Housing (un)Affordability

This is a big read and I have only scanned it. The "professional" investors might find it worth close study.

I thought the comments in Box 1 and the two charts below it were interesting.

Sorry guys! :embarassed:

http://www.demographia.com/dhi.pdf

Am I the only one not able to see the article

wow box 2 was interesting too!

I get it now!!

What am I missing?

I appear to be missing some sort of inside joke as well.

Sorry guys. I've inserted the link.

Good publication.... but probably unecessary. After all, in some mystery part of the RBA website it says that housing in Australia is affordable for 99.7% of the population.

rogue said:

Good publication.... but probably unecessary. After all, in some mystery part of the RBA website it says that housing in Australia is affordable for 99.7% of the population.

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The other 0.3% is sleeping on the streets.

Looking at the "affordable" Canadian cities listed they are generally not attractive places to live. Either in the middle of nowhere or polluted heavy industry - steel mills and nickel refineries.

The sort of places you live because you have to - not because you choose to. A possible exception for St John (NB) and St John (NL) - I have never been there - they could be nice - but being located on the East Coast theres not much business activity out that way.

By comparison the "unaffordable" places all tend towards the highly attractive end - Vancouver is listed as #15. Not surprising because its arguably the best place in Canada to live.

I dont doubt that prescriptive planning - like the London Green Belt - drive up prices. But theres a hell of a lot to be said for prices being high in nice places and being low in crap places irrespective of planning laws.

The Sunshine Coast is listed as being highly unaffordable in Qld - but that completely misses the point. People that live in Brisbane and Sydney buy on the Sunshine Coast to retire. The locals may not be able to afford it but that doesnt matter because there are enough retirees to prop up the prices flooding in from out of the area. So long as the Sunshine Coast remains attractive to outsiders this pattern will continue.

Kelowna in British Columbia, Canada is rated as the most "unaffordable" market in Canada. But again - its a popular retirement area. Likewise Victoria also in British Columbia.

Detroit was voted by Americans in 2006 as the place they would least want to take a holiday - and big surprise its the 12th most affordable place listed. Windsor which is directly across the river linked by a number of bridges and suffers from its association with Detroit is also 12 equal. I dont think this has anything to do with planning laws.

If demand alone were the cause of housing price increases, then prices would have increased strongly in Ottawa, Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Kansas City Austin and the host of other markets that have remained affordable even in the environment of more liberal credit and heightened speculation (Box 1).

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I can only speak for Ottawa because its the only city I know well - but its a government town just like Canberra. The only industry there is working for the government. This doesnt create a lot of economic drivers for growth - hence theres no significant demand there.

LOL this takes the cake:

A household moving from Vancouver to Winnipeg would save nearly $1,000,000 in
purchase and mortgage costs for the median priced house. This is the equivalent of 16
years median household income in Vancouver income levels or 17 years in Winnipeg
rates. This is the equivalent of 40 percent or more of a 40-year career pre-tax income. [...] Differences of this magnitude have arisen only in this decade and are unprecedented.

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Winnipeg is known as "Winterpeg". Its permanently winter there and 40 below. Its famous for the winds that come screaming down the main street. No one in their right mind would live there if they could avoid it. There are plenty of people, myself included, that would happily live in a low standard of housing in Vancouver rather than a high standard of housing in Winnipeg.

boomtown said:

By comparison the "unaffordable" places all tend towards the highly attractive end - Vancouver is listed as #15. Not surprising because its arguably the best place in Canada to live.

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That's a pretty weak argument. Belfast is number 10 on the list and i can guarantee you it is neither very attractive or desirable - in fact very plain and dull.

What about Bundaberg (#20)? Or Bunbury (#33)?

And Mandurah might be an attractive place to live... but how is it more attractive then any other regional coastal town? Why should it be the most unaffordable city in Australia?

hmmmm. very interesting.

Australia (with New Zealand) has the most unaffordable housing in the surveyed nations, with an overall Median Multiple of 6.3, more than double the Median Multiple ceiling.

There are no 'affordable' markets in Australia and there are no 'moderately' affordable markets. 25 of the 28 markets are rated 'severely unaffordable'. All of the capital cities (Sydney, Perth, Melbourne, Brisbane and Adelaide) are rated 'severely unaffordable'. The best ratings are 'seriously unaffordable' in three smaler markets, Maitland (NSW), Ballarat (Vic) and Bendigo (Vic).

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Nothing new about this report and the blunt use of the ratio of median house price to median household income. To make matters worse, just apply this ratio across countries, whether there is comparability of formation of new households or not.

