June 2012 Update. Sydney median household income confirmed by ABS to be $88K, much higher than Demographia's guesstimate of $69K.
Link... 'The city's median family income reached $87,516 a year, the 2011 census figures released yesterday show'
The infamous Demographia survey is updated and released every year, and every year the property bears of Australia use the survey to claim that Australian houses are the most expensive in the world, the most unaffordable on the planet, the greatest real estate bubble in history.
But almost half a million families and individuals bought homes in Australia last year. So while housing may be unaffordable to some (has it ever been otherwise?) plenty of people do seem to be able to afford to buy houses. So how come so many people are buying houses in a country that Demographia claims to be completely unaffordable?
Obviously there must be many flaws in the Demographia survey, some of which I will outline here.
For a start, the Demographia survey uses a very simplistic measure of affordability - the median house price to median gross household income ratio. Using gross household income is an inappropriate way to determine household spending power, because the spending power of a household is based on the amount of gross income remaining after costs are deducted for essentials such as taxes, food, transport, clothing etc. Differences in tax rates and cost of living pressures across various countries make a comparison of spending power based on gross income meaningless.
Furthermore, there is no reason why a family on median wage income should feel entitled to be able to afford a median house, because houses are not purchased using wage income alone. Houses are purchased using wealth. A better measure of a household's ability to afford property would be to consider household discretionary income and total wealth. This would include non-wage income (such as income from interest, shares or other investments), and wealth stored in other assets (such as shares or equity in existing property) that may be liquidated or borrowed against in order to fund a new property purchase. A family with median wealth should feel entitled to a median dwelling, but an FHB on median wages (with no other wealth) should not.
Note that I don't agree with using imputed rent (because it isn't actual money) or superannuation (because it's not easily accessible to most people) in income/wealth calculations for the purposes of determining dwelling affordability. However I do believe rental income (and real income from any other investments including savings interest) should be included, along with any liquid assets or easily leveraged assets such as equity in existing property. The reality is that people can and do use those forms of wealth to buy property.
The average loan size in Australia is approximately 60% of the median dwelling value as shown here...
"Between October and November 2010, the average loan size for first home buyers fell $4,900 to $277,900. The average loan size for all owner occupied housing commitments rose $600 to $287,300 for the same period."
This shows that people are putting considerable wealth (in the form of savings/equity etc.) towards their property purchases, in order to reduce the size of the loan that must be serviced using wage and non-wage income.
The Credit Suisse Research Institute recently found that average wealth per adult in Australia is the third-highest in the world, after Switzerland and Norway, and that the level of real assets per adult in Australia is the second-highest in the world after Norway, and the proportion of adults in Australia with wealth above $US100,000 is almost six times the global average. (http://www.theaustralian.com.au/business/senior-banker-bullish-on-dollar/story-e6frg8zx-1225936194274)
Additionally, the Demographia survey only considers the initial purchase price of the house, but not the total holding cost. For example, homeowners in the USA are required to pay large annual property taxes, which over the course of their lifetime will result in the total housing cost being similar to or higher than that in Australia, despite the much lower initial purchase price in the USA.
The survey also fails to consider dwelling size. Houses in Australia are, on average, the largest in the world, so when comparing median houses it is important to note that a median dwelling in Australia is much larger than a median dwelling in the other countries. Why would Australians build the largest houses in the world if our houses are supposedly unaffordable? Wouldn't we build smaller less expensive ones if that was the case? The truth is that Australians have high incomes, Australia is a prosperous country, and as a nation we choose to spend a large portion of our disposable income on nice large well appointed houses. Clearly we can afford to do that.
Another major failing with the Demographia survey is its measure of median house price. The official median house price figures that Demographia use for Australia are sourced from the Australian Bureau of Statistics. However these ABS figures only include freestanding houses. They don't include units or townhouses, meaning that Demographia are overstating median house prices in Australia compared to the other countries assessed in their survey (countries where units and townhouses are included when calculating the median house price).
