Seriously ‘Unaffordable’ Housing

Here’s something of interest, but what happens when housing has been overpriced and unemployment and job insecurity run counter to the market:

“Both Treasury and the Reserve Bank have been counting on the lack of housing supply in Australia to stop prices from plunging as they have in the US and Britain.”

I thought I’d post this interesting article simply because it’s a reality that the housing bubble in Australia is set to deflate, but to what extent? Is it likely to mirror the falls seen in the US and UK?.

Seriously Unaffordable

The Daily Reckoning Australia

London, England – Melbourne, Australia

Tuesday, 27 January 2009

Australian house prices are severely and seriously unaffordable…Pink Monday in the U.S. costs 79k jobs…the decline and fall of consumer credit and its effect on prices…and more!

–Stocks in the U.S. were up overnight. The only really positive news on the day was that existing home sales in the U.S. were up 6.5%. It was unexpected news. A lot of short sales and foreclosure sales boosted the market.

–See. Markets work if you let prices function. Median house prices have fallen over 15% in the U.S. in the last year, according to the National Association of Realtors. The median price of US$175,400 is obviously starting to clear some of the inventory over-hang. If prices fall even more, you can expect more buyers to come in off the sidelines and back into the market.

–The alternative is to keep those new buyers out of the market by propping up prices through various government-backed lending initiatives. If you want to make homes more affordable, you should let home prices adjust lower, to a level that reflects tighter credit. How hard is it to figure out that if you take away copious amounts of credit from the housing market (in Australia or America) prices are going to fall?

–But is that such a bad thing? Well, it is if you own a house and have a large mortgage on it. But let’s consider a new study on global housing affordability by Performance Urban Planning. The report concluded that Australia has the most unaffordable housing of all the nations surveyed. Not only that, but according to the report, Australia doesn’t even have a single urban area in which housing is merely “moderately unaffordable.”

–Now before you write in defending the honour of Australia’s housing market, let’s be clear what the survey’s designers consider unaffordable. They use a ratio of Median House Price to Median Household income. A house is “Affordable” if the ratio is 3.0 or less. It’s “Moderately unaffordable” if the ratio is 3.1 to 4.0. It’s “Seriously Unaffordable” if the ratio is 4.1 to 5.0. And it’s “Severely Unaffordable” if the ratio is 5.1 or more.

–Australia sports a ratio of 6.3, which is both “Severely Unaffordable” and “Seriously Daloob.” New Zealand comes in next t 5.7, followed by Ireland at 5.4 and the U.K. at 5.3. Owing to its large number of metropolitan areas in which there is a wide variety of median prices and incomes, the U.S. nationwide ratio is just 3.2.

–Part of the problem in the other countries is that national median incomes and house prices are derived from just a small number of densely populated urban areas. It’s a pretty common occurrence in America to pack up your car, change states, and change jobs. You trade lower wages for a lower cost of living. That may be harder to do in more homogenised labour and housing markets, like, say, Australia.

–So is today’s ratio any higher than historically? You bet it is! According to the study, “In recent decades, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices being generally 3.0 or less times median household incomes.”

–“This historic affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in Australia, Ireland, New Zealand and the United Kingdom and in some markets of Canada and the United States.”

–There are other ways to measure affordability, of course. But it really comes down to the mortgage payment. Looking at house prices in terms of household earnings and income, then, is the method that makes the most sense to us. And by that measure, Australia has some of the most expensive housing in the world.

–In fact, according to the table below, Australia has over a third of the sixty housing markets ranked “Severely Unaffordable” by the survey. Two of the top three “Severely Unaffordable” markets are in Queensland. And eight of the top twenty “Severely Unaffordable” markets are in Australia, according to the survey.

Source: 5th Annual Demographia International Housing Affordability Survey

–If you’re in the market for something “Seriously Unaffordable” you should try Bendigo (4.8), Wagga Wagga (4.9). or the goldfields in Ballarat (5.0). The other 24 major urban areas surveyed are either prohibitively expensive, or overvalued, depending on your point of view. So why haven’t Aussie house prices fallen more?

