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Demographia Debunked - Debunking Demographia; The Truth About Australian Housing Affordability
Topic Started: 31 Jan 2011, 02:26 PM (32,762 Views)
Shadow
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Evil Mouzealot Specufestor

Shadow's Blog - Analysis of the Australian Real Estate Market. Part 1 - Debunking Demographia.

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?

Posted Image

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...

http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5609.0Nov%202010?OpenDocument

"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
- Urbanisation
- 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.

Posted Image

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.
Edited by Shadow, 3 Jun 2011, 03:13 PM.
1 - Debunking Demographia. Demographia Survey Debunked. Australian housing is not particularly unaffordable by global standards.
2 - USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia. All property bubbles had one thing in common...
3 - Banks can't margin call on residential property unless borrower defaults, because residential property loans regulated by NCCP Act 2009.
4 - Housing is second highest taxed sector of Australian Economy. Renters subsidised by high taxes incurred by homeowners.
5 - Epic Fail! Steve Keen's Bad Calls and Predictions.
6 - Australian household formation rate faster than population growth rate since 1960s = ongoing improvement in housing affordability.
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1 - Would we choose to build the largest homes in the world if homes were unaffordable?
Yes, as the bigger the house and the bigger the loan you could take, the more money and capital gains you made.
Note now construction has tanked and low cost green building and high density city developments are all the go.

2 - Would half a million families (approximately) be buying homes every year if they couldn't afford those homes?
Yes, many would be upgrading as the credit stats show and this will continue, while they can keep selling them.
Equity upgraders as fist home buyers is declining over the longer term as well have less kids in our population as a percentage and it's only gets worse.

3 - Would we have one of the lowest mortgage default rates in the western world if people couldn't afford their homes?
Yes as we can not walk away from our loans, like most of the rest of the world. Our default rates on over 90 days for the low docs is out of control. 7% I heard..... Generally our mortgage defaults have been growing.
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davel
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Good on you for posting the blog.

I know you don't specify an alternative in your blog, but remember that other countries have "wealth factors" too. None of them are included in the data for those countries, so there IS comparability in as far as separately-governed data sets can produce. OTOH the figures used by CJ (the ABS Household income) include all kinds of spurious factors such as imputed rent, superannuation, gross rent on IPs etc etc. Additionally, they include "households" which are not households eg schools, churches etc etc.

Second, you make the oft-repeated point about US property taxes. But you don't mention that US property owners get to claim tax back on their mortgage interest for the lifetime of the mortgage. This is more than the prop tax in most cases (for the lifetime of the loan).

Third, you say that cost of living is not taken into account. Well CoL in Aus is pretty damn high. I would have thought that would push Aus down compared to other countries.

Fourth, you don't mention much higher interest rates in Aus.

Fifth, Aus houses are the biggest in the world, but block sizes are not. They are way way higher in the US for example (don't have figures, but most US houses are on > 1 acre).

Sixth, your point about median wealth may be arguable. But I would love to know what the average/median non-equity wealth of an Aus household is. My bet is its no different to other countries, and hence when the term "wealth factor" is used by spruikers it really means equity.

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raveswei
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To prove that survey like this is not good you need more than this:
- you need to prove that factors you mentioned will affect final conclusion claim of this survey is to compare cities.
For example I personally know that total taxation for median income family is lower in US, including the property tax you mention. Cost of living excluding housing in Sydney is higher in than in all cities in US, all but maybe one city in UK, all cities in NZ, all cities in Canada (do not know about HK). Also you should take into account the fact that interest pay for owner occupied home is tax deductible in some countries.

Your over-median to median home entitlement idea is irrelevant because survey do not care whether family wants to buy or not it just compares whether family can buy or not. In addition Australia has more narrow distribution of the house prices than US, Canada and UK (do not know about KH and NZ) (ie. in some areas of these cities you may find homes for 1/5 of the median price – not in Sydney). This means that Australian houses would be even less affordable compared to cities in these countries if lower percentile price statistics is used.

In meanwhile, while waiting for your definite proof I will try to answer these questions:

Quote:
 
1 - Would we choose to build the largest homes in the world if homes were unaffordable?

Why not? Construction cost for a median house in Sydney is lower then 25% of the house sale price. By making house 20% larger you will increase cost by only 3-5% of the total development cost. At the same time this increase in the size would increase sale price more than 20%. One of the caracteristics of the houses bubbles is house size growth - disproportion between construction cost increase and sale price increase caused by greater fool attitude.

Quote:
 
2 - Would half a million families (approximately) be buying homes every year if they couldn't afford those homes?


First of all who said they can afford to buy those houses. More than 95% of these families took credit. Only after credit is repaid they can claim they could afford to buy the house. By this measure all 5 million mortgage holders in US that face foreclosure could afford to buy. Now we all know that they couldn't.

