Adam Schwab should stick to his day job and quit writing factually flawed missives about housing.
Schwab’s key argument is that Australian “dwelling prices are almost nine times disposable income”, which is “extremely high by international and historical standards”.
As with most of the things Schwab writes on this subject, his facts are way wrong. If he had exercised a modicum of due diligence, he might have checked the Reserve Bank of Australia’s latest estimate of Australia’s dwelling price to income ratio, which can be found here.
Based on the RBA’s estimates, Australia’s capital city dwelling price-to-income ratio is just under 4.5x (more recent data puts it at 4.8x). Now how on earth does that reconcile with Schwab’s estimate of 9x incomes? Of course, it does not.
Schwab makes two key mistakes. First, the national median dwelling price is not the $480k he claims. If we take every single home sale in Australia since, say, March 2008, which RP Data collects directly from the Valuer Generals’ offices (and represents over 99% of all sales nationally), Australia’s median dwelling price is about $360k. As at June 2009 it was about $370k.
So this is more than $100,000 less than the number Schwab quotes.
Why is he wrong? Because the data he quotes only relates to the more expensive capital cities (where household incomes are also higher), and 40% of all homes in Australia are not located in the capitals.
The second mistake he makes relates to his disposable income definition. The best definition is that which is employed by the RBA to calculate the dwelling price-to-income ratios linked above. This measure is based on the ABS-compiled National Accounts and not the “survey information” that is also published by the ABS. To quote the RBA:
For income, our conventional measure is household disposable income before interest payments and excluding unincorporated enterprises obtained from the national accounts … To make it per household, we use the number of households, which is reported by the ABS in their Australian Demographic Statistics release … This provides a yearly time-series of the number of households.
Combining the national median dwelling price in all regions, and including all property types, of $370,000, with the RBA’s disposable household income definition, Australia’s dwelling price-to-income ratio today is slightly above 4x, which is less than half the 9x estimate that Schwab proposes is so offensive.
Accordingly, Australia’s housing is not unusually expensive by international standards.
This perfectly correlates with:
- Australia’s internationally high home ownership rate of 70%;
- Australia’s incredibly low mortgage default rates, which is a fraction of overseas levels; and
- the fact that the value of Australian housing has been rising, not falling, indicating that households are having little trouble affording to purchase properties.
As I recently noted, few issues galvanise public debate as effectively as house prices. It must have something to do with the fact that unlike, say, salaries, houses are transparent and ubiquitous. No matter where you live, somebody close by always has a bigger and better place. And, for better or worse, that fact is shoved in your face.
It may be that much of the emotion and misinformation that accompanies the housing debate can be traced back to comparative justice. Imagine, by way of contrast, how we would feel about salaries if folks walked around town with their pay levels plastered on their foreheads.
For the zealots such as Adam Schwab, the frustrating truth is that the hard facts on housing do not support their hyperbole.
The cost of Australian housing has been increasing, not decreasing…
Yes, but that is not something to be happy about, is it?
It is making house purchasing very difficult for the lower income end of the community. The worst off. Those on crap wages.
Why is the cost of housing going up? I live in Springvale. A suburb of Melbourne with lots of social problems. I love living in Springvale, by the way. But it cant be denied: we have problems. And yet house prices are leaping and the rents are also leaping. The very poor have been pushed out of Springvale and are heading further south east or just east. To Dandenong, Hallam, Hampton Park, Packenham,… What causes this? The large blocks of land that the old houses are built on? They get bought, bulldozed, and 3 or 4 flats are built. But they are new flats and each one rents for what the old weatherboard house use to rent for, (more or less).
What is going on to cause this?
I have heard some say it is because the most common occupancy of new houses these days is a single person. And so we need more houses or flats for that change in the way society is functioning.
I have heard others say it is because we let overseas investors buy our houses and they derive income and increased captial over time, by doing so. But it puts too much demand on our market and pushes prices up.
Still others say it is the big developers who get most of the land that goes up for sale (deals with state governments), and they trickle feed it back to the buyers so the prices stay high (lots of demand not much supply). Land goes up.. so total prices go up.
I would love to know if these or other reasons are the real reasons for the increasing cost of housing. And I would love to know the answer to providing affordable housing for all Australians – especially the forgotten bottom 25% on pathetic income levels.
I will probably get flamed for this, but, here goes:
Jim, the bottom 25% of the socio-economic ladder probably have never owned their own homes. They are those on welfare, or labourers who can’t get a loan, nor should they, simply because their incomes won’t support the payments, or their positions are often not stable. In fact, giving loans to the bottom 25% is what got us into this mess – anyone heard the term ‘Sub Prime’ before?
Sorry but security and shelter is a basic human right – OWNING it for yourself is a privelige, one people work very hard for. It requires sacrifice, hard work and education. It has never been easy to own a home – ever.
Single people occupy these places because (generally) people are staying single for longer, delaying marriage and living their lives through their 20’s and early 30’s. These people (generally) are the ones who can’t buy a home because they travel, spend it on nights out and other consumer items. It’s not until they pair up and settle down do they start thin
I don’t know where Springvale is, I’m not from Melbourne, but if it is closer to the CBD, of course there will be gentrification and urban renewal, and, with today’s focus on urban sprawl and lack of facilities, infilling and creating denser housing is not a bad thing. these newer, modern buildings attract a better class of people, because the buildings are nicer. The owners can pick and choose who they let rent it, rather than having to let to ferals a weatherboard fibro shack, because they are the only ones who would want to live in it. The better class of people can afford to pay more and so they do, and as such, the area gets more expensive. The feral element get moved on.
Blame the government for lopping off public housing.
And yes I’ll get flogged for this by some people I’m sure, but Adam Schwab has been forecasting this overvalued collapse in house prices for around 18 months now. I’m still waiting.
Damn my comment got cut off. I meant to say *thinking about a secure place to live and raise a family*.
Reasons?…try disproportionate and rampant immigration levels, try the laxing of foreign ownership rules, try the systematic ramping-up of prices by the realestate industry, try an idolatrous culture that prepetuates the myth of the Great Australian Dream of home ownership in order to lock people up into a life-time of debt servitude.
These statistical average arguments are smoke and mirrors. I recently saw a residential property in a country town sell for well under $20K. That won’t even cover stamp duty on a suburban property purchase.
And I’m happy to read Mr Schwab’s perspective as an alternative to the self serving spruiking of one eyed interest groups. At best this spiralling asset value activity is instituting a new version of serfdom with corporates and banks playing the wealthy power brokers this time round. Those arguing this is a good thing are likely making a living out of the increases or were probably all able to purchase their first homes a decade or three ago when properties were still affordable as a ratio of income that didn’t equate to financial slavery. Bubble or no bubble it highlights a real lack of vision or care for Australia’s future generations.
Also ABARKER, I dispute your differentiation between security and shelter as a ‘basic human right’ versus owning said being a privilege. The whole lot is a social privilege, not a basic human right. The only inherent human right we hold is the right to die, and not usually to our own timing. Using that dodgy rights argument in a country that can’t even bring itself to give its citizens a bill of rights is almost quaintly absurd.