What do I know - the ratio looks nice and comparable, regardless! It gives a veneer of scientific integrity.

The information in the report that resonates with me is where it cites urban planning as contributing to the 'unaffordability' problem. Of course, existing residents like the neighborhood just as they are and so will want any further building around their houses to be restricted. This restricts land for building in the inner suburbs and drives up housing cost. Urban planners will want their say as to what can be built, satisfying all housing constraints, such as restrictive plot ratios. This drives up cost of building on the plot of land. Govt wants easy revenues from captive customers and pile up on the rates, land tax, water levy, stamp duty, etc.

"There are no 'affordable' markets in Australia"


lol, for those that love boom stats

rogue said:

That's a pretty weak argument. Belfast is number 10 on the list and i can guarantee you it is neither very attractive or desirable - in fact very plain and dull.

What about Bundaberg (#20)? Or Bunbury (#33)?

And Mandurah might be an attractive place to live... but how is it more attractive then any other regional coastal town? Why should it be the most unaffordable city in Australia?

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I can't comment on Belfast I have nfi about it.

Re: Bundaberg, Bunbury and Mandurah - can it be explained that these are either beneficiaries of the mining boom (fly in fly out workers live there) or retirement areas? Generally if prices are high there is a hard economic driver you can point to rather than just the city council is restrictive.

To take another approach, Noosa has a very tough city council and that in itself makes it a very attractive place to live. I bet Noosa is off the charts in terms of affordability. Just like Whistler in Canada, Aspen in Colorado and Monaco would all be off the charts in terms of affordability. Just because a bank teller or teacher in Monaco can't afford to buy a median priced home doesn't mean that prices are going to come down any time soon though.

Very interesting link thanks. Australia might look more expensive when comparing country to country, but when you compare major cities with major cities it's a different story altogether. We don't have extremely cheap houses (median 100-200k) in smaller cities to drag the average down.

Francesco said:

Nothing new about this report and the blunt use of the ratio of median house price to median household income. To make matters worse, just apply this ratio across countries, whether there is comparability of formation of new households or not.

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Yes, there are many flaws in the Demographia survey. Median house price to median income is a very blunt tool. The survey fails to consider the following factors:

- Disposable income
- General cost of living
- Interest rates
- Rental yield
- Tax incentives such as negative gearing
- Block size (blocks in Sydney are bigger than in London for example)
- Dwelling size and quality
- Proximity to transport and infrastructure

It is comparing apples with oranges.

The other issue with the Demographia survey, is that it only compares Australia with five other countries, yet the media proceeds to claim that Australia is the most expensive in the world. The survey conveniently ignores all the cities in the world with much higher house prices than Australia. For example Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore, Monaco...

Here are some alternative studies...

GlobalProperty Most Expensive Cities 2008 (apartment price per sqm):
http://www.globalpropertyguide.com/investm...-cities-in-2008
Sydney - Number 13: US$7,085 per sqm

Mercer Most Expensive Cities (cost of living, including housing)
http://www.mercer.com/costofliving
Sydney - Number 21

CityMayors Expensive Cities
http://www.citymayors.com/economics/expensive_cities2.html
Sydney - Number 24

Knight Frank Survey (prime residential property)
http://www.finfacts.com/irelandbusinessnew..._10010019.shtml
Sydney - Number 8: EU$13,100 per sqm

Overseas Property Mall Survey
http://www.overseaspropertymall.com/proper...tional-markets/
Average home values for select 2,200 square foot single-family dwellings with four bedrooms...
Tokyo - $785,818
Sydney - $683,109

Aneki (most expensive countries to live in)
http://www.aneki.com/expensive.html
Australia - Not shown in the top 20

Most expensive countries in the world
http://www.associatedcontent.com/article/1...the.html?page=2
Australia - Not in the list

Most expensive rental markets
http://www.forbes.com/2008/02/11/properties-world-rent-forbeslife-cx_mw_0212realestate.html
Australia - Not in the list

rogue said:

That's a pretty weak argument. Belfast is number 10 on the list and i can guarantee you it is neither very attractive or desirable - in fact very plain and dull.

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Rogue, I am from Belfast. I lived most of my life in Northern Ireland. I can say that Belfast is a great city, especially now that they're not all blowing each other up! Belfast is a very old city with a lot of character.

(Sydney is better of course, that's why I'm over here now!).

rogue said:

Good publication.... but probably unecessary. After all, in some mystery part of the RBA website it says that housing in Australia is affordable for 99.7% of the population.

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Here is the chart that shows that 99.7% of Australian mortgage holders are coping just fine with their mortgage repayments - i.e. that they can afford their homes.



