Deflated changes in Wages and Debt: 7.30 Report Data

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Tables like the ones below take my breath away when I see them for the first time–because the story they tell is worse than any I would have dared make up. As I noted in the inter­view with Kerry O’Brien on the 7.30 Report, real wages have increased since 1990, and since Australia’s last elec­tion in late 2004. How­ever, mort­gage debt has increased by far more.

My apolo­gies in advance that the data here is shown in links to Excel files, rather than as a native table. I’m using an old ver­sion of Word­Press, and its impor­ta­tion of tables is flaky; once I update, hope­fully I’ll be able to post a table directly into the blog, but for now the fastest way to get the data up is via a link to an Excel File. So here we go:

Real Wages 1990-Now

Real Mort­gage Debt Per Capita 1990-Now

Real Wages 2004-Now

Real Mort­gage Debt Per Capita 2004-Now

Real Mort­gage Inter­est Per Capita 1990-Now

Real Mort­gage Inter­est Per Capita 2004-Now

Real Mort­gage Inter­est Per Capita 2004–2008

The punch line in the data is that real wages have increased sub­stan­tially, but not by any­where near as much as has debt. Real wages have risen 25.6% since 1990, and 4.7% since the 2004 elec­tion. Real mort­gage debt per Aus­tralian has risen 526% since 1990, and 18.3% since the last elec­tion. Given the increase in inter­est rates since 2004, the real inter­est repay­ment bur­den rose by 35.1% between the 2004 elec­tion and the start of 2007–and it was up by 45.7% before the rate rise this week.

Given the rate rise, the real inter­est bur­den on the econ­omy has increased by 50% since the 2004 election–and much of that bur­den is falling on the west­ern sub­urbs of Syd­ney and Mel­bourne. It’s no won­der that the slo­gan “you’ve never had it so good” isn’t really res­onat­ing with the entire Aus­tralian elec­torate.

For parts of it, that is undoubt­edly true: West­ern Aus­tralia and Queens­land are boom­ing, those whose make their liv­ing from credit are doing very well, and those in the East­ern Sub­urbs are still enjoy­ing ris­ing prop­erty val­ues. But for those in NSW, Vic­to­ria, South Aus­tralia and Tas­ma­nia, work­ing for a wage, bor­row­ing rather than lend­ing, and liv­ing in the West­ern Sub­urbs (or Adelaide’s North and South, I believe) and regional areas, ris­ing debt has more than coun­tered ris­ing real wages.

I’ll add more data once I’ve installed an updated ver­sion of Word­Press!

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • cray

    Steve, there is a com­monly stated idea that there is a rental cri­sis.

    Although I agree that this may exist in some high demand areas, city cen­tres, min­ing towns, I feel it could be argued that the cri­sis is in ‘houses avail­able for rent’ not ‘vacant houses’.

    Much of the hous­ing boom has been gen­er­ated by spec­u­la­tion, the fact that RE prices are ris­ing faster than inter­est rates has resulted in a large num­ber of prop­er­ties being bought and sold, being ren­o­vated, or held while owner occu­piers com­plete their move to a new res­i­dence.

    It has been pointed out many times on GHPC that the total num­ber of vacant houses has increased at a greater rate than the pop­u­la­tion growth (from ABS data). This I feel is a hid­den fac­tor that will not cause rents to rise with inter­est rates as stated in your recent debt­watch — hous­ing is NOT at full capac­ity.

    Added to this are the fac­tors involved in spec­u­la­tion on exist­ing realestate — why buy a prop­erty that you expect to grow in price by $50k per year — and then rent it out (with wear and tear and the asso­ci­ated has­sle) for $15K per year. I believe many spec­u­la­tors are ‘hold­ing’ vacant prop­er­ties and an inter­est rate rise is more likely to bring more ‘for rent’ prop­er­ties onto the mar­ket.

    I have not gath­ered any data to sup­port this the­ory yet, but I fele that it is a fac­tor that will come into play in the near future.

  • Hi Cray!

