Australian housing overvalued

Hmm all part of the cycle.

Delloite Access Economics have a great moving chart of periods of 'undervalued and overvalued' over time. According to them, over the last 15 year period there have both been periods where housing was undervalued and periods where they have been overvalued.

I believe they factored in a lot more than price to income and price to rent multiples in their models too.

Ps thanks for the link!
 
Hmm all part of the cycle.

Delloite Access Economics have a great moving chart of periods of 'undervalued and overvalued' over time. According to them, over the last 15 year period there have both been periods where housing was undervalued and periods where they have been overvalued.

I believe they factored in a lot more than price to income and price to rent multiples in their models too.

Ps thanks for the link!

Hi Redom, could you please provide the link for this useful information. It would be really helpful if it provides chart for the state also. Thanks in advance.
 
Francesco - i wish i knew where it was publically available. I've looked and havent been able to locate it. It may have been a presentation i went to last year.

From memory (at around mid 2013), we were entering a period where house prices were 'slightly' overvalued according to his model - but nothing alarming. THere's been some accelerated growth since then, so i'm not sure how their equation has changed.

Cheers,
Redom
 
So the sustainability of a long term commitment should be measured on the basis of whatever interest rates are right at this moment?
The price/rent & price/income ratios don't take the biggest expense into account, so the income/interest paid ratio is an improvement over those measures.

The RBA/Commsec chart I referred to shows Income /Interest Paid is v. close the middle of the 6x to 13x range of the last 25 yrs. OTOH the price/rent & price/income charts are less useful because they only take 2 of the 3 most significant variables into account.

The 1st year of a house purchase is the hardest. After a bit of wage inflation the 2nd yr is a bit easier, and so on, until yr 25 when it's free.... OTOH renting, while a little cheaper in the early years, is far more expensive in yr 25.

Starting a long term commitment is always hard - it's easiest when IRs are low & expected to remain low (especially when fixing rates). The new normal is lower IRs than previous decades, and therefore any ratio or chart that doesn't take that into account is flawed. The RBA who published the chart presumably feel it's relevant, and are likely to reference it when making IR decisions - so Yes it is sustainable.
 
The price/rent & price/income ratios don't take the biggest expense into account, so the income/interest paid ratio is an improvement over those measures.
Just because something can be serviced with the same initial payments doesn't mean that it's equally as affordable.

$300,000 borrowed @ 6%
Repayments of $2000 per month
23 years, 2 months to payoff loan
Total repayments = $555,903

$150,000 borrowed @ 12%
Repayments of $2000 per month
11 years, 7 months to payoff
Total repayments = $278,643

The 1st year of a house purchase is the hardest. After a bit of wage inflation the 2nd yr is a bit easier, and so on, until yr 25 when it's free.... OTOH renting, while a little cheaper in the early years, is far more expensive in yr 25.

Depends on what the renter does with the savings in the initial years. Even owned outright a PPOR isn't "free" to maintain.

The RBA who published the chart presumably feel it's relevant, and are likely to reference it when making IR decisions - so Yes it is sustainable.

The RBA also has a job to maintain financial stability and will do what it takes to achieve that, including publishing data and opinion that downplays risk.
 
Judging by the auction results in my area I am a bit fearful. People are paying lots of money for small things, and my area isn't one with lots of foreign cash either...
 
This chart of ratio of house prices to interest payments is IMO a lot more relevant than price/income or price/rent ratios - neither of which take into account the most important factor of the house purchase equation.

wouldnt a chart of House prices to interest paymetns also be ambiguous as it would depend on what the loans are, ie in an environment where everyone is doing 105% loans then the repayemtns would be higher then say when everyone is doing 80% loans
 
Just because something can be serviced with the same initial payments doesn't mean that it's equally as affordable.
Is it safe to conclude that you think ratios/charts that take into account only 2 of the 3 most significant variables are better than one that takes all 3 into account ?

$300,000 borrowed @ 6%
Repayments of $2000 per month
23 years, 2 months to payoff loan
Total repayments = $555,903

$150,000 borrowed @ 12%
Repayments of $2000 per month
11 years, 7 months to payoff
Total repayments = $278,643
Did you miss the bit about 'new normal' and low interest rates for the foreseeable future ?
10/15yr fixed rates of <7% ?

I'm assuming you agree with the bits of my post that you didn't respond to.


Depends on what the renter does with the savings in the initial years.
That's a completely different strawman. We both know that the vast majority of renters don't put the $$$ they save by renting into something that produces better returns than a PPOR.

Even owned outright a PPOR isn't "free" to maintain.
The point I was making is that the largest expense (ie interest) disappears. The RBA rarely publishes charts/ratios that include trivialities such as maintenance, rates & insurance - do you feel that is important ?

The RBA also has a job to maintain financial stability and will do what it takes to achieve that.....
I agree entirely, and if they feel that the interest paid/income ratio is not sustainable they will act accordingly. It's important to look forward at likely scenarios, and not backwards. Just because we once had IRs of 20%, doesn't mean they WILL happen again in the short/medium term. And in the long term (25yrs) a PPOR is free housing for anyone who starts now.

.....[RBA] publishing data and opinion that downplays risk.
Conspiracy theory much ?
 
wouldnt a chart of House prices to interest paymetns also be ambiguous as it would depend on what the loans are, ie in an environment where everyone is doing 105% loans then the repayemtns would be higher then say when everyone is doing 80% loans
The chart is correctly labeled as income/interest paid ratio ..... my post incorrectly called it interest paid/price.
 