–“Unlike the other national markets in the Survey,” the survey surmises, “Australia has thus far been able to avoid material house price declines. It seems likely that, sooner or later, the inherent instability and unsustainability that characterizes bubbles will lead to house price declines in Australia. However, were it possible for Australia to retain its highly over-valued house prices, there would still be a significant cost. Future generations would pay far more for housing than in the past, and Australia’s relative standard of living would decline.”

–Far be it for us to suggest that Australia’s love affair with homeownership could be financially ruinous at these prices. Besides, we don’t have to say it when you can see it for yourself in the image below. But the generation psychology of getting rich in property is hard to break. It’s worked for the Boomers. Now everyone thinks it will work. Hmmn.

Source: 5th Annual Demographia International Housing Affordability Survey

–The other side of the affordability ratio is household incomes. And if the job market data from the U.S. on Monday is a preview of what’s ahead for Australia, median incomes are going to decline for the people who got fired. In the U.S. alone, over 79,000 pink slips were handed out to start the week.

–Maybe it will be remembered as “Pink Monday.” Corporations are hoping to stem the rising tide of red ink by slashing jobs. Caterpillar is cutting 20,000 people loose. Sprint Nextel fired 8,000, Home Depot, 7,000. Pfizer is laying of nearly 19,000. And American Express, after reporting an earnings drop of 79%, is sacking 7,000 workers too.

–It’s a lot of bad news. But the Amex news shows just how bad things are getting in the real economy. “Our fourth-quarter results reflect an operating environment that was among the harshest we have seen in decades,” Amex CEO Ken Chenault said. Card member purchases declined by ten percent, year-over-year. Amex reported rising late payments, delinquencies, and is expecting larger default rates by its customers.

–Do you see what’s happening? Consumers are cutting back their use of credit cards. But even so, they are having trouble servicing their outstanding credit card debt. Households have a cash-flow problem too. They too, are overleveraged and have to reduce the amount of debt they are carrying.

–The only way to do that is to cut spending. Thus a double whammy for the retail economy. With one hand, households cut spending, damaging business profits. With the other hand, businesses lay off workers, further reducing household income. And on the cycle goes.

–The cycle of rising unemployment, negative earnings news, and recession is obviously a big downer for the stock market. Of course, as we write that, stocks are up on the day. But in a credit depression, asset values fall faster than government efforts to reinflate the money supply.

–As we pointed out last week, the value of credit outstanding dwarfs the patchwork efforts of various government spending programs to prop up banks and house prices. We’d expect weaker stock prices, falling house prices (yes, even with interest rate cuts from the RBA), and the build up of a big inflation trade. More on that tomorrow.


31 Responses

  1. Something I noticed almost immediately in that graph. Look at when most capital city house prices had generally flattened except for Perth, and then notice the year house prices started accelerating upwards.

    Coincidence, I don’t believe so.

  2. The way that graph took off in Adelaide is probably the luckiest break I’ll ever get; only because we sold at the right time (more luck) & moved to the country where things are a lot cheaper, relatively speaking.
    If it hadn’t been so, I imagine I’d be the proud owner of a “Buffalo Shanty” rather than the Lodge.

  3. To imagine, I was lucky enough to have purchase a 3 bedroom home in Sydney’s West in 1996 for $95K, four years later sold at a hefty profit and upgraded to a 5 bedroom home with a study for $215K.

    I knew then that the boom had started and would only gain momentum unless otherwise brought into line. I never expected to see the type of acceleration that we experienced and the type of lending that became readily available.

  4. Talking about mortgage stress, It’s back on the agenda and I’m sure we’re going to hear more and more about the issue in coming months.

    Gillard alarmed at mortgage stress evictions
    Australia’s banks have a role to play in limiting the impact of mortgage stress on Australian families, acting Prime Minister Julia Gillard said today.

    Speaking in Sydney, Ms Gillard said that families being evicted from their homes was clearly an issue for the banks, along with governments and the welfare sector.

