Article of Interest for Friends, Clients & Associates of Linda and Carlos Debello, LJ Gilland Real Estate Pty Ltd

Australian housing at its most affordable level for nine years: Christopher Joye

By Christopher Joye
Thursday, 28 June 2012

In encouraging news for prospective property owners, Aussie housing continues to get cheaper when deflated using disposable incomes. According to Rismark, Australia’s all regions, average dwelling price-to-average disposable household income ratio has fallen to around four times, which is its lowest level since March 2003 (abstracting away from a temporary dip during the GFC).

This analysis is based on both “average” and “median” dwelling prices calculated using all home sales recorded across the country during the March quarter. The quarterly income estimates are extracted from the ABS’s National Accounts data, which publishes a regular “disposable household income” aggregate. To translate this figure into a “per household” unit, Rismark divides through by the number of households each quarter. It is important to remember here that this income estimate reflects that there are multiple income earners per household, and is an “average”, not a “median”, and likely to be biased upwards somewhat due to right-skew in the distribution of incomes.

Click to enlarge

The second chart below seeks to remove one of the main “non-cash” items that is captured in the ABS’s disposable household income series: “imputed” owner-occupied rents, or the rents you effectively save by buying a home rather than renting it. As you can see, this boosts the dwelling price-to-income ratio to about four and a half times.

Click to enlarge

The exact levels of the price-to-income ratio are relatively trivial: it is thechange in the ratio over time that affords much more useful insights.

From the analysis above we can infer several things. First, disposable household incomes in Australia have grown as quickly, if not more quickly, than nominal Australian house prices over the last nine years. Indeed, when we measure changes in house prices more precisely using a “hedonic regression” technique, we arrive at even lower house price inflation numbers. In particular, we find that disposable incomes have actually out-paced house prices by about 15% over this period.

A second learning is that the price-to-income ratio seems to have risen by about one-third from circa three times to four times since 1993. In fact, there was a very distinct regime change in the late 1990s and early 2000s.

There is a sound explanation for this innovation: the long-term cost of mortgage debt in Australia declined by north of 40% between 1980 and 1995, and 1995 and today. This was largely a function of the long-term reduction in realised inflation and measured inflation expectations, which in turn allowed Australia’s central bank, the RBA, to permanently lower its cash rate.

The radical reduction in the day-to-day cost of mortgage debt permitted Australian households to significantly increase the amount of debt they were servicing without a noticeable rise in underlying mortgage default rates. Notwithstanding a peak in headline mortgage rates of around 9.5% in August 2008, system-wide arrears have remained no higher than their last spike in 1994-95.

Here we are able to document another development. The striking rise in Australia’s household debt-to-income ratio from the mid-to-late 1990s onwards ceased altogether in about 2006, a year or two prior to the onset of the GFC. That is, credit growth started tracking income growth, which is what you would expect through the cycle. Households evidently discovered that they had maxed out their debt servicing capability, and rationally stopped leveraging up.

Rismark’s price-to-income ratio analysis does not, of course, account for changes in interest rates. Today mortgage rates are well below their long-term averages. You can get discounted variable rates as low as 5.6% per annum, and three-year fixed-rates at about 5.8% per annum.

Factoring in the change in both incomes and interest rates is important. As one exercise, Rismark took the median Australian dwelling price in 1985 and indexed it up by changes in per household disposable incomes and adjustments in borrowing capacity afforded by changes in mortgage rates (i.e., holding the repayment-to-income ratio constant).

Rismark found that they could explain 93% of the actual increase in median Australian house prices over the 1985 to 2011 period simply referencing these two variables.

Christopher Joyeis a leading financial economist and a director of Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.

Best regards,

Linda J. Debello Licensee, LJ Gilland Real Estate Pty Ltd

Tel: (07) 3263 6085 | Mobile: 0409 995 578

Contact me: ljgilland

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About ljgrealestate 据联大

Removing the Hassle from Sales and Rentals across South East Queensland. Aim to Empower other like minded Property Investors. L J Gilland Real Estate is a prestigious boutique agency specializing in Property Investment Management Services and the Sales of Investment Properties with tenants in place. Comprised of a top performing group of handpicked specialists, our Agents proudly serve Property Investors in Queensland. Since 1996 our Agency has demonstrated a genuine enjoyment of working with people, developing long-term relationships and delivering on the promise of great service. Carlos and Linda Debello offer property investor's the confidence to sell and lease in any market. We provide comprehensive market appraisals, exclusive multimedia marketing campaigns, and knowledgeable, highly personalized counsel on all aspects of real estate. Our Property Management Team is equally considerate, offering investors with in-depth advise, well-researched rental valuations, and highly professional rental management services. Carlos’ direct mobiles are 0400 833 800 & 0413560808. Linda’s mobiles are 0409995578 & 0414978700 (prefer email contact for Linda). Office 07 3263 6085.
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