In addition, there is no any data that shows that half a million families bought a home last year. Knowing the statistics (high percentage of property investors on the market) and Australian PI attitude it is very likely that many PI bought multiple homes.

Quote:
 
3 - Would we have one of the lowest mortgage default rates in the western world if people couldn't afford their homes?


Again the same false argument. Using this argument somebody could say that all Spanish people who bought home in 2006 could afford it because Spain had the lowest default rate in western world? Do still think they could afford those homes in 2006?
http://1.bp.blogspot.com/_c9sjMyNxqqw/TTQJBIGX-QI/AAAAAAAAAeM/8Tty-nScMSg/s400/Non-performing+Housing+Loans.jpg
Edited by raveswei, 31 Jan 2011, 05:28 PM.
http://popping-bubble.blogspot.com/

Thinking of an Australian property speculator (PI):
Inaction = missing opportunities.
Missing opportunities = losing.
Too much thinking = inaction.
Thinking = missing opportunities.
Therefore thinking = losing.

disgraceful little man Frank Castle owes a house to Salvation Army

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Shadow
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Evil Mouzealot Specufestor

Debunking Demographia / Demographia Debunked

Thanks for the comments all. I will address them in turn, and update the blog where appropriate.
1 - Debunking Demographia. Demographia Survey Debunked. Australian housing is not particularly unaffordable by global standards.
2 - USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia. All property bubbles had one thing in common...
3 - Banks can't margin call on residential property unless borrower defaults, because residential property loans regulated by NCCP Act 2009.
4 - Housing is second highest taxed sector of Australian Economy. Renters subsidised by high taxes incurred by homeowners.
5 - Epic Fail! Steve Keen's Bad Calls and Predictions.
6 - Australian household formation rate faster than population growth rate since 1960s = ongoing improvement in housing affordability.
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Shadow
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Evil Mouzealot Specufestor

pauk
31 Jan 2011, 02:39 PM
1 - Would we choose to build the largest homes in the world if homes were unaffordable?
Yes, as the bigger the house and the bigger the loan you could take, the more money and capital gains you made.
Note now construction has tanked and low cost green building and high density city developments are all the go.

2 - Would half a million families (approximately) be buying homes every year if they couldn't afford those homes?
Yes, many would be upgrading as the credit stats show and this will continue, while they can keep selling them.
Equity upgraders as fist home buyers is declining over the longer term as well have less kids in our population as a percentage and it's only gets worse.

3 - Would we have one of the lowest mortgage default rates in the western world if people couldn't afford their homes?
Yes as we can not walk away from our loans, like most of the rest of the world. Our default rates on over 90 days for the low docs is out of control. 7% I heard..... Generally our mortgage defaults have been growing.
I'm not really sure whether you're agreeing or disagreeing with me. You seem to be saying that most people are not walking away from their loans, and that instead they have the capacity to take on even bigger homes and mortgages, and that many are also upgrading their homes. That doesn't sound like an environment where housing is terribly unaffordable.
1 - Debunking Demographia. Demographia Survey Debunked. Australian housing is not particularly unaffordable by global standards.
2 - USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia. All property bubbles had one thing in common...
3 - Banks can't margin call on residential property unless borrower defaults, because residential property loans regulated by NCCP Act 2009.
4 - Housing is second highest taxed sector of Australian Economy. Renters subsidised by high taxes incurred by homeowners.
5 - Epic Fail! Steve Keen's Bad Calls and Predictions.
6 - Australian household formation rate faster than population growth rate since 1960s = ongoing improvement in housing affordability.
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catnap
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Shadow
31 Jan 2011, 02:26 PM
We should note that the historical '3-4 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.
So what ratio do you consider to be valid? 5 as in the UK? 4.8 as in Ireland? Both countries with far lower interest rates than Australia.

Where is the evidence of large number of buyers with large deposits? Any FHBs?
Again evidence of high discretionary income?
Dual incomes? How does the need for dual incomes mean housing is affordable? By that reasoning if in 20 years most house purchases are paid for out of 4 pay-packets you'd still say housing is affordable?

Seems like your idea of affordability = affordable for buyers with high dual incomes, large deposits and /or other wealth? Or investors?

I definitely don't think the demographia study is without flaws, but Sydney comes out at a ratio of 9.6. Do you honestly believe affordability is not an issue there?
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Catweasel
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Shadow
31 Jan 2011, 02:26 PM
Shadow's Blog - The Australian Housing Market. Part 1 - Debunking Demographia.

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 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?

Posted Image

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.

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
- Urbanisation
- 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 ten alternative surveys below).

We should note that the historical '3-4 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.

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.

