Demographia 2011

oracle said:
Hobo, you are confusing on how people value houses compared to shares. Share price can go up or down but sooner or later it reverts to it's true value which is mostly tied to it's current earnings and future earning potential. You don't have to sell your shares just because the price has dropped today if you believe in the company and it's earnings.
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It was just a comparison. I'm not confusing anything. I was simply saying that just because there is a bunch of holders with a 70% stake, that doesn't mean the stock that is available for sale will hold up in price. It will sell wherever the current sellers and buyers meet. Even if 70% of property owners do live in the property, that still leaves 30% that are owned as investments. We only see roughly 5-10% turnover of homes on the market each year and these transactions are what drive market prices, not the families that will stick in their homes through thick and thin.

Your response is suggestive that property prices are tied to nothing but the emotions of buyers, which not true at all.

Australian housing is currently over priced when measured against rents, wages and other assets. We're not talking about 1 or 2 suburbs where a majority of buyers are emotion driven home buyers, we are talking about entire markets.
oracle said:
On the other hand if the price of my property falls and I need a place to stay I am not going to get rid of it just coz it's value is less now then it was yesterday. It is still serving me the purpose of providing shelter. Just because of the fear of properties declining in value is not going to force me to sell unless I am in financial trouble. And except a majority of FHO I expect rest of OO must have atleast 30% equity in their properties. So even a 30% drop will get them to break even.
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Which FHOs are those? Of those that bought post recent stimulus only the few that were able to afford to buy in Melbourne might have seen a 30% gain since.

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But if you'd read the post I wasn't saying that people will be 'forced' to sell, I suggested they might sell out of fear. I'm not suggesting that would be everyone. It doesn't need to be many to drive sharp price falls. Infact some areas are already seeing/have seen sharp falls (e.g. parts of the GC, Cairns, luxury end of some markets, etc).
 
Deltaberry said:
Oracle - you're still talking about specific examples. Intrinsic-Value and I just are saying that the Price / Income is simply a ratio to compare countries.
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actually just to be clear i prefer the 'general usefulness' of medium price/medium wages on a single country basis.

I am more interested in noticing the change within a country, rather than using it to justify one countries property price against another.

Medium's are just a general guide, start looking at country vs country and that 'generalism' becomes even wider.
 
and to provide a further point of clarification, these sought of generalisations provide an insight into the underlying 'value' of the asset class.

(a)
It does not provide any insight into the likely near term future direction in the pricing of an asset class.

This is a very important point because people tend to associate the 'correctness' of a decision by what happens in the near term.


(b)
It does not provide any insight into how in the future the underlying asset will gravitate back towards its intrinsic value.

In otherwords it could crash back towards intrinsic value, it could slowly decline, it could even appreciate (but with wages appreciating faster than property prices).
 
Fallacy of House price to median household income

House prices based on actual transaction data on houses sold within a period are available. Data on household incomes of buyers are probably not available because of the complexity of it and privacy reasons. So, to merge these two pieces of data into a realistic index, a proxy is used the income denominator.

More so in Australia, (don't know about UK, Japan or US), the proxy median household income of population, even regional, has no realistic relationship to actual purchaser households of population or the region, respectively. The proxy median household income of buyer could include those who have no hope of buying and are in rent or in concessional government housing. These non buyers usually make up the lowest 33% of household incomes.

The fact is purchasers can make up of lower socio-economic income groups, successful migrants allowered into Australia based on criteria (including financials) and those who qualify to borrow loans and afford a property. Lower socio economic buyers are assisted with government housing. These government assisted buyers probably are not captured in the commercial data. IMO the proxy household income for buyers should reflect at least upper 66% of household income levels because they include investors and elite migrants with financial means, and these are reasonably expected to be above the mean.

With all these complexities, overseas analysts (including Demographia and Jeremy Grantham), have less chance of producing a better proxy household income than local analysts. Of the local analysts, there are: Christopher Joye, RBA, Macquarie Bank and Steven Keen. IMO, the first three seem to grasp the problem better than the last and therefore produce more credible calculations and conclusions.
 
Francesco said:
With all these complexities, overseas analysts (including Demographia and Jeremy Grantham), have less chance of producing a better proxy household income than local analysts. Of the local analysts, there are: Christopher Joye, RBA, Macquarie Bank and Steven Keen. IMO, the first three seem to grasp the problem better than the last and therefore produce more credible calculations and conclusions.
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As I pointed out on page 2 Joye's income calculations include superannuation, gross rents and other streams that shouldn't be included in a credible disposable income calculation. What are your thoughts on those inclusions? How can you claim his figures are credible knowing what they include?