    Your the­ory is worth inves­ti­gat­ing. Assum­ing that it is true, then inter­est rate rise will have an ini­tial pain impact on renters. But in the long run, I think it will have a ben­e­fi­cial impact:

    1. Ini­tial impact: land­lords may raise rents to recoup their increased loan ser­vic­ing costs.
    2. But sus­tained inter­est rate hikes, com­bined will slow­ing econ­omy will result in deflat­ing house prices.
    3. Investors hold­ing vacant houses will have no choice but to (1) liq­ui­date their invest­ment prop­er­ties because falling house price + no rental income is uneco­nom­i­cal or (2) attempt to rent out their houses at lower rental rate. This puts fur­ther down­ward pres­sure on house prices/rental rate. Of course, if house prices deflate faster than rental growth/fall, it will grav­i­tate investors to dump their invest­ment prop­erty.
    4. As house price deflate fur­ther, it will come to a point where renters who pre­vi­ously could not afford to buy houses is able to afford one now.
    5. This result in the num­ber of renters leav­ing the rental pool, thereby reduc­ing the size of rental demand.
    6. As a result, then this will put down­ward pres­sure on rents.

    The gov­ern­ment can cer­tainly help by (1) remove all CGT exemp­tions and (2) Close neg­a­tive gear­ing loop­hole. But this is polit­i­cal sui­cide for any gov­ern­ment to do that.

  • That’s an inter­est­ing obser­va­tion Cray–I might be lazy and ask if you can tell me which ABS data set has that infor­ma­tion. If correct–and I’m sure you know what you’re talk­ing about–then it’s yet another “Catch 22” ele­ment to our hous­ing sys­tem. A “rental cri­sis”, while the num­ber of vacant prop­er­ties has risen faster than pop­u­la­tion…

    Joseph Heller, where are you? -:)

  • Dutchie

    I’m not Cray, but the issue of more houses and even more empty dwellings has been dis­cussed exten­sively on GHPC. One rel­e­vant ABS Sen­sus set: http://www.censusdata.abs.gov.au/ABSNavigation/prenav/ProductSelect?newproducttype=QuickStats&btnSelectProduct=View+QuickStats+%3E&collection=census&period=2006&areacode=0&geography=&method=&productlabel=&producttype=&topic=&navmapdisplayed=true&javascript=true&breadcrumb=LP&topholder=0&leftholder=0&currentaction=201&action=401&textversion=false
    (2/3 down). 

    I even wrote a rather long Memo about this and pos­si­ble solu­tions to the politi­cos and among oth­ers the 7.30 report .… no reac­tion of course. 

    Any­way, my intro was:
    The first fact that jumps out when look­ing at houses is that accord­ing the cen­sus 830.376 pri­vate dwellings are not occu­pied. So 10% of the Aus­tralian dwellings are vacant. How is this pos­si­ble when every­body talks about hous­ing short­ages? Another strik­ing num­ber is that the pop­u­la­tion (and num­ber of ‘families’) increased almost 6% between 2001 and 2006 while the num­ber of dwellings increased over 8%. The aver­age num­ber of peo­ple per dwelling remained con­stant at 2.6. How that is then there is a hous­ing short­age?
    What/where are these unoc­cu­pied dwellings that even increased in num­bers from 717.877 in 2001 (9.2% of all dwellings) to 830.376 in 2006 (9.9% of all dwellings)?

    IMHO the issue of a lack of ‘avail­able’ hous­ing and even so more about ‘avail­able’ land is an issue about hoard­ing for cap­i­tal gain. Even the states keep (semi-devel­oped) land from the mar­ket as they can­not sell it for their ‘wish-price’. This appalling atti­tude can be trans­lated as that state gov­ern­ments want to play the spec­u­la­tion game and pre­vent land prices to come down.
    See e.g. http://www.news.com.au/story/0,23599,22070844–2,00.html

    The only way to force such land on the mar­ket would be to make hoard­ing and hold­ing with­out build­ing puni­tively expen­sive. There are ways to do this, but I won’t hold my breath as the oppo­si­tion to such mea­sures would be fierce.

  • Thanks for the link. I’ll check that data out–it is ver intrigu­ing.

    I’ll be putting out an “elec­tion hous­ing promises spe­cial” of Debt­watch tomor­row, once Rudd has deliv­ered the ALP’s elec­tion launch speech.

    I’ll also be on SBS Insight next week (Tues­day).

  • Hi Steve, Cray and Dutchie!

