Affordability chart interpretation?

[ArJay]

Hey Folks...

Just wanted your opinions on some data I've compiled on affordability so all you armchair economists fire away...

First off just a quick explanation. I've taken the median price data as supplied very kindly by Twitch in this thread and divided it by the average yearly earnings for the same period sourced from the ABS website.

IMO the end result looks quite disturbing...

Am I missing something or are homes consistently becoming less and less affordable?

I haven't adjusted for interest rates etc but thought that the basic comparison of the average wage versus the median price would give a true indication of affordability.

Here's a link to the SS which I couldn't upload here due to the size.
http://www.mediafire.com/?setmadyqt3w

Rory

 

[MarkB]

Nice graph which you have obviously gone to alot of trouble to compile.

If I may, a couple of comments from a stats pov.

- Rather than wages, "household income" would probably be a better measure [your graph doesn't account for cases where two members of a family both work], and

- I think also that it's more meaningful to compare averages with averages, or medians with medians, but not averages with medians, and vice-versa.

- Notwithstanding the points above, imho "affordability", from the pov of the consumer, is a function of two things: (1) incomes, and (2) deposits (equity contributed). Graphs like this can capture the first of those factors, but not the second.

M

 

[ArJay]

Thanks for the input Mark.
Good points...

I'm going to try and scrape up some household income stats (if avail) and plug them in.

R

 

[ArJay]

Ok...

Got what household income data I could from the ABS website (not much) and plugged it into the SS. Took the Median Household Incomes and divided them by the Median House Price to give a percentage.

Results look quite different....

Like you were saying Mark, the increase in household incomes over the same period significantly changes the affordability.

I guess this still doesn't take into account interest rates but overall still interesting.

As a further point...in days gone by we could see that the average income versus the median price was much closer. Does this mean that currently you almost certainly require a double income household to afford buying into RE?

R

 

[MarkB]

Got what household income data I could from the ABS website (not much) and plugged it into the SS. Took the Median Household Incomes and divided them by the Median House Price to give a percentage.

Results look quite different....

Very nice work

Like you were saying Mark, the increase in household incomes over the same period significantly changes the affordability.

Yes, though even I have to admit I'm a little surprised by the difference in the two graphs

I guess this still doesn't take into account interest rates but overall still interesting.

If you include interest rates, why not property taxes, rental returns, etc and so on.

My point being that once you head down that path, where do you stop? You'll keep going and going and eventually end up with what amounts to a price model (though how accurate it is would be open to great debate). [That's me being cynical about RE price models in general - even the ones done by the "experts"]

Imho it's fine as it is.

As a further point...in days gone by we could see that the average income versus the median price was much closer. Does this mean that currently you almost certainly require a double income household to afford buying into RE?

Other things being equal, yes.

Human nature compels us to spend what we can afford to on a house (I'm generalising) - so with more double-income households out there, prices get bid up and up - and the single income households get left behind.

M

 

[BV]

ArJay

What does the % represent?
Why is Sydney nearly like a flat line?

Cheers

 

[ArJay]

Hi BV.

Sorry the percent is the percentage of the capitals median household income versus the same capitals median house price.

ie. if the med income for is $30k and the med house costs $300k then 10%.

Basically the higher the percentage the more "affordable" the market.

R

 

[Witzl]

ArJay - thats a VERY interesting graph... certainly wouldnt ever see that second graph shown on TodayTonight/ACA/etc.

You can certainly see the sharp decline of housing affordability in Perth during the recent boom. Also interesting to see all the capital cities have sharp drops in affordability over the 2001-2002 period.
I wonder if you had the data for 2007 it would show the affordability in melbourne decreasing and sydney increasing?

... i love stats sometimes.

 

[ArJay]

Hey Wiltz..

Yeah it's a good one to watch and will be interesting when they release last year's data. Will plug it in when they do...

R

 

[WinstonWolfe]

http://www.aph.gov.au/LIBRARY/Pubs/rn/2006-07/07rn08.htm
pros and cons of main affordability indices

http://economics.hia.com.au/publications/Pubs.aspx

http://www.reia.com.au/market_reports/pub_details.asp?id=6
have a look at the sample report