The AFR’s David Bassanese has written a good article in today’s AFR debunking the Reserve Bank of Australia’s (RBA) submission to the Senate Inquiry into Affordable Housing, claiming that the RBA has dramatically understated Australia’s housing costs due to its reliance on the national accounts measure of disposable income, which includes all sorts of measures like compulsory superannuation, workcover premiums, and owner-occupied imputed rents, that are not actually available to fund current consumption:
…if you believe the RBA figures, the median nationwide dwelling price at the end of last year was worth around five times average household disposable income. And it would take only around 22 per cent of household income to pay off a mortgage for 80 per cent of the home’s value…
[But]…the last publicly available survey-based figure suggested median weekly household disposable income was $1284 in 2011-12, or around $67,000. Inflate that by the average income gains in recent years of around 4 per cent, and we’re left with median disposable household income closer to $70,000 by late last year.
That would produce a dwelling price to income ratio of 7.7.
And even at a 5 per cent interest rate, to pay off a 25 year mortgage equal to 80 per cent of the home’s value – or $432,000 – would take a whopping 44 per cent of median household income…
That doesn’t seem too affordable to me.
That’s because it isn’t affordable, David, no matter how much the RBA says otherwise.
It’s fair to say that the RBA’s submission to the latest Affordability Inquiry is one of its poorer efforts. In addition to using bogus affordability metrics, the RBA has also completely dropped the ball on housing supply, ignoring the hyper-inflation of urban land prices as well as the policies that have caused this mess.
The RBA also makes no mention of Australia’s overly generous taxation arrangements, such as negative gearing, which have fueled investor speculation and driven-up prices. The RBA’s ignorance is particularly curious given its 2003 submission to the Productivity Commission Inquiry on First Home Ownership, which made detailed mention of Australia’s peculiar tax laws and recommended removing incentives towards property investment:
The main way in which the current mix of demand could be altered is through a reduction in demand by investors. Reduced investor demand would allow scope for increased demand from those purchasing a house for the first time, without adding to the overall pressure on demand and prices.
Addressing the issue of investor demand might also be justified on other grounds. As discussed in the previous chapters, the central role played by investors in the current housing boom is quite unusual by international standards. By adding to the speculative dynamics in the market, the activity of investors has not only pushed up house prices, but has also contributed to an increase in the overall vulnerability of the household sector to a deterioration in economic conditions.
Policies that had the effect of reducing the strongly procyclical nature of investor demand could have the dual advantages of creating more room for first-home buyers and contributing to a more stable housing market.
As discussed in the previous chapter, the main factors underpinning the unusually strong investor demand in Australia are the favourable terms on which lenders are prepared to provide finance to investors, the taxation treatment of investor housing, and the active promotion being undertaken by the property investment seminar industry.
A more conspiracy-minded analyst than myself might conclude that the underlying reason for the RBA’s new found housing obtuseness is that it has become the Australia’s key defender of high house prices. Not only has the RBA changed tack on the supply-side (after previously making sensible observations) and utilised questionable affordability metrics, but it has also turned largely silent on the structural causes behind Australia’s investor speculation.
