Demographia 2011

Graemsay

Graemsay

The new Demographia report on affordability has been released, and there's a bit of coverage at The Age.

To save you reading, the top ten most expensive markets (median multiple in brackets) are:
  1. Hong Kong (11.9)
  2. Sydney (9.6)
  3. Vancouver (9.5)
  4. Bournemouth and Dorset (9.3)
  5. Coff's Harbour (9.1)
  6. Melbourne (9.0)
  7. Honolulu (8.5)
  8. Sunshine Coast (8.4)
  9. Warwickshire (8.1)
  10. London / Plymouth and Devon (tie) (7.9)
I'm disappointed. The UK is supposed to be having a housing bust, and we occupy three of the top ten positions. Australia, despite having the mother of all booms according to my fellow Doom and Gloomers, gets four. :D

What amazes me is the difference between Demographia's figure for Sydney (rising to 9.6 times), and Rismark's figure of 4.4 times household disposable income, and falling from 4.6 times last year. Either Demographia have really messed things up, or Rismark are cooking the books something chronic.
 
Graemsay said:
The new Demographia report on affordability has been released, and there's a bit of coverage at The Age.

To save you reading, the top ten most expensive markets (median multiple in brackets) are:
  1. Hong Kong (11.9)
  2. Sydney (9.6)
  3. Vancouver (9.5)
  4. Bournemouth and Dorset (9.3)
  5. Coff's Harbour (9.1)
  6. Melbourne (9.0)
  7. Honolulu (8.5)
  8. Sunshine Coast (8.4)
  9. Warwickshire (8.1)
  10. London / Plymouth and Devon (tie) (7.9)
I'm disappointed. The UK is supposed to be having a housing bust, and we occupy three of the top ten positions. Australia, despite having the mother of all booms according to my fellow Doom and Gloomers, gets four. :D

What amazes me is the difference between Demographia's figure for Sydney (rising to 9.6 times), and Rismark's figure of 4.4 times household disposable income, and falling from 4.6 times last year. Either Demographia have really messed things up, or Rismark are cooking the books something chronic.
Click to expand...

The Median Household incomes used to calculate the median multiple do not look correct.
How can Melbourne have a Median Household income of $63,100. Maybe 6 to 8 years ago. Certainly not now.
Maybe i'm out of touch.....
 
This Wikipedia article also gives the median household income in Australia in 2007 to 2008 as $66,890. Given wage inflation, I'd estimate it somewhere between $70K and $75K.

Yeah, I know, using an article on US incomes to get the Australian figure. :D The raw stats can be found at the ABS.

Even if Demographia have messed up their figures, and the real median income is 20% higher, then Melbourne is still very, very expensive on this measure.

The leaves the Rismark figure that affordability in Sydney is actually improving, and is only 4.4 times median household income.

Joye has said that their calculation uses all income streams, and that the house (being a family's biggest asset) should be included.

The only way I can get to Joye's figures, assuming the median Sydney property is around $550K (RP Data's figures), is by taking into account income from the house. Something like:
  • Income after tax: $56K ($80K taxed at around 30%)
  • Increase in property's value: $50K (based on an 11% rise)
  • Imputed rent: $19K (yield of 3.5%)
  • Total: $125K
(Imputed rent is what it would cost to lease an equivalent property. It's money that is saved rather than earned.)

$125K times 4.4 is $550K.

The trouble is that 55% of that income is coming from the house. So it's a circular argument that property is affordable because prices are high and increasing rapidly!

And that's why I'd like to see RP Data reveal their methodology.

Edited to add:

Deltaberry's figures from the same ABS report I cited put household income in Canberra at $91K, so maybe $100K now. That city has (according to their propaganda) the highest average earnings in Australia, so I might be $10K out in my income estimate. Add in a few more dollars for investments, and it might be possible to remove the imputed rent number...

Given that the bulk of the population in NSW and Victoria live in Sydney and Melbourne respectively, the median wage in those cities cannot be that might higher than the state as a whole. (If the regional population of Victoria earned nothing then Melbourne's residents would be on something like $80K.)
 
Graemsay said:
The trouble is that 55% of that income is coming from the house. So it's a circular argument that property is affordable because prices are high and increasing rapidly!
Click to expand...