So, the Demographia survey compares median house price to income ratios across various countries, but clearly there is no reason why those house price to income ratios should be consistent across each country, because there are substantially different factors impacting the housing markets in each country. The Demographia survey fails to consider the following important factors:
- Disposable/discretionary income
- Wealth (including wage income, non-wage income, and assets)
- Employment rate
- General cost of living (affects spending power)
- Interest rates
- Credit availability
- Rental yield
- Availability of public housing
- Marginal tax rates
- Mortgage default rates
- Tax incentives such as negative gearing, FHOG, CGT reductions
- Land/block size
- Dwelling size and quality
- Proximity to transport and infrastructure
- Currency exchange rates
- Economic and political stability
- Average persons per dwelling
- Home ownership rates
- Population growth rate
- Demographics (it is ironic that a survey called Demographia ignores basic demographics!)
Of course, no survey is perfect and no survey can possibly hope to account for all these factors. The best we can do is try to look at as many different surveys as possible, each of which address a few of these factors, and this will give an better general impression of comparative affordability in each country, rather than looking at just one survey (I have linked to twelve alternative surveys below).
We should note that the historical '3 x income' house price affordability ratio that some bears cling to are no longer valid, because interest rates are historically low, and a large number of buyers today have large deposits, dual incomes, high discretionary income, and in the case of investors, rental income and negative gearing to off-set the holding costs. Although dual income families have been around for some time, lenders are increasingly willing to recognise the second income and allow families to borrow at a higher level.
The RBA demonstrated that 25-39 year olds today still have more real household income left over after buying a 30th percentile house than at any time in the past 30 years.
Returning to the 'demographic' failings of the Demographia survey, take for example Demographia's claim that a certain 'sea-change' town in Australia is particularly unaffordable. They base this on the median house price to medium income ratio in that town. What they fail to consider is that the median income there is largely irrelevant, because much of the population are cashed-up retirees (zero income) with substantial savings who purchased a large beach house, often with very low borrowings. Sure, these beach houses may be unaffordable to a first home buyer who works in the local supermarket, but that's not the primary demographic driving house prices in the town.
Another key issue with Demographia is that it compares cities in Australia with cities in only six other countries, yet the media proceeds to claim that Australia is the 'most expensive country in the world'. The survey conveniently ignores all the many cities around the world with much higher house prices than Australian cities. For example Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore, Monaco. Here are some alternative studies...
World's Top 10 Priciest Cities To Own A Home
Sydney - not in the top 10
Numbeo: House Price to Household Disposable Income Ratio
London 15x, Singapore 14x, Tokyo 12x, New York 8x, Dublin 8x, Sydney 7x
GlobalProperty Most Expensive Cities 2009 (apartment price per sqm):
Sydney - Number 28: US$4,994 per sqm
CityMayors Expensive Cities
Sydney - Number 38
Knight Frank Survey (prime residential property)
Sydney - Number 8: EU$13,100 per sqm
Overseas Property Mall Survey
Average home values for select 2,200 square foot single-family dwellings with four bedrooms...
Tokyo $786K, Sydney $683K
The Economist: Worldwide Cost of Living Survey
Australia - Not shown in the top 10
Mercer Most Expensive Cities (cost of living, including housing)
Sydney - Number 24
Xpatulator Global Cost of Living Ranks
Sydney - Number 22
Aneki (most expensive countries to live in)
Australia - Not shown in the top 20
Most expensive countries in the world
Australia - Not in the list
Most expensive rental markets
Australia - Not in the list
Three of the above surveys quote data from the others, but they do also add their own additional information and commentary, so I have included them anyway. Although these surveys are not always directly related to house price per se, they are all directly related to affordability. Some of the surveys do show that dwelling prices are lower in Australia, while others show that rents are lower here, and others show that the cost of living is lower. Taken together (along with Demographia survey), would suggest that Australia is somewhere in the middle of the road in terms of global housing affordability.
Back to the Demographia survey. So far, I have discussed the flaws in the Demographia survey in general terms, and I have explained why I don't believe median house price to gross household income is a particularly useful way to measure affordability. But anyway, that's the ratio that the Demographia survey does use, so let's look at some of their figures in more detail.
