Housing affordability Part II

I know that Keith has cited the RBA paper that highlighted the increase in discretionary income over the years contributing to the housing boom. Now an article from the Australian

http://www.theaustralian.news.com.au/business/story/0,,25340236-36418,00.html

cites that real wage growth from 2000-2008 was also a contributing factor in house prices remaining more stable than US. The charts aren't in the online article but are in the print version on page 4.

For discussion.

Cheers

Shane

Hi Shane,

I didn't see the print version or graphs..... these below are taken from the RBAs Luci Ellis in his speech on The Global Financial Crisis: Causes, Consequences and Countermeasures, so I'd guess they'd be similar. They're certainly relevant to the affordability debate. The discussion about the alleged house price 'bubble', needs to be related to the disposable income 'bubble'. We've had relatively low inflation with wages growth 1-1.5% higher - so real wages growth has increased, unlike that of the US. No-one is talking about our increased disposable income being a bubble though .



If real wages falls or flatlines over the long term then house prices could be expected to follow. Conversely, if disposable income increases then house prices will continue to rise faster than wages growth.

how very interesting - food for thought really....

thanks for the update keith.
I noticed the your comment 'nobody has commented on whether growth in australian wages' is a bubble though?'
Do you mean that relative to property or by itself?

One of the things that strike me about America (and i really dont know much about America's economic structure), it seems they have a pretty efficient labour market (with maybe the exception of the GM car workers union).

In Australia our unions are still quite powerful, we also have a more regulated labour market, hence the ability to demand wage increases. But over the long term with an increasingly global village approach to trade, do you think this is sustainable?

I think this effects all of us property owners, both through the ability to afford the underlying asset (ie home buyers) and through future rental income (although i do recognise that rents have significantly lagged property price increases over the last 10 years).

chilliaa said:

thanks for the update keith.
I noticed the your comment 'nobody has commented on whether growth in australian wages' is a bubble though?'
Do you mean that relative to property or by itself?

Click to expand...

Hi chilliaa,

The point I was making is that disposable income has risen at roughly the same rate as house prices. It's just that property bubbles are newsworthy, disposable income bubbles aren't. So relative to property, wages have risen a similar amount. The left hand chart shows that the US in contrast has had house prices rise faster than disposable income. The difference has probably got a lot to do with our commods boom and their cheap mexican labour.

chilliaa said:

In Australia our unions are still quite powerful, we also have a more regulated labour market, hence the ability to demand wage increases. But over the long term with an increasingly global village approach to trade, do you think this is sustainable?

Click to expand...

We have the commods, we don't allow cheap labour to enter the country... while the developing world needs our products, wages will continue to rise. Labour doesn't move as freely in the 'global village'. I reckon they'll be pretty flat till global confidence returns (couple of years?), then after a while people will realise again that houses are cheap.... and the cycle will continue.

chilliaa said:

I think this effects all of us property owners, both through the ability to afford the underlying asset (ie home buyers) and through future rental income (although i do recognise that rents have significantly lagged property price increases over the last 10 years).

Click to expand...

Maybe a new thread exploring what will happen to house prices when technology improves, productivity rises, our wages rise, our standard of living rises, and we have even more disposable income. Will we pay more rent ? Will we spend it on more expensive houses ? Will we blow it on bigger plasmas & smaller iPhones ? Or will we do some sensible, socially responsible stuff for the next generation that won't actually satisfy our 'I want it now' mentality ?

Cheers Keith

Hi Keith

Thx. Those charts were some of the ones in the Australian. I thought the real growth in wages was the interesting bit especially since it was above the rate of growth in housing prices.

Cheers

Shane

Hi Keith,

Thanks for the info, very interesting. Can you tell me if my thinking is correct.

The rate of growth of the median house price over the last 10 years has been roughly equal to the rate of growth in real wages.

So to put it another way, housing has doubled in value in the last 10 years 7% p.a, wages have also doubled in the same time or am I missing something.