Have you got a link to the RBA and Macquarie methodologies?
 
hobo-jo said:
As I pointed out on page 2 Joye's income calculations include superannuation, gross rents and other streams that shouldn't be included in a credible disposable income calculation. What are your thoughts on those inclusions? How can you claim his figures are credible knowing what they include?

Have you got a link to the RBA and Macquarie methodologies?
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On the face of it, disposable household income must include considerations for incomes from investment properties and superannuation payments. You should expect publicly available disclosures by Joye about his methodology to be necessarily general and not explicit as they are of commercial value. Hence, I do not expect an obvious error such as including a gross rent figure without a compensating adjustment for it to be 'net'. Notice the diverse conclusions possible (by his antagonists) due to simplistic calculation methodology and the implications to large and strategic investments.

Sorry I do not have a link to RBA and Macquarie methodologies.
 
Francesco said:
On the face of it, disposable household income must include considerations for incomes from investment properties and superannuation payments.
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Can superannuation payments be used by the majority to buy their home? If not why would you consider it a reasonable inclusion? The term 'disposable income' to me means income available for spending after necessary expenses have been paid...

Francesco said:
Sorry I do not have a link to RBA and Macquarie methodologies.
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The reason I ask is that I don't recall seeing Macquarie present an income/housing ratio of their own (think the RBA one fairly closely aligned with Joye's figures), but I find it incredulous that someone would rate them as credible over other analysts without checking their methodologies. That said, nothing seems to surprise me on this forum anymore. There only seems to be a select few interested in scratching below the surface of any commentators that are prepared to paint a rosy picture for property.
 
hobo-jo said:
Can superannuation payments be used by the majority to buy their home? If not why would you consider it a reasonable inclusion? The term 'disposable income' to me means income available for spending after necessary expenses have been paid...

Can 'majority' use superannuation? Generally all BB investors above age 55 can use their superannuation to buy properties. They may not be the 'majority' in population numbers but in $ value they should be significant. Without taking rental income and superannuation income into considerations, many BB investors would have zero disposable income. Where else do they get the money, in particular, if they are retired (like me)?Should they rely on Centrelink income? If you follow this line of argument, make sure you factor in the billions $ of govt benefits in welfare to offset the disposable income of these otherwise non income investors.

The reason I ask is that I don't recall seeing Macquarie present an income/housing ratio of their own (think the RBA one fairly closely aligned with Joye's figures), but I find it incredulous that someone would rate them as credible over other analysts without checking their methodologies. That said, nothing seems to surprise me on this forum anymore. There only seems to be a select few interested in scratching below the surface of any commentators that are prepared to paint a rosy picture for property.
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Be surprised as you wish. I am just as surprised by those who use indices for all situations and make pronouncments on affordability without fully exploring the composition of them and their appropriateness in context. Each to his own. I will save my breath and withdraw from contribution to this thread.
 
devo76 - yes maybe USA is severely undervalued too. The way I look at it is like a sharemarket's P / E ratio, when the resources index fell from a top of 17.0x to a low of around 5.0x during the GFC. Both are extremes. Perhaps Australia is at the extreme high end while USA is at the extreme low end. So the arbitrage would probably be, short Australia long America.

oracle - yes the latter scenario would be the minimum thing that would happen (ie a dive of 10-15%). For most new buyers this would be a crash as it would wipe out their entire equity. Just hope they don't lose their jobs and force-sell, as that's the pathway to financial freedom (ie bankruptcy).

Intrinsic-Value - yes I can see why you shouldn't compare countries. It's like comparing Australia's S&P / ASX 200 P / E with the Shanghai Composite Index P / E. Shanghai trades on a high P / E because it is a much STRONGER market than Autralia and is booming like mad cow disease. Same thing applies to Australia vs USA comparison I guess. The USA is where they are because they are dying like mad bears.
 
hobo-jo said:
Can superannuation payments be used by the majority to buy their home? If not why would you consider it a reasonable inclusion? The term 'disposable income' to me means income available for spending after necessary expenses have been paid...
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Why wouldn't they include super payments in their calculations of overall Australian household income?
Just like they include workers compo payments.
Life insurance pensions.
Child support.
Some retired people live of their super payment.
It's all income.
Having said that I don't feel inclined to take the time to fully comprehend the statistical weightings and what not that they apply to these figures as detailed here.
http://www.ausstats.abs.gov.au/Ausstats/subscriber.nsf/0/32F9145C3C78ABD3CA257617001939E1/$File/65230_2007-08.pdf
Suffice to say I am more concerned with the sums relating to working out whether my household can afford the property that I want to speculate on.
 