If you're going to use gross household income, then you should at least get the figures right. Demographia claims that the median gross household income for Sydney is $66,200. It is unclear how they derive this figure - it doesn't exist in any of the official ABS statistics for Sydney. However the Demographia survey does state the following (on page 46 of their most recent report):
"Median household income data is generally estimated using the most recent national statistics bureau (census) base for each metropolitan market and adjusted to a current estimate by the best available indicator of median income growth. In the United States, the United Kingdom, China, New Zealand and Ireland, specific metropolitan area interim adjustments are possible from data sources. However, in Canada and Australia, it is necessary to use more general provincial or state level data."
Is the Demographia survey using the median income for the whole of NSW, rather than for Sydney? And then comparing this to the median freestanding house price in Sydney itself? It's really not clear how they derive their income figures, but the site here (http://www.abcdiamond.com/australia/australian-median-income-2006-and-2010/) suggests that the median gross household income figure for Sydney is likely to be closer to $82K for the Sydney Locality (rather than Demographia's claimed $66K), or $107K for the Sydney LGA. Quite a difference.
And various sources (RPData, Residex, APM) put the Sydney median dwelling price at around $525K (rather than the Demographia figure of $634K for freestanding houses only).
So if we take the more accurate median home price to gross household income figures, we get a ratio of 525/82 = 6.4 for Sydney, rather than the 9.6 ratio claimed by Demographia.
Does this ratio of 6.4 mean Sydney houses are really affordable after all? Not necessarily. In my opinion this ratio is almost as meaningless a measure of 'affordability' as Demographia's 9.6 figure (but at least 6.4 is more accurate as a house price to gross household income ratio). As mentioned above, the spending power of an average family depends on many things, not just their gross household wage income. In my view, the best way to determine whether homes in Australia are affordable or not is to employ a little common sense.
1 - Would we choose to build the largest homes in the world if homes were unaffordable?
2 - Would half a million families and individuals (approximately) be buying homes every year if they couldn't afford those homes?
3 - Would we have one of the lowest mortgage default rates in the western world if people couldn't afford their homes?
I believe the answer to each of those questions is 'no'.
Can every first home-buyer in Australia afford the home they desire right away? Of course not... they never could. But any family willing to work hard can afford a home of some description, and as they progress through life, increasing their income and wealth, over time they will be able to afford comparatively better houses. Once they have achieved median wealth then the average family can afford a median dwelling, and later in life an average family who continues to build their wealth can afford increasingly higher quality dwellings. This is the way it has always been.
Some people might argue that housing was apparently 'affordable' in the USA, Spain and Ireland prior to their recent property crashes. I will point out that this blog is not an attempt to prove that house prices in Australia can't fall. House prices in Australia can fall, have fallen in the past, and will do so in the future. They could even crash given sufficiently adverse conditions in the future.
The fact that house prices fell in Spain, Ireland and the USA does not necessarily mean that prices there were unaffordable. Cheap affordable things can fall in price, and often do. In my opinion, prices fell in those countries predominantly due to an over-supply of housing following construction booms. Home-buyers in those countries could afford their houses when they were first purchased, under the environment at the time of purchase, however conditions later changed so that some of those people could no longer afford their homes.
If conditions change for the worse in Australia then some people here may also be unable to afford their homes. Credit could tighten, interest rates could rise, unemployment could rise. Similarly those factors (and many others) could improve, rather than worsen. Many things could happen in the future to either reduce or improve affordability. However the Demographia survey is not saying that houses in Australia are unaffordable because conditions might change in the future to make them unaffordable. The Demographia survey is claiming that house prices in Australia are severely unaffordable today, under our present environment, which includes our present employment levels, interest rates, credit availability, and all of the factors mentioned in the bullet points above.
In conclusion, I believe that under present conditions, homes in Australia are affordable. I also believe the Demographia survey is flawed, and does not consider enough factors to be able to determine where Australia ranks in housing affordability compared to the other six countries surveyed.
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