Hahaha I like this. So we can afford to buy houses as long as houses get more expensive and help us pay for more houses? When does the music stop though...
 
Don't you just love demographia. Just take a look at their site http://www.demographia.com/ to put it in context first.

The main problem here is that they forget that affordability is not measured as a factor of household income.

It's the amount left over to pay a mortgage AFTER taxes and living expenses which vary greatly between countries and even households.

Then what's left over can be used to pay a mortgage. But since most mortgage repayments are the interest component, interest rates need to be taken into account too (and predictably aren't).

A better measure would be the % of how much money is left over after household expenses and tax is required to service a loan for the median house type minus the amount people contribute themselves.

But this accurate assessment would be too hard for all the D&Gers to understand, and may come up with a different (although correct) result.
 
tubs said:
Don't you just love demographia. Just take a look at their site http://www.demographia.com/ to put it in context first.

The main problem here is that they forget that affordability is not measured as a factor of household income.

It's the amount left over to pay a mortgage AFTER taxes and living expenses which vary greatly between countries and even households.

Then what's left over can be used to pay a mortgage. But since most mortgage repayments are the interest component, interest rates need to be taken into account too (and predictably aren't).

A better measure would be the % of how much money is left over after household expenses and tax is required to service a loan for the median house type minus the amount people contribute themselves.

But this accurate assessment would be too hard for all the D&Gers to understand, and may come up with a different (although correct) result.
Click to expand...

Agreed.

And on that front HK should not be at the top of the list. Interest rates at 1.3% and capped at 2.5% at most banks for the next 3 years. Gross yield on properties are between 3.0-6.0%.

Not to mention cost of living is low. I had a very nice bowl of wonton noodles 2 months ago in HK for A$2.50. Better than most crap I find on the street here.
 
Does it matter how they measure it? It's obvious that property is many multiples of income (somewhere between 7 & 10). That much is clear. Being pedantic about how they measure it is just a distraction.
 
OK, I'll take up Tubs's challenge. :D

The only figure for Sydney's median household income in 2010 that I can find is $81,848.

Depending on how I dice the figures, the ATO tax calculator gives me between $62K and $70K. (The lower is for a single earner, the higher for wages split equally between partners.)

So I was close in my initial income estimate, but a way out with tax paid. Good thing I'm not an accountant.

I don't have a definitive figure for the median Sydney property price. This article suggests $634,300.

According to a table of historical mortgage rates, you'd currently be paying 7.79%. (Yes, I know that better deals are available.)

Feeding the figures into the BBC Mortgage Calculator, based on a 90% deal over 30 years, gives:
  • Interest only: $3705.89 per month / $44,470.68 per annum
  • Principle and Interest: $4142.30 per month / $49,707.60 per annum
So at current rates, the best case would be that a household would have $12,000 to $25,000 per year to pay for food, bills, travel, health insurance and clothes, etc. and would be spending the bulk of their income on a mortgage.

However, in 2008 mortgage rates peaked at 9.45%, giving:
  • Interest only: $4495.60 per month / $53,947.20 per annum
  • Principle and Interest: $4816.41 per month / $57,796.92 per annum
The best case would be $16,000 a year for everything else, and the worst case would be $4,000. That wouldn't be fun...

I agree with EvanD. The researchers at Demographia might have messed up the figures, but affordability looks terrible however you slice it.
 
Graemsay said:
OK, I'll take up Tubs's challenge. :D

The only figure for Sydney's median household income in 2010 that I can find is $81,848.

Depending on how I dice the figures, the ATO tax calculator gives me between $62K and $70K. (The lower is for a single earner, the higher for wages split equally between partners.)

So I was close in my initial income estimate, but a way out with tax paid. Good thing I'm not an accountant.

I don't have a definitive figure for the median Sydney property price. This article suggests $634,300.

According to a table of historical mortgage rates, you'd currently be paying 7.79%. (Yes, I know that better deals are available.)

Feeding the figures into the BBC Mortgage Calculator, based on a 90% deal over 30 years, gives:
  • Interest only: $3705.89 per month / $44,470.68 per annum
  • Principle and Interest: $4142.30 per month / $49,707.60 per annum
So at current rates, the best case would be that a household would have $12,000 to $25,000 per year to pay for food, bills, travel, health insurance and clothes, etc. and would be spending the bulk of their income on a mortgage.