Posted Image

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 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 Australia. 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

Mercer Most Expensive Cities (cost of living, including housing)
Sydney - Number 24

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

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 (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 homebuyer 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.
Catweasel say it the very nice a narrative. Of course, not can do any empirical a proof, but a neither can a Demograhia man. But a mouse need a be a careful because not just a grizzly bear use a survey, but also a hedge fund contrarian and sometimes a mainstream economist. Even a CBA bank use before (incorrectly though). A naturally, Chris Joye don't a use but that a because he have a secret formula and 4 Phds to sprinkle their brain juice over a data.
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Shadow
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davel
31 Jan 2011, 03:04 PM
Good on you for posting the blog.

Thanks. Well, all the uber-bears seemed to be doing one... so I thought it was time for a less bearish one!

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I know you don't specify an alternative in your blog, but remember that other countries have "wealth factors" too. None of them are included in the data for those countries, so there IS comparability in as far as separately-governed data sets can produce. OTOH the figures used by CJ (the ABS Household income) include all kinds of spurious factors such as imputed rent, superannuation, gross rent on IPs etc etc. Additionally, they include "households" which are not households eg schools, churches etc etc.

I don't agree with using 'non-households', imputed rent (because it isn't actual money) or superannuation (because it's not easily accessible) in income calculations. However I do think 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. The reality is that people can and do use those forms of wealth to buy property.

Quote:
 
Second, you make the oft-repeated point about US property taxes. But you don't mention that US property owners get to claim tax back on their mortgage interest for the lifetime of the mortgage. This is more than the prop tax in most cases (for the lifetime of the loan).

I believe they must also pay capital gains tax when they sell in the USA, although this can be rolled over if purchasing a new dwelling. But I agree that their ability to claim tax back would mitigate the property tax cost in some cases (depending on marginal tax rates vs cost of property taxes).

Quote:
 
Third, you say that cost of living is not taken into account. Well CoL in Aus is pretty damn high. I would have thought that would push Aus down compared to other countries.

My blog already includes the Mercer Cost of Living Survey, which places Sydney at number 24 behind more costly cities such as Tokyo, Moscow, Geneva, Hong Kong, Singapore, Beijing, London and Paris. I have also included two extra cost of living surveys below. One places Sydney at number 22, and the other (by The Economist) only lists the top 10 most costly cities, but Sydney isn't one of them.

http://www.economist.com/node/13252399

http://business.ezinemark.com/global-cost-of-living-rank-of-300-international-locations-world-wide-september-2010-169ce6ebacb.html

I will add these surveys to the blog.

Quote:
 
Fourth, you don't mention much higher interest rates in Aus.

Interest rates are included in the bullet list in my post, and I agree they are currently high in Australia. Just to clarify - the main point is that we can't look at any single factor and use this to rank cities by affordability. There are too many variables. Some variables that reduce affordability in Australia (such as high interest rates) are mitigated by other factors that improve affordability.

Quote:
 
Fifth, Aus houses are the biggest in the world, but block sizes are not. They are way way higher in the US for example (don't have figures, but most US houses are on > 1 acre).

You might be right. I haven't seen any data on that. Do you have I link - I would be happy to update the blog with this information if I can get some data.

Quote:
 
Sixth, your point about median wealth may be arguable. But I would love to know what the average/median non-equity wealth of an Aus household is. My bet is its no different to other countries, and hence when the term "wealth factor" is used by spruikers it really means equity.

I guess we would need to define which items we want to include or exclude when calculating wealth. Equity is frequently used to purchase property, especially when upgrading. The equity may be accessed by selling, or by borrowing against the asset. Since it is used to fund property purchases, I think it is fair to include it when assessing affordability. The sale price of a dwelling is usually not the same size as the loan. Most loans are smaller than the sale price because buyers use equity, savings or funds derived from other liquid assets to reduce the amount they need to borrow.
Edited by Shadow, 31 Jan 2011, 09:21 PM.
1 - Debunking Demographia. Demographia Survey Debunked. Australian housing is not particularly unaffordable by global standards.
2 - USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia. All property bubbles had one thing in common...
3 - Banks can't margin call on residential property unless borrower defaults, because residential property loans regulated by NCCP Act 2009.
4 - Housing is second highest taxed sector of Australian Economy. Renters subsidised by high taxes incurred by homeowners.
5 - Epic Fail! Steve Keen's Bad Calls and Predictions.
6 - Australian household formation rate faster than population growth rate since 1960s = ongoing improvement in housing affordability.
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Catweasel
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Shadow
31 Jan 2011, 09:18 PM

Thanks. Well, all the uber-bears seemed to be doing one... so I thought it was time for a less bearish one!

Does it think that a global credit boom have a anything to do a Australia? Or just a confusion on a number?
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