Francesco said:
Be surprised as you wish. I am just as surprised by those who use indices for all situations and make pronouncments on affordability without fully exploring the composition of them and their appropriateness in context. Each to his own. I will save my breath and withdraw from contribution to this thread.
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you raise a very valid point here. Your comments are similarly raised by a respected hedge fund manager (Denis Gartman) that i follow.

because of the way statistics are organised and compared it is naive to delve to deeply into short term movements in the statistics. Especially as they tend to be revised backwards over time.

However their usefulness comes very much in comparing the overall trends over time. What ever the limitation in the compilation of the statistic, its the movement over time that is of more relevance rather than the absolute value of the statistic themselves.
 
Crabnet said:
Why wouldn't they include super payments in their calculations of overall Australian household income?
Just like they include workers compo payments.
*snip*
.
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I think the issue is - and I'm working from memory here - that the measures aren't talking about income from super, but the super portion of your salary, including compulsory employer contributions.
 
I've been watching this thread for a couple of days, and having a think about some of the issues raised.

I agree that using a multiple of median income is a very crude metric, and doesn't capture all the factors (such as tax or interest rates), but it's a useful rule of thumb. Sure there are corner cases (8x mortgages are almost affordable with 1% interest rates), but it works as an approximation.

There was a comment on another forum that the only way to afford a significantly more expensive house is to either save / pay down the mortgage, or increase earnings.

To an extent home owners will get the benefit of appreciation, but this would increase their buying power by something like a third over a decade. This is assuming their income and house prices rise at the same rate.

But basically it means that someone who's on the median income over their career would find it virtually impossible to afford a median priced house in Sydney. (They could do it if they sold and upgraded three times over a thirty year period, though that might make clearing off the mortgage at the end tricky. Or buying, holding and repaying one home over 30 years then upgrading.) That doesn't strike me as being affordable in any sense.
 
Crabnet said:
Why wouldn't they include super payments in their calculations of overall Australian household income?
Just like they include workers compo payments.
Life insurance pensions.
Child support.
Some retired people live of their super payment.
It's all income.
Having said that I don't feel inclined to take the time to fully comprehend the statistical weightings and what not that they apply to these figures as detailed here.
http://www.ausstats.abs.gov.au/Ausstats/subscriber.nsf/0/32F9145C3C78ABD3CA257617001939E1/$File/65230_2007-08.pdf
Suffice to say I am more concerned with the sums relating to working out whether my household can afford the property that I want to speculate on.
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As said it's just a relative measure. Adding all these things in is just clutching at straws. Would you include the $2 you pick up on the street every now and then?
 
Graemsay said:
I've found a couple of relevant articles to this thread.

The first is by the Unconventional Economist, and investigates House Price to Income Multiples. (The second link is the article.)

The second is cited by the Unconventional Economist, and picks apart the RP Data Affordability Statistics.

As I thought, the income calculation uses imputed rent as one of its components, so I can feel smug. :D
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..and includes super contributions as "disposable income", so a degree of smugness here too ;)

As an aside, who here figures that a before tax disposable family income of $125K is a fair estimate of the representative Australian household?
 
Token Funder said:
As an aside, who here figures that a before tax disposable family income of $125K is a fair estimate of the representative Australian household?
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Well apparently it's 2 x the 'average' wage but due to massive skewing at both ends of the curve I can't see how it's 'representative.' I know there are investors here with household incomes considerably less than that but I'm guessing that the representative income on SS would be considerably more than 125k. Of course, by 'income' I'm still leaving out investment income - which would skew it higher still. In my world most households bring in at least 125k; but in the real world most Australian families earn a lot less. Why do you ask, TF?
 
Debunking Demographia

One of the authors of the Demographia survey has posted an article on SMH, here...

Report: housing affordability out of sync with incomes

I have left a few comments on the article.

Some people here may also be interested to read my blog about the Demographia survey...

Demographia Debunked - Shadow's Blog

To summarise very briefly, I believe I demonstrate quite clearly in the blog that Demographia are using incorrect price and income figures for Australia, which they are not doing for the other countries, and I have shown that looking at gross wage income alone is not a particularly good way to determine affordability when houses are generally purchased using a combination of discretionary income (including wage income and non-wage income), and other forms of wealth (liquid assets, equity etc).

Cheers,

Shadow.
 
Been wondering where you were, and it looks like you've been busy. Welcome back!
Interesting blog & especially the ABS use of 'median house' to literally mean 'house'(!). With population growth in the cities & increasing density this figure will look more & more 'unaffordable' over time. Were you able to confirm that the median value in other countries included all types of RP?
 
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