Whitney Fitzsimmons’ interviewed Chris Joye and myself on house prices for the ABC’s Business Today last week, and the 11 minute segment ran last Friday. The Business Today site doesn’t allow you to embed a given interview, so I’ve saved it onto my blog for viewing here.
I made one stuff-up, as can happen in an interview—I said that house prices had risen 20 percent “last year” when I meant “under the influence of the First Home Vendors Boost”. The actual period of the rise was from March 2009 till March 2010 (and it was an 18.8% rise in nominal terms and a 15.5% rise in real terms).
Whitney also got one datum wrong in her questions—that a forecaster had predicted a 0.5% fall in house prices—which I dismissed; in fact he had predicted a 5% fall in prices, which is more in the ball park of what I expect. Whitney corrected this in her intro, which was recorded after the interview.
Chris and I didn’t have one debate I expected, on whether house prices are expensive when compared to incomes. We’ve since had that at a debate today at the Portfolio Construction “Bubble, Bubble, Toil and Trouble Summit”. Chris trotted out his comparison of house prices to incomes which asserts that the house price to income ratio in Australia is only about 4.4 to one (versus the Demographia estimate of 7.1), and that the ratio hasn’t changed all that much in recent years.
I dispute Chris’s calculations, and I was asked by The Age to do longer range comparisons of house prices to disposable incomes, which gave me the impetus to see what the long range data shows (most of Chris’s statistics go back no earlier than 1982, the year before the First Home Vendors Grant was introduced and began to distort the market).
My chart compares the median house prices in Sydney and Melbourne to average household disposable income per house. This comparison therefore includes the impact of changing demographics—the trend from one to two income families–and it records house prices against the income actually available on average to pay the mortgage. It also avoids the fallacy of comparing house prices to forms of “income” that simply can’t be used to pay the mortgage—such as the imputed rental “earned” by owner-occupiers by living in their own home rather than renting.
The inputs to this calculation are:
- The ABS median house price series for capital cities, which began in 2002 (ABS 641602);
- Nigel Stapledon’s calculations of median house prices in Sydney and Melbourne from 1880 till 2005 (Long Term Housing Prices in Australia and Some Economic Perspectives);
- The ABS data on Australian population (ABS 32220ds10_summary_statistics_2006-2101); and
- ABS data on the housing stock ((ABS 4102) plus Building Activity ( ABS 87520037) since the last housing stock data in 2009.
The results are stark. The median house price in Melbourne was less than 2 years average disposable income per house in the 1960s, and between 1.5 and 3 times that in Sydney. The ratio in both cities then took off under the influence of the property bubble inspired by the second incarnation of the House Price Vendors Grant in 1988, to reach a level of 2.5 in Melbourne—still not particularly high—but 4.5 in Sydney.
Prices then went sideways compared to incomes until 1997, when the level of lending for housing finally kicked in and started house prices rising again—so it is clear that rising debt played the major role in setting off the bubble.
Then the Howard Government first reintroduced the First Home Vendors Boost (as a temporary measure to get the housing industry over the impact of introducing the GST) and doubled it in 2001 (to ward off a feared recession), and the price took off even more—reaching an all-time high of 8 in Sydney and hitting the 4.5 range in Melbourne.
A correction began in Sydney in 2004—more by disposable income rising than by nominal house prices falling—with the ratio falling to 5.5. The ratio instead flatlined at the 4.5 level in Melbourne.
The final stage to date in this act was Rudd’s doubling of the First Home Vendors Grant, which turned around the trend for the ratio to fall with yet another mini-bubble. The ratio rose again to 6.5 in Sydney, and hit the all-time record of 5.7 in Melbourne—thanks to the Victorian Government’s turbocharging of the Federal grant with its own giveaways.
Is that a bubble? Is the Pope a Catholic?
Over to Whitney’s interview of Chris and me.Steve Keen’s Debtwatch Podcast