The chart is included in the RBA report below...

http://www.rba.gov.au/PublicationsAndResearch/FinancialStabilityReview/

Shadow.

rogue said:

hmmmm. very interesting.

There are no 'affordable' markets in Australia and there are no 'moderately' affordable markets. 25 of the 28 markets are rated 'severely unaffordable'. All of the capital cities (Sydney, Perth, Melbourne, Brisbane and Adelaide) are rated 'severely unaffordable'. The best ratings are 'seriously unaffordable' in three smaler markets, Maitland (NSW), Ballarat (Vic) and Bendigo (Vic).

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And according to the report Syd & Melb haven't been affordable since 1981, and all capitals (except Perth) have been severely unaffordable since 1991. So is the Demographia report relevant to Australia today ? It says we've been out of whack for over a generation, so isn't it time to look at why.... has anything changed ? Is average income still relevant to house prices ? Are there other things apart from AWOTE that might be relevant ?

If ratios revert to what Demographia considers affordable, then average Syd prices revert to $150-200K - of course some blocks will be cheaper and lots will be more expensive. Will a nice big block on the harbour continue to be around 5 times the average Syd price - if so, then I'll take half a dozen please .

Demographias methodology is flawed - AWOTE is not a valid measure of what house prices should be when supply is restricted.

keithj said:

And according to the report Syd & Melb haven't been affordable since 1981, and all capitals (except Perth) have been severely unaffordable since 1991. .

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Does it say that Keith? Surely houses in Australia were cheap in 1997 to 1999, when positive cashflow was common. Looking at this chart,....






Rental yields were about 5.5% in 1997, and interest rates were about similar. Surely property was very cheap then, and history would show that it was, as that's when the boom started. It would be good to overlay interest rates onto this chart, over rental yields.

Going back further, 1989, the yields were only 5.5%, and interest rates were terribly high, and that was the start of the property bust that saw falling or flat prices untill about 1997, when prices were cheap again.

Going back further, 1987, yields were 9%, although interest rates were still high, about 11% ...???. This was the start of the 87 to 89 boom.


Not trying to over analise here but I suppose I am. To me property is only worth what people can pay for it. Land when it's used for agriculture has a fundamental worth. It's worth what you can make off it. As soon as it turns into real estate, it's speculative, and it's worth what someone can afford to pay for it. The amount people have been able to pay for property has been increasing until this latest economic slump. I believe people have less to pay for property right now with the increased energy, food and interest rates.

See ya's.

topcropper said:

Does it say that Keith? Surely houses in Australia were cheap in 1997 to 1999, when positive cashflow was common. Looking at this chart,....

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Hi TC,

According to their graph (p13) and rankings -

Housing Affordability Ratings
Affordable 3.0 or Less
Moderately Unaffordable 3.1 to 4.0
Seriously Unaffordable 4.1 to 5.0
Severely Unaffordable 5.1




everything has been unaffordable since 1981..... IF AND ONLY IF you solely use average wages as a measure. They fail to consider all the things Shadow mentioned above, and the things (like IRs & yields) you mention below.

topcropper said:

Rental yields were about 5.5% in 1997, and interest rates were about similar. Surely property was very cheap then, and history would show that it was, as that's when the boom started. It would be good to overlay interest rates onto this chart, over rental yields.

Going back further, 1989, the yields were only 5.5%, and interest rates were terribly high, and that was the start of the property bust that saw falling or flat prices untill about 1997, when prices were cheap again.

Going back further, 1987, yields were 9%, although interest rates were still high, about 11% ...???. This was the start of the 87 to 89 boom.

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I agree - all this is v. relevant, however the 48 page report ignores all that stuff - it solely uses average income.

topcropper said:

Not trying to over analise here but I suppose I am. To me property is only worth what people can pay for it. Land when it's used for agriculture has a fundamental worth. It's worth what you can make off it. As soon as it turns into real estate, it's speculative, and it's worth what someone can afford to pay for it. The amount people have been able to pay for property has been increasing until this latest economic slump. I believe people have less to pay for property right now with the increased energy, food and interest rates.

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I agree with you - houses are worth what emotional people are able & willing to pay. Productive land, shares etc are worth what hard nosed & unemotional investors are prepared to pay - again two different markets.

So IP investing is somewhere along the speculation scale - same as speculating that BHP will increase it's dividend next year & the govt will not renage on it's promise to pay interest on the bonds it issues.

Reports like this one compare countries with hugely different characteristics - eg pop growth, planning laws, IRs, taxs, and then use a single crude measure (ie average wages) to make comparisions. The whole report is flawed IMO.

Cheers Keith