    I’m intrigued by the the­ory of vacant hous­ing and hoard­ing. I think we must be care­ful here due to the def­i­n­i­tion of ‘vacant’. If you look at this page at the ABS, it says that:

    An unoc­cu­pied dwelling for cen­sus pur­poses is dif­fer­ent from a vacant dwelling. For a dwelling to be counted as unoc­cu­pied in the cen­sus it need only be empty on Cen­sus Night itself. In sit­u­a­tions where the col­lec­tor has not been able to col­lect a form from a dwelling, the col­lec­tor is faced with the choice of record­ing the dwelling as either non-con­tact or unoc­cu­pied.
    It will be inter­est­ing to find out how many of these occu­pied dwelling is indeed vacant. 

  • Cor­rec­tion: The last sen­tence on my pre­vi­ous post is not part of the quo­ta­tion from ABS (i.e. they are my own words) and should not form part of the quote.

  • Yohan

    Cray is cor­rect and you only have to look at the US hous­ing mar­ket to see his the­ory played out in real­ity.

    When prices were ris­ing from 2002–2005 there was a large rental short­age in many of the ‘Hot’ mar­kets in the US. Vacan­cies were at 1 %, with peo­ple lin­ing up to rent prop­er­ties. But as the mar­ket turned south in the last 12 months, the investors tried to sell but were unable to because of over­lever­age.

    These investors were just sit­ting on the prop­er­ties rather than rent­ing them for the rea­son Cray described, but because of their poor cash flow they were then forced to put their invest­ment houses up for rent and the amount of avail­able houses to let has risen con­sid­er­ably. I have seen some sta­tis­tics of vacan­cies going from 1 % to 3 % year over year. Some sub­urbs are hit­ting 7 % vacan­cies, with some RE agents offer­ing 1 or 2 months free rent to get some­one to sign a long term lease.

    This proved that the the­o­ries ‘they are not mak­ing any more land’ and ‘hous­ing rental cri­sis’ were false and there really was no hous­ing short­age.

    The ques­tion is will Aus­tralia fol­low a sim­i­lar path? The only way to alle­vi­ate the rental cri­sis in this coun­try is to see a sus­tained drop in the value of invest­ment prop­er­ties so that the own­ers see rental income as their main source of income rather than 20% a year cap­i­tal appre­ci­a­tion.

  • foun­da­tion

    Hi Con­trar­ian. It’s true that there might be some level of error in the ABS cen­sus data, but this error should be expected to remain rel­a­tively even between cen­suses.

    Regard­ing US over­build­ing, Hired Goon (GHPC) did a lit­tle dig­ging and came up with the fol­low­ing fig­ures:

    - — - — - — - — - -
    US:
    Pop­u­la­tion growth 01–06 : 4.97%
    Dwelling growth 01–06 : 7.18%

    US Over­build­ing 01–06 : 44%

    pop­u­la­tion: http://www.census.gov/popest/states/NST-ann-est.html
    dwellings: http://www.census.gov/popest/housing/HU-EST2006.html

    From the cen­sus, 2001 — 2006 Aus­tralia increased:
    Pop­u­la­tion growth 01–06 : 5.78%
    Dwelling growth 01–06 : 8.17%

    Over­build­ing: 41%
    — - — - — - — - — -

    Now that’s pop­u­la­tion, not house­holds. House­hold for­ma­tion depends on age dis­tri­b­u­tion and social trends. So let’s look at dwellings ver­sus house­holds. From the ABS cen­sus, we have:

    Total pri­vate dwellings (2001) : 7,790,079
    Total pri­vate dwellings (2006) : 8,426,559
    Change 2001 – 2006 : 636,480 (8.17%)

    Occu­pied pri­vate dwellings (2001) : 7,072,202
    Occu­pied pri­vate dwellings (2006) : 7,596,183
    Change 2001 – 2006 : 523,981 (7.41%)

    And we can extrap­o­late:

    Vacant pri­vate dwellings (2001) : 717,877
    Vacant pri­vate dwellings (2006) : 830,376
    Change 2001 – 2006 : 112,499 (15.67%)

    Now onto house­holds. From HOUSEHOLD COMPOSITIONOCCUPIED PRIVATE DWELLINGS, we get the fol­low­ing totals:

    House­holds (pri­vate dwellings — 2001) : 6,744,795
    House­holds (pri­vate dwellings — 2006) : 7,144,097
    Change 2001 – 2006 : 399,302 (5.92%)

    Now that doesn’t seem to tally per­fectly with any­thing above, but take your pick of Occu­pied pri­vate dwellings or House­holds, and it’s clear that build­ing has exceeded house­hold for­ma­tion, hence the rapid growth in the num­ber of vacant dwellings.

