is mired in post-crash syndrome after median multiples went to 9, 10, 11, and 12 in LA and SF and other cities, and have fallen back to around 5; now Bernancke pump-priming looks like it has “turned the California housing market around again”, YIPPEE, the cancer is growing again, the patient must be recovering…..!

          Meanwhile, in parts of the USA where they never had price volatility in the first place and median multiples are always around 3, Bernancke pump-priming means that a high proportion of first home buyers can pay mortgages off in SEVEN years……! No wonder migration flows into those cities are running so high and things are relatively humming in Southern USA.

          If you want to criticise Southern USA and find negative statistics, consider how many people are migrating there. If unemployment has stayed close to 10% – just as bad as much of the rest of the USA – at least this shows that job creation is running about as fast as in-migration.

          And just how much of an economic advantage is it in the long term, when household discretionary income “after housing costs” is something like 50% to 100% higher than in California, Australia, Canada, UK, etc (especially when a time period covering the full term of current mortgages is considered).

          This COULD have been Australia…….
          As the estimable James Delingpole said, how on earth did the people of the Outback and the Kokoda Trail end up getting dragged around by the nose by a bunch of eco-pansies?

          • I’ve considered our land price bubble something of an ‘own goal’ for a while now. If there is such a thing as natural advantages, we’ve turned ours – abundant space – into a disadvantage. Though I’d put most of the blame with the FIRE sector for it.

            It’s that loss of discretionary spending power that makes me wonder why retail at least, isn’t up in arms over land prices in this country, as it screws them from both directions, raising their overheads and reducing their customer’s spending power.

      • Ah- the answer to that was on “Today Tonight” last night. They had a section on numeracy skills in the population (sinking like a stone) and one Gen X or Y stated that she couldn’t read her credit card bill. The guy demonstrated how to calculate interest – look of shock on her face.

        That said- it’s possible to learn- my husband was all for payment plans to buy computers, and getting mobiles on payment plans when we met 5 years ago. After 5 years of me calculating the actual cost of things, plus paying outright when I want something, he finally gets it- the next phoen will not cost more than its actual worth.

        • Ah- the answer to that was on “Today Tonight” last night. They had a section on numeracy skills in the population (sinking like a stone) and one Gen X or Y stated that she couldn’t read her credit card bill. The guy demonstrated how to calculate interest – look of shock on her face.
          While this doesn’t surprise me, in fairness it’s become quite the trend to try and obfuscate things like bills (or charging models) as much as possible. Mobile phone charging models/bills are particularly prone to this.

          That said- it’s possible to learn- my husband was all for payment plans to buy computers, and getting mobiles on payment plans when we met 5 years ago. After 5 years of me calculating the actual cost of things, plus paying outright when I want something, he finally gets it- the next phoen will not cost more than its actual worth.
          You still need to do the maths, though. It’s not uncommon for vendors to do loss-leading promos with the expectation of making up the loss (and more profit) with previously mentioned obfuscated charging models, penalties and “value added services”.

          • You still need to do the maths, though.

            Or you could just take the entirely reasonable position that if they are trying to persuade you to do it, it must be in their interest and inimical to yours.

          • Or you could just take the entirely reasonable position that if they are trying to persuade you to do it, it must be in their interest and inimical to yours.

            Ah, not if their plan is to get you with extra services you have no interest in or penalty fees you can easily avoid. 🙂

  7. I do enjoy the argument that housing is still perfectly affordable as now most households are double income and working more hours.. Sounds like a great result, nothing like debt slavery at all.

    Stay tuned for 2015’s argument that housing is still affordable as you only need to sell one of your kidneys not both and your kids only need part time jobs to pay the family mortgage..

        • EX-freakin-ZACTLY.

          But hey, why don’t these “affordability” experts look at affordability according to THEIR methods of calculation, in Houston or Dallas or Raleigh or Atlanta or Indianapolis – now that not only do these cities have median multiples of below 3 (and that never bubbled anyway), but they have Bernancke interest rates AS WELL? Now THAT is the “affordability” comparison I would like to see these charlatans make with Australian cities.