Did you miss the bit about 'new normal' and low interest rates for the foreseeable future ? 10/15yr fixed rates of <7% ?
So replace example with 4.5% & 9%. The point is that lower rates/higher prices relative to income doesn't make it more affordable.

How many borrowers take out 10-15 year fixed rates?

I think I saw a stat the other day that puts 85% of borrowers on variable.

You talk about incomes creeping up making it easier to repay over time, but we have low income growth at present and rates only rising a couple of % could blow out the cost of a mortgage 30% or more.

Conspiracy theory much ?
Not really. It's called jawboning and the RBA does it all the time (for various reasons). If you don't think they downplay financial risk, you are the one with the tinfoil hat :)
 
So replace example with 4.5% & 9%. The point is that lower rates/higher prices relative to income doesn't make it more affordable.
So are you saying higher rates/lower prices make it more affordable ?:confused:

How many borrowers take out 10-15 year fixed rates?

I think I saw a stat the other day that puts 85% of borrowers on variable.
Irrelevant. The point is that the market thinks that IRs for the next 10-15 yrs will average around 7%.

You talk about incomes creeping up making it easier to repay over time, but we have low income growth at present and rates only rising a couple of % could blow out the cost of a mortgage 30% or more.
The market thinks that your scenario is unlikely - IRs will NOT be rising 'only a couple' of %', while incomes will continue to creep up, and people will get promotions & consequently their income will increase faster than the average.


It's called jawboning and the RBA does it all the time (for various reasons). If you don't think they downplay financial risk, you are the one with the tinfoil hat :)
Not as far as housing is concerned -all their recent rhetoric (for over a decade) has been emphasising how risky housing is.

Are you saying that the RBS Income/interest paid chart is not worthy of consideration ?
 
So are you saying higher rates/lower prices make it more affordable ?:confused:
Clearly. Serviceability ≠ affordability.

Pointing at higher prices/lower rates and saying housing is affordable because the debt can be serviced is a farce when the total repaid & risk are both substantially higher (with the house price to income ratio having doubled).

An environment with higher interest rates would also indicate higher levels of inflation, which reduces the debt burden faster.
Are you saying that the RBS Income/interest paid chart is not worthy of consideration ?
It's not a very relevant measure for overvalued/undervalued prices, it makes more sense to measure against income &/or rent.

If you think that it's a relevant measure, then I'd be interested in your take on when housing has been overvalued using that measure [e.g. when it goes above 12% (once in the last 20 years), when it goes above 10% (half the last decade)]? Or is it just that Australian property has never been overvalued?
 
This chart of ratio of house prices to interest payments is IMO a lot more relevant than price/income or price/rent ratios - neither of which take into account the most important factor of the house purchase equation.

Thanks for the link Keith - very interesting to see.

Affordability is strongly correlated to the current interest rate , while assessments of 'valuations' tend to consider broader structural factors at play that affect the housing market. E.g. long term supply issues, policies, etc.

Given movements in rents are a 'stickier' than interest payment ratios, I would think they're a better fit in models that value house prices.

When assessing whether a house price is 'overvalued or undervalued' - they need to make judgements about the 'structural' or equilibrium price level. The actual price of homes is a known quantity (ie median house price). The 'equilibrium' house price is trying to answer 'what should house prices be given the structural features of the economy'. Therefore it should incorporate structural finance issues (e.g. deleveraging of system, access to finance, taxation implications, etc) in this judgement, but not cyclical ones (interest coverage ratios). It would also include a 'neutral' interest rate judgement in the equation.
 
It's not a very relevant measure for overvalued/undervalued prices, it makes more sense to measure against income &/or rent.

If you think that it's a relevant measure, then I'd be interested in your take on when housing has been overvalued using that measure [e.g. when it goes above 12% (once in the last 20 years), when it goes above 10% (half the last decade)]? Or is it just that Australian property has never been overvalued?

Agree with this Hobo-Jo.


Clearly. Serviceability ≠ affordability.

Pointing at higher prices/lower rates and saying housing is affordable because the debt can be serviced is a farce when the total repaid & risk are both substantially higher (with the house price to income ratio having doubled).

An environment with higher interest rates would also indicate higher levels of inflation, which reduces the debt burden faster.


I think if your measuring current 'affordability' of house prices, serviceability is a key factor.

When looking at affordability over time, current serviceability doesn't mean much as the interest rate will have a very large bearing on the serviceability.

Unfortunately this isn't all that well priced in - its what the RBA are worried about and keep harping on about fearing people overextend themselves by relying on todays interest rate.
 
I think if your measuring current 'affordability' of house prices, serviceability is a key factor.

When looking at affordability over time, current serviceability doesn't mean much as the interest rate will have a very large bearing on the serviceability.

Unfortunately this isn't all that well priced in - its what the RBA are worried about and keep harping on about fearing people overextend themselves by relying on todays interest rate.
I have a problem measuring affordability using a snapshot in time or making assumptions such as rates will always stay low, incomes will increase at the rate they have in the past, etc.

Here are two definitions of 'afford':

1. Afford: To have the financial means for; bear the cost of.
2. Afford: To manage or bear without disadvantage or risk to oneself.

Some think that the first defines affordability, if the household has the means to purchase a house (/service the loan) with everything as it stands today, then they can afford it. I lean toward the second definition which is a more holistic view, which is important when looking at a decision that will affect the buyer for many years. In my opinion a household taking on an amount of debt that couldn't be afforded should rates normalize is not able to afford it (as it's a real risk). Which is why I said above:

Serviceability ≠ affordability.
 
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