Data Diary

Wax, feathers and sun – house prices are flying

Posted on 02 February 2010

A couple of perspectives on the house price data released by the ABS yesterday.  First up, a quick summary of the data – frothy:

According to the 6th Annual Demographia International Housing Affordability Survey, Australia now carries the mantle of the least affordable housing amongst its survey contestants.  (Click on the image for enlarged table.)

Okay, Vancouver gets the Hammer & Sickle for the single most expensive city – but as a country Australia – our land of open plains – wins best and fairest.  (Note that the Economist has been banging this drum for some time – check out their cool app for monitoring house prices.)

The Demographia survey measures housing affordability by comparing median house prices to gross annual median household income.  A median multiple greater than 3.0 has historically meant that house prices were unaffordable.  According to their stats, Australia (outside the emerald city) was around 3.0 at the start of the 80′s:

To put this analysis in context, it reads like this survey has a tilt to it.  For the authors, the prime culprit for elevated house prices is land use regulation – “which materially increases the price of land, which makes housing unaffordable”.

For them, housing starts have been held back by red tape and short-sighted town planning.  The solution – make land on city fringes easily available for building on:

(It is notable that the introduction is written by Dr Tony Recsei – President of Save Our Suburbs – an organisation blessed with the task of stopping “densification of neighbourhoods”.)

To present a slightly less nuanced picture then, it’s worth a look at a presentation by Tony Richards (Head of the RBA’s Economic Analysis dept) from September last year.  The measure of housing affordability that he points to is the ratio of average household disposable income to P&I on a new mortgage for a median price dwelling.

Falling interest rates were credited with the recent snap-back in affordability as the breakdown of determinants of affordability shows (note his data excludes the government grants to home buyers):

Note the big difference in the RBA’s “Dwelling price to income ratio” and Demographia’s “Housing Affordability”.  Presumably there is a significant disparity between the median and average trends in gross versus disposable income (cause the numerator should be the same)?  It’s going to require some digging to get to the bottom of – as 1) it may reflect growing income disparity between high and low incomes and 2) it’s unclear as to which is more representative of the mortgage market.

Notwithstanding this rather large difference, the RBA’s conclusion is broadly the same – housing demand, driven principally by immigration and rising real incomes, has pushed house prices beyond where they should be.  The RBA agrees that “there have been a number of factors on the supply side that have combined to keep the supply of new housing below where it would have been in a more responsive environment.”

Does this mean that house prices can only go up from here?  Not necessarily:

1) Housing is a consumption item – the higher the prices relative to income the less available for other consumables.  Real incomes have to keep rising to enable prices to bid up.

2) Supply is responding – the RBA notes that the number of starts for 2009 were substantially higher than previous years and that government housing has increased.

3) Mortgage financing – not only are interest rates on the rise (notwithstanding today’s “hold”), but the banks have also tightened their lending parameters (eg. reducing the maximum LVR).

Putting it together – immigration clearly remains the big plus, but the confluence of extended prices, increasing supply and tighter finance will cap further price rises this year.