Australian housing bubble 'yet to burst'

[komstak]

AN international group has predicted that the housing bubble in Australia is yet to burst.

The public policy group Demographia says a comparison of median house prices with median household incomes in Australia, Canada, Ireland, New Zealand, Britain and the US found Australia has the most cities in the "severely unaffordable'' category - where house prices are more than five times the median income.

http://www.news.com.au/business/money/story/0,28323,24963180-5013951,00.html

 

[kum yin lau]

Hi, I well remember my 1st house. It cost $166200. My annual wage was $13000 gross out of which compulsory super + insurance etc took $1800.

Did I get into trouble? Yes, plenty and for all of two years. Then interest rates dropped right down & I'd paid back a bunch in 2 years.

So when I purchased that house in all naivete, it was more than severely unaffordable. It was 20x my annual wage.

Who rules that houses are 4x annual wage?

Btw, that house sold for $310000 after 10 years.

KY

 

[tubs]

Who rules that houses are 4x annual wage?

Steven Keen apparently.

Of course, affordability for a house should be based on disposable income, not overall income.

Such 'indicators' do not take into account variables such as tax paid on the income, cost of living, whether both partners are working, etc etc etc.

We can only pay our houses with what's left of our income once everything else is taken out. Such indicators are meaningless unless they show this.

 

[evand]

The 'disposable income' defence is not relevant imo in the affordability debate.

I always thought disposable income is money left after all living expenses were paid. Including mortgage payment or rent.

Why don't you include the mortgage payment in the group you call "everything else is taken out"

What is the reason you think a mortgage is only to be paid with the money left over?

Such 'indicators' do not take into account variables such as tax paid on the income, cost of living, whether both partners are working, etc etc etc.

We can only pay our houses with what's left of our income once everything else is taken out. Such indicators are meaningless unless they show this.

 

[andrew_de_a]

The 'disposable income' defence is not relevant imo in the affordability debate.

I always thought disposable income is money left after all living expenses were paid. Including mortgage payment or rent.

Why don't you include the mortgage payment in the group you call "everything else is taken out"

What is the reason you think a mortgage is only to be paid with the money left over?

Disposable income is whats left over after the government has taken its taxes. Anything that you pay for after tax is taken from your disposable income.

 

[evand]

So, are you saying Tubs' definition is incorrect?

Heres a pretty good explanation:

http://en.wikipedia.org/wiki/Disposable_income

Disposable income is whats left over after the government has taken its taxes. Anything that you pay for after tax is taken from your disposable income.

 

[andrew_de_a]

i used the ANZ's

http://www.anz.com/edna/dictionary.asp?action=content&content=disposable_income

from my recent search i think there are a few interpretations

 

[Sunfish]

I always thought disposable income is money left after all living expenses were paid. Including mortgage payment or rent.

I'd call that "discretionary" not "disposable". But that's just me.

 

[tubs]

All fair enough.

The point I'm really trying to make is that income should not be used as the benchmark for affordability.

Affordability really comes down to what people can afford (in practical terms) to pay.

Yes, it all comes down to discretionary spending. People choose to forgo some things to have others. But in real terms, if tax rates are low, both partners are working and the general cost of living is low, it is easier to afford to pay off a loan several times higher than your income, than if all these other factors went the other way.

 

[VYBerlinaV8]

I am starting to wonder whether 'affordable' is even that relevant. Whether or not you can afford a house is based on a range of variables, including your desire to own. The argument that 'housing must get cheaper because people can't afford to buy it' doesn't really wash for me, simply because there are plenty of places around the world where housing, by our standards, is extremely expensive. In such places, Joe Average rents rather than buys, which is what I suspect you'll see happen in Australia over the next 20-30 years.

I plan to be one of the people Joe Average rents from.

 

[keithj]

The 'disposable income' defence is not relevant imo in the affordability debate.

I always thought disposable income is money left after all living expenses were paid. Including mortgage payment or rent.

Why don't you include the mortgage payment in the group you call "everything else is taken out"

What is the reason you think a mortgage is only to be paid with the money left over?