    We can also look to the con­struc­tion and build­ing per­mit sta­tis­tics from the ABS, but it’s just more of the same. We’ve built plenty of houses right through the boom, and despite the cries of doom from the HIA (“building insuf­fi­cient houses for under­ly­ing demand”), there is no evi­dence this is true. Even the recent low of 150,000 dwellings per annum (annu­alised) would exceed the require­ments of our cur­rent pop­u­la­tion growth.

    Cheers, F.

    Look for­ward to Insight next week Steve. What’s the topic (please tell me it’s house­hold indebt­ed­ness!)?

  • foun­da­tion

    Oops, I meant to pre­empt the ques­tion “why then is there a rental short­age?” by say­ing that:
    a) Vacancy stats are sup­plied by REIs and are wrong
    b) Spa­tial dis­tri­b­u­tion of vacant dwellings doesn’t match rental demand
    c) Quality/price dis­tri­b­u­tion of vacant dwellings doesn’t match rental demand (as a result of recent trends towards profli­gacy)
    d) Inner-city apart­ments used for ‘ser­viced apart­ments’
    e) ‘Cray the­ory’ of spec­u­la­tive house hoard­ing
    Just a few guesses, I don’t have much to back them up.

  • foun­da­tion

    Shit… sorry, just one more thing. Regard­ing “assum­ing that it is true, then inter­est rate rise will have an ini­tial pain impact on renters”, if his­tory is any guide real rental costs are pretty imper­vi­ous to exter­nal pres­sures. I think prices would crack before rents broke out. You can bor­row your mort­gage but you can’t bor­row your rent! Here’s a bunch of charts I whooped up:
    http://img91.imageshack.us/img91/4893/realrentsvsrealinterestax1.png
    http://forum.globalhousepricecrash.com/index.php?showtopic=24062

    It shows real rent costs have remained incred­i­bly sta­ble over the last 34 years while the real costs of own­er­ship have var­ied wildly. If land­lords truly were able to pass their costs on to renters, I think these charts would be dif­fer­ent.

    Okay, I’m done now. Seri­ously! 😉

  • cray

    Gee, foun­da­tion and Dutchie, thanks I have not had a lot of time recently to fid­dle with this sort of stuff — so its good to see some­one else ‘grab the baton’.

    Steve, look­ing for­ward to next weeks ‘Insight’ usu­ally a good show — I may even send a reminder around work.

  • Thanks for all this dis­cus­sion guys–useful infor­ma­tion and per­spec­tive for me. I agree that a large part of the rental cri­sis may well be apart­ments being kept empty prior to antic­i­pated prof­itable sales. When that expec­ta­tion reverses, then forced rentals may well be the first step before forced sales.

    On Insight, the pro­gram isn’t solely on house­hold debt–it’s on the elec­tion, which it has to be given the tim­ing of the pro­gram. But you can be sure I’ll raise it as the “ele­phant in the liv­ing room” of the elec­toral debate–and I sus­pect that’s a major rea­son why SBS approached me as well.

    Finally, couldn’t agree more with Yohan that “The only way to alle­vi­ate the rental cri­sis in this coun­try is to see a sus­tained drop in the value of invest­ment prop­er­ties so that the own­ers see rental income as their main source of income rather than 20% a year cap­i­tal appre­ci­a­tion.” I’ve put pre­cisely such a rec­om­men­da­tion at the end of an opin­ion piece that will run in The Age (and per­haps the SMH) in the next cou­ple of days. It will form the gist of this week’s blog (which I’m delay­ing a bit till The Age piece comes out) enti­tled “Both Are A Plague on our Houses”

  • Pingback: Contrarian Investors’ Journal » Blog Archive » Myths on the Australian housing/rental crisis & its implications()

  • I believe it is true that hous­ing short­age is a myth. In one of the west­ern Syd­ney sub­urbs, devel­op­ers (e.g. Sky­ton, Mir­vac) are build­ing plenty of apart­ments and houses. In one of the apart­ment blocks, it is 3 years since it was first sold off the plan. Until today, there are still apart­ments unsold in that block alone. Worse still, other devel­op­ers are build­ing more and more apart­ments in the sur­round­ing area. One of the devel­op­ers ran out of money and was refused fund­ing from the bank- the result was that apart­ment block’s inte­rior was unfin­ished and the project aban­doned. Else­where, in a nearby sub­urb, Mir­vac is build­ing a lot of houses, but there are hardly any demand because there are still plenty of vacant houses. It’s obvi­ous why- Mir­vac is still pric­ing these houses at above mar­ket value and refuses to cut price. Worse still, you can see even more houses under con­struc­tion!