Cheers

Benjamin

yes so just to reiterate... if property trades at say 6 times wages, a $10,000pa increase in wages sees a $60,000 increase in the property price.

throw in greater workforce participation and a physical change in a 'median price home' (usually gravitates out from the CBD as each year goes by) and we see why house prices continue to grow. Equally if wages fell the reverse applies. And all this holds true even if the wage growth jsut reflects cost of living adjustements

keithj said:

Maybe a new thread exploring what will happen to house prices when technology improves, productivity rises, our wages rise, our standard of living rises, and we have even more disposable income.

it'll go up over the long term, as usual, in line with inflation and oddball supply/demand curves.

Will we pay more rent ?

we better - WA yields are still crapola

Will we spend it on more expensive houses ?

i doubt it - money is tighter than ever and i don;t see that changing in the forseeable future.

Will we blow it on bigger plasmas & smaller iPhones ?

yep.

Or will we do some sensible, socially responsible stuff for the next generation that won't actually satisfy our 'I want it now' mentality ?

nope.

Cheers Keith

Click to expand...

land - they ain't making any more of it.

plusnq said:

I know that Keith has cited the RBA paper that highlighted the increase in discretionary income over the years contributing to the housing boom. Now an article from the Australian

http://www.theaustralian.news.com.au/business/story/0,,25340236-36418,00.html

cites that real wage growth from 2000-2008 was also a contributing factor in house prices remaining more stable than US. The charts aren't in the online article but are in the print version on page 4.

For discussion.

Cheers

Shane

Click to expand...

How do they work out these wage increases? It's about as accurate as my putting.

My wife is on the same pay after being away overseas for 3 years - she's a nurse.

Satanoperca said:

The rate of growth of the median house price over the last 10 years has been roughly equal to the rate of growth in real wages.

So to put it another way, housing has doubled in value in the last 10 years 7% p.a, wages have also doubled in the same time or am I missing something.

Click to expand...

Wages haven't necessarily doubled, the graph shows they've increased by 30% in real terms (ie above inflation), while in the US they've increased by only 13%.

So assume that 10 yrs ago food,petrol,rent,etc cost $300pw, and nett wages were $500pw, there would be $200pw discretionary left to spend on iPods, plasma & more expensive houses. Today that $300pw of necessary outgoings has increased by inflation, but wages have increased by 30% more than inflation. Say inflation over the 10 yrs has added up to 50%, which means wages increased by about 65%. Using those numbers.... expenses have increased to $450pw, and wages are now $825pw. No big deal...... until you look at discretionary spending...... that's now $375pw ($825-$450).... and increase of 88%..... pretty close to doubling even though wages have only grown at 30% above inflation.

So in answer to your question, wages haven't doubled, but discretionary income has come close to doubling.... and discretionary income is what we spend on stuff that makes us happy, like iPods, and plasma & a better house than the Jones.

Keith, Thank-you for your explanation, that makes it a little clearer.

Were able to find these stats

Average wage 1999 $762 pw
2009 $1164 pw

50% increase in wages over the 10 years or approx 4%p.a growth.
CPI averaged 3.2 pa over the last 10 years
Property 7% p.a

Conclusion, discretionary income has increased over the last 10 years but 88% seems a little to high. Regardless, it does seem a good argument that housing has become more affordable in the last 10 years.

Cheers

Benjamin

keithj said:

Hi Shane,

I didn't see the print version or graphs..... these below are taken from the RBAs Luci Ellis in his speech on The Global Financial Crisis: Causes, Consequences and Countermeasures, so I'd guess they'd be similar. They're certainly relevant to the affordability debate. The discussion about the alleged house price 'bubble', needs to be related to the disposable income 'bubble'. We've had relatively low inflation with wages growth 1-1.5% higher - so real wages growth has increased, unlike that of the US. No-one is talking about our increased disposable income being a bubble though .

If real wages falls or flatlines over the long term then house prices could be expected to follow. Conversely, if disposable income increases then house prices will continue to rise faster than wages growth.

Click to expand...

Thanks Keith for the link, I haven't read all luci ellis report jet but the chart are interesting. To me definetly look like we have a wage bubble. It is very important to keep in mind that at the bottom of all this there is productivity, if wages growth above productivity improvement it is very likely we have a wage bubble. But of course, specially in the short term commodity effect real term wages, but in the long term it really doesn't as pupulation in australia is increasing probably at a comparable amount as the income from resources. Another big player in the wage bubble is the debt bubble, for sure increasing debt level that australia had in the last 10-15 year effect real term wages, I am sure an economist can prove it with numbers, but the logic also is very simple: of course if you take on more debt this goes into the economy and in the pocket of workers and businesses.