I think some of us are getting a little confused.

Disposable income is gross income minus income tax on that income.[1]
Discretionary income is income after subtracting taxes and normal expenses (such as rent or mortgage and food) to maintain a certain standard of living.[2] It is the amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of:
Discretionary income = Gross income - taxes - necessities

So after paying for necessities (ie food, clothes, travel, rent or mortgage expenses of ~3x income) there is some discretionary income left over for spending on wants and not needs.

This discretionary income has been growing at around 6% pa, even though wage growth has been lower.

People are choosing to spend this discretionary income on stuff that makes them happy - like iPods and plasma..... and more expensive houses than the Jones because they can - it is at their discretion.

The 3x median income ratio may have been relevant 15 yrs ago before people had significant discretionary income. People used to spend their discretionary income on nicer clothes, a movie once a month or an occasional nice meal out. Nowadays discretionary income is a much more significant proportion of total disposable income, so they can afford to spend on all that & more. This is because of low inflation (~3%) and slightly higher wages growth (~4-5%). The 'needs' have risen at CPI, while wages have risen faster, so there's significantly more discretionary income available for the 'wants'. Over the last 15 yrs of low inflation, people have had more discretionary income so they can spend more on things that make them happy.

What have people chosen to spend their excess discretionary income on ? - new mobile every year, new ute every 2, matching iPods, bigger plasma than the Jones, and a bigger house. If wages continue to rise faster than CPI and consequently discretionary income continues to rise, what will people choose to spend their excess $$ on in the future ? Some will put more into their plasma repayments, car loans and mortgages over the next 3 years. Then people will realise that there's a house in the next suburb in that they can afford seems cheap, they've been paying down debt for the last 3 years so they deserve a reward..... and it's bigger & better than the Jones.

Will wages continue to rise faster than CPI in the medium term ?

 

[BV]

I thought some of you would like to see your worst affordability ranking so here it is:

RANKING, LOCATION, MEDIAN MULTIPLE,

1 Australia Sunshine Coast, QLD 9.6
2 United States Honolulu, HI 9.1
3 Australia Gold Coast, QLD-NSW 8.7
4 Canada Vancouver, BC 8.4
5 Australia Sydney, NSW 8.3
6 United States San Francisco-Oakland, CA 8.0
7 United States San Jose, CA 7.4
7 Canada Victoria, BC 7.4
9 United States San Luis Obispo, CA 7.3
10 Australia Bundaberg, QLD 7.2
10 United States Los Angeles, CA 7.2
12 Australia Adelaide, SA 7.1
12 Australia Melbourne, VIC 7.1
14 Australia Mandurah, WA 7.0
14 United States New York, NY-NJ-PA 7.0
16 United Kingdom Belfast, Northern Ireland 6.9
16 United Kingdom London, England 6.9
16 United States Santa Cruz, CA 6.9
19 Canada Kelowna, BC 6.8 51 Ireland Cork 5.4
19 United Kingdom Southwest Region,
19 Australia Wollongong, NSW 6.8
22 United Kingdom London Exurbs, England 6.7
23 Australia Newcastle, NSW 6.6
23 New Zealand Taraunga-W. Bay of Plenty 6.6
25 Canada Abbotsford, BC 6.5
26 New Zealand Auckland 6.4 55
26 Australia Perth, WA 6.4 55
28 Australia Brisbane, QLD 6.3
29 Australia Hobart, TAS 6.2
30 Australia Cairns, QLD 6.1
30 New Zealand Christchurch 6.1 60
32 Ireland Dublin 6.0
32 Australia Geelong, VIC 6.0
34 United Kingdom Aberdeen, Scotland 5.9
34 Australia Albury-Wodonga, NSW-VIC 5.9
34 Australia Darwin, NT 5.9
34 Australia Rockhampton, QLD 5.9
34 United States San Diego, CA 5.9
34 New Zealand Wellington 5.9
40 Australia Mackay, QLD 5.8
41 Australia Townsville, QLD 5.7
42 United States Bridgeport, CT 5.6
42 Ireland Galway 5.6
42 Australia Launceston, TAS 5.6
42 Australia Maitland , NSW 5.6
42 United States Miami-West Palm Beach, FL 5.6
47 United States Boulder, CO 5.5
47 New Zealand Dunedin 5.5
47 United Kingdom Edinburgh, Scotland 5.5
47 United States Santa Rosa, CA 5.5
51 United States Oxnard, CA 5.4
55 Australia Bunbury, WA 5.2
60 Australia Canberra, ACT-NSW 5.1