    So, we can see that there are over-sup­ply of unwanted new houses in parts of Syd­ney and over-demand of hous­ing in other parts.

  • Dutchie

    IMO there is one other aspect that often is missed in the dis­cus­sion, and that is the link between credit cost for com­pa­nies, hoard­ing and the avail­ablity of land for build­ing. The hous­ing build­ing indus­try is no level ply­ing field any­more (not in finance, not in release size and not pro­vided infra­struc­ture).

    I think there is enough land avail­able, but this land is in the hand of devel­op­ers or land­bankers which can finance their pur­chases and car­ry­ing costs very cheap with inter­na­tional financ­ing. They can afford to carry the costs of own­ing this land with­out any devel­op­ment for a long time. It is in their inter­est to hold or slowly release in order to pre­vent a price decrease. Scarcity will gen­er­ate huge cap­i­tal gain.… for which you can buy more land with low hold­ing costs to grow the port­fo­lio.

    I think you can see this in part in the land sales on the inter­net. Sets of small pieces of sub­di­vided land for sale for months and months with­out any price reduc­tion. Look around Cairns and Mackay where whole cane farms are bought out .… and sit as deserts wait­ing to be built.
    I would love to see hard data which par­ties hold how many titles.

    This is why IMO releas­ing more gov­ern­men­tal land avail­able is a farce. It will be snapped up by those ‘devel­op­ers’ who have the cheap­est financ­ing and they will just hold it. Also the size of the releases make it impos­si­ble for pri­vate par­ties to buy any­thing. So in the end the developers/hoarders will ben­e­fit.

    As said before; IMO the only way to solve the sit­u­a­tion is mak­ing hold­ing land unpro­duc­tive pro­hib­i­tively expen­sive. There is more to it, but to get the gist: e.g. intro­duce a yearly penalty of 20% of the pur­chase price (larger than the expected cap­i­tal gain) for own­ing a third prop­erty title if that block is not being built after three years.

    I think the the dis­cus­sion needs to shift to the ques­tion if you want as soci­ety that essen­tial resources like land and hous­ing are hoarded for cap­i­tal gain. If not, than have a look how you can force such ‘hoarded’ prop­er­ties back on the mar­ket. As a tem­po­rary mea­sure I can even imag­ine you will allow prop­erty to be sold to the gov­ern­ment for pur­chase price indexed for CPI and then have the gov­ern­ment auc­tion 10% of their stock.

    And BTW Steve,
    if you get a chance on Insight pls. let them show that ‘debt vs. GDP’ graph … and the also graph with the low per­cent­age of money being used for new build­ing (which under­mines the whole neg­a­tive gear­ing argu­ment).
    These graphs tell more than 1000 words. Most shows have too much dis­cus­sion and spend no time on the objec­tive facts.

    The prob­lem is not high inter­est rates, but ridicu­lous record debts that peo­ple have taken in chas­ing houses and cap­i­tal gain.

  • Peter M

    Dutchie wrote: What/where are these unoc­cu­pied dwellings that even increased in num­bers from 717.877 in 2001 (9.2% of all dwellings) to 830.376 in 2006 (9.9% of all dwellings)?

    The ABS fig­ures don’t show how many of these unoc­cu­pied dwellings are even intended as ‘invest­ment’ prop­er­ties. I wouldn’t be sur­prised if a large pro­por­tion of these are hol­i­day houses/second dwellings. There has been sig­nif­i­cant growth in the wealth of the top 20% of Aus­tralian fam­i­lies and sec­ond hous­ing is fairly pop­u­lar in that seg­ment. Speak­ing of which it would be inter­est­ing to see how the real mort­gage interest/real wages breaks down in to the var­i­ous quin­tiles.

  • hired­goon

    Hi Peter M, I do agree that hol­i­day houses would account for part of an increase in vacan­cies. It is not noted on the cen­sus whether the build­ing is a hol­i­day home or not, but I think it is a rea­son­able assump­tion that most hol­i­day homes would be out­side of cap­i­tal cities.

    The ABS data is grouped per state and per city, and while the increase in vacant houses is larger for the coun­try over­all than it is for the cap­i­tal cities, the major cities did reg­is­ter an increase in vacan­cies.