    “All Australians will be concerned about families being chucked out of their homes due to a lack of financial resources,” Ms Gillard said in Sydney.

    “Clearly it is an issue for our banks.”

    Ms Gillard said she would meet representatives from the welfare sector and not-for-profit organisations today to discuss possible government assistance in the face of the economic downturn.

    “These organisations have a critical role in assisting with issues such as unemployment, people with disabilities and secure housing,” Ms Gillard said.

    “The not for profit organisations were locked out by the Howard government. I very much want to hear … what they’re experiencing now, and what they think will happen during 2009.

    “The discussion today will be part of that, how do we best keep people in work, how do we best assist them if they lose their job,” she said.

    The meeting will cover unemployment, the plight of carers, people with disabilities and housing.”

  5. “Clearly it is an issue for our banks.”

    Our banks???

    We haven’t got a bank, that’s why these institutions are sticking it to everyone they can with impunity!

  6. It’s got to make us wonder whether much of the so-called prosperity was simply a mirage.

    Australia tops prosperity index
    October 14, 2008
    Australia has topped the rankings in a prosperity index of more than 100 countries, with its quality of life and economic strength pushing it into number one spot.

    The Legatum Institute’s Prosperity Index of 104 nations measures the material health of a country, including wealth, quality of life and life satisfaction.

    Australia has topped the 2008 index, ahead of Austria and Finland in that order.

    The Dubai-based investment group said Australia bettered other countries because of its strong economic performance, governance and high quality of life.

    “(Australia) has reinvented itself as a wealthy, service-oriented economy with good scores on liveability indicators, including health, charitable giving and effective governance,” Legatum said.

    “Strong norms or civic participation, robust health, and plenty of leisure time contribute to the high liveability ranking.”

    While Asian powerhouses Singapore, Taiwan and Hong Kong scored well economically, their livability dragged down their performance.

    Vice president of the institute, Dr William Inboden, said Australia had the fundamentals right.

    “True prosperity consists of more than money – it also includes happiness, health and liberty,” he said.

    “The Prosperity Index shows that in addition to economic success, a society’s prosperity is based on strong families and communities, political and religious liberty, education and opportunity, and a healthy environment.

    “The Australian government earns high scores on corruption control and overall effectiveness, supporting the country’s quality of life in many areas.

    “Strong civic participation by Australian citizens furthermore contributes to the high levels of life satisfaction.”

    Bottom of the list was Yemen, with Zambia and Zimbabwe not faring much better.

    The financial crisis-racked United States was rated equal fourth, alongside Germany and Singapore.

  7. Is that Adrian ‘The Prince’ Machiavelli?

  8. scaper regarding yeasterday, just read it, lol(email)ring next time, i would of came down for sure.

    lol two faced. thank you migs

  9. Hexx, planning a fishing day in a couple of weeks…catch and release and lunch at Mission Point.

  10. oops wrong blog

  11. scaper…, on January 27th, 2009 at 8:10 pm Said:

    “Clearly it is an issue for our banks.”

    Our banks???

    We haven’t got a bank, that’s why these institutions are sticking it to everyone they can with impunity!

    Banking deregulation has a lot to answer for. “The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live ” as Galbraith said.

  12. aquanut, on January 27th, 2009 at 8:28 pm Said:

    oops wrong blog

    Lol I saw you’d posted and was eager to view your wisdom.

  13. Hope I’ve taken your meaning right Mac?

    Machiavellian? Now I know you are joking.

    I’m all for central control in Defence and in fact insist on it. Wouldn’t go near a Defence force without a strong pyramidal structure with central control.

    But when it come go government I believe a little anarchy is good for the soul.

  14. wisdom, lol . that was good.

  15. Over at LP:

    “Labor Outsider
    Jan 27th, 2009 at 7:26 pm
    Carbon – a few points here:

    It is not true that Australia’s saving rate has never been lower. The household saving rate is low, but has been trending up for the past few years (it is now positive after having been negative a few years ago). In that sense, household balance sheet repair has already begun. Corporate saving rates are definitely NOT at historic lows – things looked much worse going into the early 1990s recession. And public saving over the past few years have of course been very high.”