 

[BV]

and here is the whole article

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

 

[contrary]

I think some of us are getting a little confused.
The 3x median income ratio may have been relevant 15 yrs ago before people had significant discretionary income. QUOTE]

It is one of those strange things in debt deflation that the price of assets declines and debts remain the same. They eventually have to be written off or paid off with wages/earnings. That is why the income ratio is relevant. When expected capital return becomes zero or negative, people will have to repay their debt or try to write off the debt. The explosion in real estate values in the last 10 years may have to do with discretionary income or it may have had to do with deregualtion of lending markets, disintermediation and easier credit and increasing leverage. This I think is a very different cycle to the bull market correction that accompanies a spike in interest rates. The interest rate correction passes. This may not pass so quickly and is one reason why credit crissis collapses extend for longer, my estimate is that we may not see the bottom for the stockmarket for another 2-4 years and property will not bottom for another 6-10 years. Property has only started it's downleg. The debt deflation cycle may take a long time. Leave plenty of powder dry. I intend to have enough to buy at asx at 2000 and property down 50%.

 

[hpc08]

I think the number of transactions on the Sunshine Coast and Gold Coast has dropped dramatically as buyers and sellers cannot agree on price. The local people cannot afford the real estate on their relatively low wages. Therefore, people from out of town have bought holiday or investor properties.

Surely these areas are vulnerable to a correction given the tendency of people to sell investments when the market softens. I expect some very cheap properties in these two areas soon.

 

[turk]

I think some of us are getting a little confused.
I intend to have enough to buy at asx at 2000 and property down 50%.

Hi Contrary

Is that plan A, what are your back up plans should this situation not eventuate?

What is your time line for this scenario?

Cheers Pete

 

[asdf]

All the stats say to me is that rich people are flocking to those areas and if you scan the Top 10, those are places where people WANT to live or seek a better lifestyle. The locals can never compete with money brought in thats been earnt elsewhere. Which means the unfortunate "not so rich" folks, earning the local median wage will have to rely on journos sensationalising their area in a vain attempt to bring prices down. There are some magnificent new homes up in the Sunshine Coast, still much much cheaper than new stock in Syd or Melb.

So if you're still picking up the dole cheques at Mudjimba I think you might have to head much further inland as the local Centrelink office is about to be sold to another developer...

 

[evand]

The property market wont burst. It will deflate slowly due to lack of demand/affordability, losing say 5% - 10% pa over 5 or so years.

Same scenario as in the 90s, no one really notices it happening. Its called wealth erosion by stealth.

 

[Property Meister]

The property market wont burst. It will deflate slowly due to lack of demand/affordability, losing say 5% - 10% pa over 5 or so years.

Same scenario as in the 90s, no one really notices it happening. Its called wealth erosion by stealth.

so 10% pa drop at 5 years is a 50% drop??

or 5% drop at 7 years is 35% drop??

is this your predictions?

 

[Token Funder]

The property market wont burst. It will deflate slowly due to lack of demand/affordability, losing say 5% - 10% pa over 5 or so years.

Same scenario as in the 90s, no one really notices it happening. Its called wealth erosion by stealth.

Other than some *really* nasty pockets (high-end SE QLD & Sydney in particular) that's what we're seeing/expecting/hoping for. The growth over the last cycle can't continue but as at today I'm still betting on stagnation (slow reduction in real terms) over the next couple of years.

Optimistic we can climb down the cliff rather than fall off assuming the recession is moderate and less than 12 months.