Crap arguments for affordable housing

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By Leith van Onselen

Canstar has come out with some rather dubious analysis today attempting to justify Australia’s high housing costs:

AUSSIE mortgage sizes may have quadrupled in the past few decades but experts say today’s borrowers are enjoying far better economic conditions.

New research by financial ratings firm Canstar found the national average mortgage size is 4.5 times higher than it was in 1990 – $305,000 compared to $69,100 – but current lower interest rates and increased wages have made housing more affordable.

The data showed the average wage for a male in 1990 was $28,407 compared to $70,569 – about 2.5 times higher – but repayments as a proportion of income were then 42 per cent, compared to the current 36 per cent.

And the average standard variable rate in 1990 was 17 per cent compared to just 5.95 per cent now.

Canstar’s research manager Mitchell Watson said the changed conditions have made mortgage conditions better now when comparing the average mortgage size and repayments as a proportion of income.

“Back then loan amounts were much lower, housing prices were lower as well but interest rates were extremely high compared to now,” he said.

“It did place further stresses on the household income than it did at this point in time.

I hate this type of analysis. As you can see, Canstar has drawn its conclusion by comparing repayments on mortgages taken-out today against repayments during the period when mortgage rates were the highest in Australia’s history (see next chart).

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This is misleading on a number of levels.

First, interest rates in 1990 did not stay at 17% for long and a home buyer back then got to enjoy the benefit of a massive drop in mortgage rates over subsequent years and a corresponding rise in house prices. Does anyone honestly believe that today’s first home buyer is likely to face similar conditions in the years ahead, whereby mortgage rates more than halve and values rocket?

Second, as noted by the Australian Treasury last week, average income growth is expected to be the weakest in 50 years over the coming decade, which is going to make paying-off today’s mega mortgage more difficult (see next chart).

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Third, when adjusted for inflation, real mortgage rates – 2.9% (discounted) as at September 2013 – are the lowest since late-2008 and the early-2000s, but well above levels that existed prior to the early-1980s (see next chart).

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Finally, while initial repayments on new mortgages are lower than the late-1980s and early-1990s, they remain above the 40-year average (see next chart). Therefore, current housing conditions are hardly “favourable”, particularly given the coming shock to incomes.

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What should also become clear from the above two charts is that the 1970s was a dream time to purchase a home (provided you qualified for a mortgage). Not only were homes highly affordable at roughly three times incomes, but a purchaser was in the fortunate position to have had their debts inflated away via high inflation and centrally indexed wage rises that outpaced the cost of credit.

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  1. Gotta love what passes as analysis from some of these crowds. Take a snapshot of a point in time, compare it to a snapshot from the past, and ignore everything else. Smells like appeasement of their mortgage provider overlords.

  2. ‘Dubious’ is being pretty kind, Leith.

    Cherry picking the point in time where interest rates were at record highs and comparing them to current records lows as some measure of ‘afffordability’, given for most people you are talking about a financial commitment spanning 20-30 years is farcical in the extreme.

  3. Leith, one of my pet hates of the mortgage serviceability = housing affordability is that there is no consideration of deposits. It would be worth doing this analysis assuming 1 (0r 2) year’s wages for the median wage rather than assuming a flat 20% deposit.

  4. Most look at prices as a %age of household income – but is %age of life-time income a more relevant metric? With life expectancies and working lives getting longer, does this give the average household capacity to service a higher mortgage and therefore higher house prices (without necessarily making them less affordable over a “working life”)?

    • Not having a go at you outsidetrader but why should people be expected to spend more time paying for shelter? I am afraid progress for me doesn’t mean longer periods to pay something off (at the same rate) that is a requirement for survival.

      • It’s not a question of should or should not. I just note that house prices are inevitably tied to “capacity to pay” ie if wages go up prices go up, if rates go down prices go up etc. As working lives increase, capacity to pay increases, and therefore people pay more.

        My question is whether the proportion of house price increases driven by increases in life expectancy should be seen as reducing housing affordability (as they do in the present calculations).

        • The only cause of assets rise, including housing, is the banksters greed and their evil scheme for profit extraction from the real economy. Banksters create more than 95% of all money and if the real productive capital doesn’t produce enough to feed their ever growing greed, they create even more money to indebt consumers through inflated house prices and ever growing loans to income ratio.

          • You can bet that behind the scenes, the bankers are among the biggest opponents of liberalisation of housing SUPPLY (abolition of UGB’s etc).

            In fact some of the wealthiest people in the USA were funders of “land conservation” and “smart growth” type activism right from the start. These people wouldn’t be major property investors and/or bankers who are smart enough to know what would happen to urban land prices if their useful idiots succeeded?

  5. Whenever I read these low interest rates = housing affordability arguments, I always assume that it is not an argument intended for local consumption.

    In the US the assumption is always that the majority of mortgages are Fixed rate for the life of the mortgage (but with the option for the borrower to repay early). This means that if you keep your job and have a clean credit history, than mortgage affordability can only ever get better but never worse.
    Of course we all know that this is not the case in Australia where most mortgages are effectively variable rate mortgages. So if you over spend in the good times you can easily find yourself in a very bad situation. This makes it insane for Aussies to over commit in the good times, but here we are.

    This “small” difference is likely to get lost in the details when international lenders are deciding what risk to attach to a tranche of securitized Aussie mortgages.

    That’s why I’ve always assumed the article was really intended for them.