    There’s more at 29

    Any comments?

  16. Puts hand up. Hi Nature
    IMO these figures can not be trusted.
    one example.
    because 90% of my savings sits in a safe is no indecation that the figures you provide are wrong BUT, I am hearing safe sales have more then tripled, while trying to buy one for a friend i saw how empty the shelves were in a fair few different stores.

    If those figures should be higher or lower all i can say is i dont believe they are accurate and if credit is on demand/rise then one disagrees with the other.

  17. Adrian

    “Machiavellian? Now I know you are joking.”

    I couldn’t resist (wink)

  18. i contradicted myself… typical i was never ment to make sence .

  19. Nature5

    Any comments?

    Not sure about your point.

  20. Nature5

    This might be of interest

    Household saving in Australia
    Economic Roundup Issue 4 2008

    After falling steadily from the mid-1970s, the share of disposable income that Australian households devote to saving has picked up in recent years. This paper explores a number of possible explanations for this development and their implications for household saving into the future.

  21. Wouldn’t feel like kicking yourself?

    Gold Coast beachfront property loses $5m value in months,26860,24963389-5015795,00.html
    AFTER knocking back $14.5 million last year, a Gold Coast couple have seen their beachfront home go for $9 million at auction as the financial crisis bites.

  22. John
    If it is public knowledge(current affair, news,real estate advert) the place as an option is to late. This will also happen in the sunshine coast, properties around a million or higher will suffer back to realistic prices.

    My knowledge tells me there is a silent panic, we are always the last to know everything. From what i do understand from your posts John you said it best on how it is.

  23. ‘Coincidence – I don’t believe so’. Adrian

    Quite correct Adrian. With the advent of GST (and the mining boom in WA especially), demand for new housing here went through the roof. So much so, that supplies of building materials, bricks in particular, had to be shipped in from East.
    Builders were getting exactly if not more $ than normally listed prices for their newly built homes.
    Land prices, as scarce as building land was, went through the roof. Consequently, house prices rose from affordable to unacceptably high.
    Local builders and building supply persons with whom I associate told me that such high demand had their order books full for up to 3 years in advance. Building time schedules blew out from the normal 16 to 30 weeks per building such family homes to minimum 30 weeks up to 18 months for same.
    This is what JWH refers to as ‘you’ve never had it so good’, when demand outstripped supply, while interest rates under Howard stewardship rose steadily, never declining, while land shortage prevailed. What a dick/head is JWH.
    Meanwhile, prices were going through the roof, while ALL governments, state and federal presided over the smallest ever (relative per capita) public housing works programme.
    Now we have those who can least afford private rental costs having to pay abnormally high private rents due to the acute shortage of public housing which, with new public projects in train, could have easily helped alleviate the now dire housing situation.
    Public housing (allocation) waiting times here have blown out by up to 5 years longer than normal. Yet, our former Treasurer(s) Ripper and Costello boasted abnormally high budget surpluses over the last 6/7 years.
    Rudd’s ill thought out plan of ‘housing the homeless’ may easily have been run in concert with a plan for the building of more public housing, which, in practice and by definition, may have killed 2 birds with one inclusive housing policy stone. But hey, I’m not a politician. I’m an infinitely more practical vegemite (according to me, of course).

  24. Oftenbark

    “This is what JWH refers to as ‘you’ve never had it so good’, when demand outstripped supply, while interest rates under Howard stewardship rose steadily, never declining, while land shortage prevailed. What a dick/head is JWH.
    Meanwhile, prices were going through the roof, while ALL governments, state and federal presided over the smallest ever (relative per capita) public housing works programme.
    Now we have those who can least afford private rental costs having to pay abnormally high private rents due to the acute shortage of public housing which, with new public projects in train, could have easily helped alleviate the now dire housing situation.
    Public housing (allocation) waiting times here have blown out by up to 5 years longer than normal. Yet, our former Treasurer(s) Ripper and Costello boasted abnormally high budget surpluses over the last 6/7 years.”