However, in 2008 mortgage rates peaked at 9.45%, giving:
  • Interest only: $4495.60 per month / $53,947.20 per annum
  • Principle and Interest: $4816.41 per month / $57,796.92 per annum
The best case would be $16,000 a year for everything else, and the worst case would be $4,000. That wouldn't be fun...

I agree with EvanD. The researchers at Demographia might have messed up the figures, but affordability looks terrible however you slice it.
Click to expand...

Fact is banks would never lend 90% of 635k to a family on 82k gross. The numbers do not work. At most they would be lucky to borrow 500k assuming they had 1 kid. 50k less for every other child.
 
Graemsay said:
Rismark are cooking the books something chronic.
Click to expand...
A company with property interests cooking the books? Doesn't seem likely... :rolleyes:

To cut a long story short, the numbers that Joye used imply that the ratio of house prices to incomes is actually closer to 4 to 5x which - surprise, surprise - is in line with other developed nations. The most recent incarnation of this logic has been recently updated by Joye here and here, which provides a useful snapshot of the way in which this 'modified ratio' is being used as a debating weapon. I examine the different numbers below, but the short answer on how a ~50% reduction in the affordability ratio is conjured up is that they 'find' additional disposable household income of over $20,000 compared to the ABS survey data. Oh, and they use the average household income rather than the median which is worth about another $12,000 in annual income (because the highest income earners 'drag up' the average). The 4-5x ratio implies that the disposable household income that should be compared with the median house price, across Australia, is ~$95,000. This is the after tax level of household income. With 25% effective tax rate this implies a gross income of $125,000 is what the 'median' household earns in income that can be spent on bills, food and mortgage payments.
Click to expand...
http://criticalinfluence.blogspot.com/2010/11/lies-damned-lies-and-housing-statistics.html

Because including superannuation and gross rents in households income sounds fair right??

Joye/Rismark can keep spouting their ridiculous figures, regardless over the longer term whether you say housing multiples have gone from 4x to 9x or 2x to 4.5x, it's the same thing...

dwelling.jpg
 
Where does it state that an average family on an average household income must be able to afford the average Sydney house.
A home is a massive financial commitment so there is very little that is considered average about the whole transaction.
At certain points in a cycle it may be that you can afford an average home on an average income( or better)
At other times you cant.
At this point in time an average household income will buy you a below average house or unit. But its a start and you can improve from here.
 
There's a flaw in your calculation.

You are using median household income to purchase a median house but you only used a FHB deposit, that is you only put in 10%.

What if the median buyer already has a property and used the equity of that to purchase the median house? I don't know what the median deposit is but I highly doubt its a FHB putting in only 10%.

If you can find out what the median deposit on a property purchase is then it would make your calculation more accurate IMHO.

Graemsay said:
OK, I'll take up Tubs's challenge. :D

The only figure for Sydney's median household income in 2010 that I can find is $81,848.

Depending on how I dice the figures, the ATO tax calculator gives me between $62K and $70K. (The lower is for a single earner, the higher for wages split equally between partners.)

So I was close in my initial income estimate, but a way out with tax paid. Good thing I'm not an accountant.

I don't have a definitive figure for the median Sydney property price. This article suggests $634,300.

According to a table of historical mortgage rates, you'd currently be paying 7.79%. (Yes, I know that better deals are available.)

Feeding the figures into the BBC Mortgage Calculator, based on a 90% deal over 30 years, gives:
  • Interest only: $3705.89 per month / $44,470.68 per annum
  • Principle and Interest: $4142.30 per month / $49,707.60 per annum
So at current rates, the best case would be that a household would have $12,000 to $25,000 per year to pay for food, bills, travel, health insurance and clothes, etc. and would be spending the bulk of their income on a mortgage.

However, in 2008 mortgage rates peaked at 9.45%, giving:
  • Interest only: $4495.60 per month / $53,947.20 per annum
  • Principle and Interest: $4816.41 per month / $57,796.92 per annum
The best case would be $16,000 a year for everything else, and the worst case would be $4,000. That wouldn't be fun...

I agree with EvanD. The researchers at Demographia might have messed up the figures, but affordability looks terrible however you slice it.
Click to expand...
 
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