    • Yeah, some idiot I read a couple of days ago argued that the US long term “fixed mortgage rate” made it MORE vulnerable to house price bubbles than “us more sensible nations” with mortgage rates reviewable on the comparatively short term.

      Maybe it makes their buyers more willing to commit on the upside, but it sure makes things safer in any future episodes of monetary tightening and higher interest rates. Our reviewable rates means a LOT of instant deaths to the young mortgage holders if an when interest rates have to go up by much. And I see no evidence that this has made our buyers more cautious. A dollar of house price relative to incomes is a dollar of house price relative to incomes.

  6. “What should also become clear from the above two charts is that the 1970s was a dream time to purchase…”

    That depends if you bought before the crash in 73 and then endured negative equity and stagflation with only inflation as a notional benefit to cut the debt. If you bought after the 73 crash you would be as complacent as your comments reflect.

    • Inflation isn’t a “notional” benefit as far as debt goes – it inflates away the relative value of it. Yeah, there would have been a brief window of time in which those who bought just before the 1973 crash would have regretted not waiting a bit longer, and in which people ready to buy could scoop up a bargain. But the prices in dollars speedily went back to their earlier levels and higher, along with incomes, inflating away existing debt and restoring any negative equity that might have come in temporarily.

      Leith’s point is still quite right, that the current generation is very unlikely to be this “lucky”. Unless we are in for hyperinflation whereby annual incomes will be several million dollars a few years later. Meanwhile, the effect of interest rates going up – which they certainly would – would be a lot more harmful than it was for anyone who at least bought a home with a moderate principal relative to income.

      The size of the principal relative to income is a real killer in “future scenarios”. If you borrowed 2.5 times your income at 10% interest and the rates went up to 20% you would be in trouble, but your income would be growing at close to the 20% due to inflation/wage round mandates from government. After 7 years of this your income would be equal to your mortgage principal and 20% interest on that would be quite manageable again. After the first year, your mortgage interest would be close to 1.8 times what it was relative to your income.

      If you borrow 5 times your income at 5% interest and the rates go up to 10%, you are in just as big trouble and your income will NOT be rising to inflate away the principal anywhere near as fast.

      So you are a lot more vulnerable for the following few years. After one year your interest payments will be close to 1.9 times what they originally had been, and it will take twice as long for the relief to take effect. And we need to add back to this, the larger (presumably) repayments of principal.

      And if the rates go up to 20% you are probably bankrupt that year – the result would be mortgage interest payments close to your annual income.

      • I don’t know that you are more vulnerable, for the simple reason that the central banks can’t allow rates to go up to a point where too many people are vulnerable, otherwise the economy crashes. That’s why interest rates are forever on the way down. Central banks are micromanaging things to make it so. As long as you aren’t one of the most vulnerable ones, so that you are the first to get hit, just of average vulnerability, you’ll be fine.

  7. “Does anyone honestly believe that today’s first home buyer is likely to face similar conditions in the years ahead, whereby mortgage rates more than halve and values rocket?”

    Maybe not skyrocketing prices, but I’m certain we’ll see a lot more than halving of rates. The RBA will fall over itself to screw over the prudent when things get bad over here. The government will follow. By that time, we might even be rushing towards the negative rates that are being talked about more and more recently.

        • Even if mortgage rates do halve, how much higher can prices go? Surely there has to be a point at which even the foreign investors would consider Australia too expensive.

        • If it happens, we will just repeat this argument again – because house prices will probably double again and the spruikers will be saying “mortgage affordability is nothing to worry about”.

          I fail to see why this is a good long term economic model. It reminds me of Ludwig Von Mises’ argument about endless easing to clean up the mess from the previous round of easing.

          I am a LOT more impressed with the effects of low interest rates on local economies in the USA that have house prices anchored in elastic supply, just as the prices of TV’s and cars and computers are. A genuine boost to the real economy results.


        The above demonstrates that you can lock away 5.48% for 5 years. That’s the comparison rate and yes, it is principle and interest. Seems reasonable evidence to me that rates are expected to be low for years. After all, the banks do not offer fixed rates out of the goodness of their hearts, it is because they believe rates will be even lower than that.

        Interesting as well that in the not-so-fine-print it says “a minimum interest rate of 3% applies and may vary”

  8. Well done for destroying this Leith, I read this and shook my head . . . . was it worth refuting – yeas, there will be someone out there that will fall for it if you don’t.

  9. I’d love to know if anyone is paying 5.95% interest, even Westpac with the highest rates of the big 4 is offering 5.26% variable

    • Banks are hungry for business. Anyone paying more than 5% should be negotiating with their bank (& playing off rates among lenders). For mortgages on a LVR<70% rates are closer to 4.8% (give or take around 10 bp).

  10. What I can see inflating prices at the moment is overseas/local demand from Chinese buyers

    Went to two auctions on the weekend in Glen Waverley, newer double storey houses, one sold for $1.87 million and the other for $1.71 million, both going to Chinese buyers

    Folks, when Glen Waverley properties are selling for as much as Camberwell properties you know something is up

    For the rest of us there will always be suburbs that are less desireable for the Chinese where we can hope to buy a home, Dingley anyone?

      • Give the urban planners time, golf courses are one of their favourite sources of alleged “brownfields land supply” when they are working all this stuff out and choking off greenfields supply.

  11. The exact same tactic was used yesterday to argue petrol now is actually cheaper than when prices spiked in 2008..

    Pick a peak and compare it to a constant.