    Ah, yes THE RENTAL CRISIS! How many owners have been able to milk tenants simply because of the shortage? And how many potential foreclosures on investment properties have been averted to date, simply because investors have been able to raise the rents of tenants thereby allowing to meet their mortgage obligations?

  25. Indeed John, and the political band played on.

  26. Oftenbark


    Soaring rents put squeeze on tenants

    RENTS have recorded their highest increase since 1988 amid fears the rental crisis will only get worse as the impact of the global recession takes hold.

    Latest figures from the Australian Bureau of Statistics show the annual rate of growth in rents across the country has jumped to 8.4 per cent in the year to last month, up 2 per cent from 2007.

    The statistics also reveal the increase in rents has jumped from 5.4 per cent to 8 per cent in Sydney, 11.2 per cent to 12.2 per cent in Perth and 8.6 per cent to 10.1 per cent in Brisbane.

    Adelaide also recorded an increase in residential rental growth of 4.7 per cent to 5.4 per cent and Melbourne jumped to 6.6 per cent from 5.4 per cent.

    BIS Shrapnel senior economist Jason Anderson said the rental market was only going to get worse as the country’s economy faced a possible recession.

    He said the roots of the rental crisis before the economic downturn were the significant increase in immigration and high interest rates that left a shortage of about 100,000 houses.

  27. great picture John, i just cant remember where i have seen it.

  28. Aqua

    It’s Marty Feldman

  29. Just a quick’un as hubby is quietly resting watching the rosellas nip at the grevillias.

    John McP…I have been meaning to make mention that you rank far higher re cuteness as Marty Feldman than as bug ugly fat scottish person.

  30. So there we have confirmation John Mc. A 100,000 housing unit shortfall. Boy oh boy. Makes one wonder how 8 supposedly egalitarian Labor state/territory governments sat on their collective hands for around 8 years in not providing nor facilitating the provision of the most basic of human need; housing.
    You may also note that the state with the largest real and per capita budget surplus (WA) has % rent increases double that of some other states. Beauty? Not!
    More of the feeble same from KRudd.

    I could say so much, much more on this subject, perhaps at another time.
    Suffice to say, Perth now has a north-west metro rail system stretching around 45k north, and 78k south to Mandurah, total of 123k from one ending point to the other cutting through Perth City central. That’s way longer than the rail link from Frankston to Broadmeadows, which is a total of 55k (40k south to 15k north) through Melbourne City central.
    South metro Perth is relatively sparsely populated. North metro Perth is densely (relatively) populated.
    When the former state Minster for planning and infrastructure (McTiernan) was asked why there were not new housing developments, private and public, along the southern Mandurah rail-line, her answer was, paraphrased:
    ‘we have a programme of urban renewal, inner city living/block subdivision where people can build and connect to existing essential services, which saves the government money on sewer, road, kerbing, schools, gas, power connection and supply costs’ etc.
    Which is to say, a one fifth to quarter acre inner city housing block which housed around 4 people and 4 motor vehicles may now house in home units up to 16 people and around 12 or more motor vehicles. Beauty, again. No wonder Perth traffic is beginning to choke. So much for the southern rail line.
    But wait, there’s more. State Labor also announced the imminent closure of Royal Perth Hospital, in central city Perth, to go with the ‘urban inner-city renewal’ programme.
    How stupid is that?
    Meanwhile, the same state Labor government had in train advanced plans for development of Coogee Beach, Smith’s Beach (way down south), Leighton Beach, where blocks will have fetched up $1,000,000 each or thereabouts, raising more revenue for the gov. Beauty again.
    Not to mention a $800,000,000 up front Labor guarantee to the AFL and other parties for the re-development of Subiaco Oval or a newly built football stadium. Priorities, indeed.
    I am closely associated with building, building supplies, engineering, development, structural drafting people and the like. My frustration must be quite obvious.
    And these idiot politicians wish I should vote? Yep! Right!

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