We have the commods, we don't allow cheap labour to enter the country... while the developing world needs our products, wages will continue to rise. Labour doesn't move as freely in the 'global village'. I reckon they'll be pretty flat till global confidence returns (couple of years?), then after a while people will realise again that houses are cheap.... and the cycle will continue.

Click to expand...

It is true as I said commods play a role, but the rest like cheap labour is crap. what is the difference of a worker working in US and in AUS? don't we have free trade agreement? How about import duty from China? are they high enough to sustain high wages in australia compare to China (or other asian countries)?

The point I was making is that disposable income has risen at roughly the same rate as house prices. It's just that property bubbles are newsworthy, disposable income bubbles aren't. So relative to property, wages have risen a similar amount. The left hand chart shows that the US in contrast has had house prices rise faster than disposable income. The difference has probably got a lot to do with our commods boom and their cheap mexican labour.

Click to expand...

The question to ask is: productivity in AUS outperform US and other major economy? are Australia wage rise sustainable in the long term? or is it just living beyond our mean?

EDIT: actually this explain why deflation (and high AU$) is bad for the economy, with inflation our wages get within our mean with time passing, with deflation they don't

Blue Card! said:

land - they ain't making any more of it.

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They ain't making anymore Oil, Natural gas and other resources either.

Timeshift said:

They ain't making anymore Oil, Natural gas and other resources either.

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Actually they do but call it Bio-Diesel, Methanol and Methane gas. All you need is vegie oil, sugar cane and pig s**t.

yorke said:

Actually they do but call it Bio-Diesel, Methanol and Methane gas. All you need is vegie oil, sugar cane and pig s**t.

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Of course though, if you break it down and go back to the start, vegie oil, sugar cane and pig crap are all made from oil and natural gas.

See ya's.

topcropper said:

Of course though, if you break it down and go back to the start, vegie oil, sugar cane and pig crap are all made from oil and natural gas.

See ya's.

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You gotta go further back than that TC - oil and natural gas were made from such organic matter in the first place - using it is just recycling dead dinosaurs!

Today the PPI was released by abs and was a surprising -0.4% (to me it confirm deflation in australia that is caused by too much private debt).
The good news is that building cost were down 1.6% on the quarter (biggest fall on record?) and that for sure will eventually lead to more home affordability (even if I'll find very hard to believe that with these data we would have any average wage increase any time soon)

MARCH KEY POINTS


FINAL (STAGE 3) COMMODITIES

* decreased by 0.4% in the March quarter 2009.
* mainly due to price decreases in building construction (-1.6%), petroleum refining (-8.9%) and dairy product manufacturing (-4.9%).
* partially offset by price increases in industrial machinery and equipment manufacturing (+5.4%) and tobacco product manufacturing (+12.8%).
* increased by 4.0% through the year to March quarter 2009.



INTERMEDIATE (STAGE 2) COMMODITIES

* decreased by 3.2% in the March quarter 2009.
* mainly due to price decreases in oil and gas extraction (-25.0%), basic chemical manufacturing (-23.5%), grain, sheep, beef and dairy cattle farming (-11.4%) and petroleum refining (-15.5%).
* partially offset by price increases in motor vehicle and part manufacturing (+7.7%), marketing and business management services (+2.6%) and industrial machinery and equipment manufacturing (+4.0%).
* increased by 3.9% through the year to March quarter 2009.



PRELIMINARY (STAGE 1) COMMODITIES

* decreased by 4.6% in the March quarter 2009.
* mainly due to price decreases in oil and gas extraction (-25.0%), basic chemical manufacturing (-23.4%) and petroleum refining (-15.1%).
* partially offset by price increases in motor vehicle and part manufacturing (+7.6%), marketing and business management services (+2.6%) and industrial machinery and equipment manufacturing (+3.9%).
* increased by 4.3% through the year to March quarter 2009.

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I am not really sure it is related to the PPI but the AU$ fall 2 cents today against the US$ and over 1 cent against the euro and other major currencys.