  8. yes – its tragic how some commentators can bend the “affordability” measure to suit their predefined outcomes.
    The other thing is to consider not just the price to income ratio but to look at WHAT you get for the price. Right now the average property contains a whole lot less land.

    • I was thinking of another facet of that over the weekend.

      In all seriousness, old aged care may have to revert to intergenerational family support.

      How can anyone build auxillary accomodation (granny flat) on a 350sqm block?

      • Thanks, I have been making a list of the “unintended consequences” of growth-constraint urban planning, and that is another one I had not thought of…….

    • Houses in most areas of Australia are affordable for local residents, unlike many areas overseas where locals are locked out of home ownership because wages are so low.

      • Yeah.. nah they’re not.

        Houses in most areas…lets for discussion sake call them capital cities, where a majority of Australians live hey…..

        None of them are affordable.

        • RP – do the math. I used to believe that too, but when I investigated it at the local level, I found that house prices in the USA are more unaffordable for locals than ours are.

          • Fair enough Alex – do you have a few favourite cities in the USA?
            Not too many – a handfull will do.

          • I have done the math, and I don’t need to look abroad.

            To say ‘houses in Australia are affordable for local residents’ is blatantly false.

            Whether some localities abroad are even less affordable is irrelevant.

          • OK, I have no idea how representative these are, mind you: Pittsburgh, Cincinnati, Memphis, Fort Worth. Essentially a random pick.

          • Thanks Alex, I’ll need a day or two to do some research. I may throw in another couple of cities, but your selection looks fair on the surface.

            Cheers.

          • I await your response to Alex Heyworth with interest, too, PF.

            Do you follow the annual Demographia Reports? More fool you if you do not.

            Out of 260 cities in the USA (with populations over 500,000) 200 had no price bubble, and median multiples remained stable at 3, just as they have been for decades. The bubble was particularly severe in California – without California, no economic crisis in the USA. And without regulatory restrictions on urban expansion, no economic crisis either. California had affordable (median multiple 3) housing during its most rapid growth periods, but it was when the people who had got in there started to pull up the drawbridge behind them with all sorts of “exclusionary” and enviro-loony policies, that volatility set in. The famous 2000-2007 cycle was actually the second, more volatile one.

            It is odd that so many “experts” so vividly remember the previous “US housing bubble” in the early 1990’s as consisting of a whole lot of “overbuilding” in Texas (with prices remaining affordable throughout and the overhang quickly resolving afterwards) when far more damage was done in California by PRICE volatility. But no-one correctly interpreted that episode, and certainly most of the mainstream experts are not interpreting it correctly today. Heck, Bernancke et al seem to think it is their duty to get Californian house prices “rebounding” from a median multiple of around 5, whence they have crashed from around 11. Never mind that 5 is still “unaffordable” and represents a serious erosion of regional economic competitiveness.

            This is like a team of doctors trying to save the patient by getting his cancer growing again.

          • No problem Phil – I have decided to do the cities in the all important 20 cities index – that should give a wide range of the most affordable and the most unaffordable.
            We might all learn something.

      • The vast majority of Australians live in the major cities, none of which are affordable. Not even the smaller ones like Darwin or Alice Springs, which have quite small populations, and truly vast areas of land to expand into, but are priced more like Brisbane or Melbourne. Rural prices are not representative.

        • The cheapest house on the market today (25.09.12) is $509k in Darwin.

          The cheapest land is $280k.

          I wish someone could explain to me why it is so expensive for land here.

      • Houses in most areas of Australia are affordable for local residents
        Exactly. Those who cannot afford them, cannot become local residents.
        Ditto Ferraris.

        • Ferraris are affordable for Ferrari owners.

          Housing is affordable for local residents.

          Sheer economic genius. Please enlighten us some more, O master.

  9. Good rebuttal Leith. I do have one observation however. The “Mortgage Interest Payments vs Mortgage Rates” chart tracks the Standard Variable Rate. Since the early 2000s the SVR has been increasingly replaced by various discounted rate home loan products such as Professional loans, budget home loans, etc. The fact is that very few people are currently paying SVR – and if they are they should seek out a better rate immediately! This does not invalidate the argument but my informed guess would be that if you compared the actual rate being paid over time then true current rates would be comparable to those in the 50s. Of course, this just makes your point that much stronger…..

  10. I think Salt has a point, but he has misstated meaning.

    He has a point in that, given the much more common phenomenon of two household income earners today compared to the 1960s / 70s, the ability of households to SERVICE housing costs is probably not too dissimilar. But this is quite different to saying housing is just as affordable today, as Leith points out.

    Of course,, with many households now having dual income earners, the potential to augment household income further is limited as compared to the transition from 1 to 2 income households form the 70s to 90s. Although, maybe if there are more multigenerational households, that will be a way of pooling more family income to service housing costs.

  11. Matthias, with both parents working nowadays you also have to take into consideration the costs to the family of maintaining the home and childcare (which was taken care of by the lady of the house in previous generations). These are not insignificant costs over the course of several years. Yes, we may have 2 income earners in the household and therefore in theory be able to “afford” a larger mortgage, but with both parents working there are many other hidden costs not directly related to the mortgage. Also consider quality of life, its not a financial cost, but why should we have to have both parents working full time to be able to “afford” a mortgage?

    • agreed, although daycare costs are only for a relatively short window of time.
      Speaking from experience, unless one is really organised there is also a much greater temptation to get takeaways once / twice per week when both parents are working full time and are tired, ratty and time deprived

  12. oh no, black dragon has just joined the balooning ranks of the “the property market has bottomed” brigade.

    with so many “ëxperts” lining up to tell you the property market has bottomed you can rest assured it aint a bottom.

    • GB, your prediction of ASX in 2016 was “only” 6000+. You know, 2016 is quite far away. I think Obama will get re-elected and his second term will focus more on nation building at home (already withdrawn from Iraq and look to do so from Afghan, too). By the time his second term is up I think S&P will be in the middle of a new secular bull market and renewing all time highs. Regardless of the state of the housing market here, I think ASX will be much higher than it is today, because the majority of the money in the ASX will come from abroad.

        • I might add, an enormous amount of money is sitting on the sideline in the form of gold, letrally doing nothing. Did Warren Buffett say that the total valuation of gold today equate to all the agricultural land in the US plus 16 Exxon-Mobils? Once this vast researve starts trickling out to productive capacity of the economy…

    • But with mortgage interest now falling toward multi-decade lows, the bottom may well be in – for now.

      Affordability is largely a function of prices relative to the rate of interest. There is no reason why the average income earning household can’t take on a million dollar mortgage if the rate of interest could fall low enough. I’m not saying I think such a thing is wise – I don’t – but I don’t see why it couldn’t happen.

      • You would have to assume if interest rates have got lower and lower and house prices – and hence mortgages – larger and larger – ANY increase in interest rates over the next 20-30 years will be like a death sentence for all those who bought their first home “more recently”.

        I suppose we have the example of Japan to assure us that interest rates can be artificially kept close to zero for decades. How’s that worked out for them?

        • A central bank should not be asked to take the implication to the housing market into account when it sets interest rates. It already has too many items on its plate, in GDP growth and unemployment levels, with just one number to play with. If its decision is compromised because of the housing implication that would be bad news for the entire economy.

          • It is extraordinary how few “experts” who should know better, do not “get” this. Monetary policy IS severely compromised when urban planners start running a de facto racket in urban land. Don Brash, when Governor of the RBNZ way back in the 1990’s, is an honourable example of an expert who DID complain about this, and it was a factor in his decision to get into politics to try and change things.