Why Houses Being Unaffordable is a Myth...

[Shadow]

Demographia Debunked

I might cop a caning for this...but here goes.....

I was reading this article and had a good chuckle...particularly in regards to some of the following commentary....

http://www.smh.com.au/business/melb...ins-20110131-1aa8l.html?comments=144#comments

The article indicates that houses in Australia are now 7.2 times the median wage of 66k...or aobut 475k.

I feel the story is biased and does not consider that due to the level of participation of women most people use two incomes to purchase a house. So it might be more like the median household income of 110k.

In Sydney you have plenty of choices of properties under 400k..which a 110k income will service comfortably.though mostly units. Some of these areas are well within 15-25 klms. The REAL issue is that people these days want everything now. You could comfortably buy a 2 brm unit in Meadowbank, Belmore, Lidcombe, Homebush, or Ryde for that kind of money.

In other cities like Melbourne, Adelaide, and Brisbane you will find houses under 350k mark confortably within 15-25klms.

So perhaps an article need to be written not about housing affordablity....but the lack of will and snob factor by FHB.

I totally agree. I think we can determine whether house prices in Australia really are unaffordable using three simple questions.

If Australian houses are really so unaffordable, then...

1 - Why would we choose to build the largest homes in the world? Wouldn't we build smaller less expensive ones instead?
2 - How are half a million families and individuals (approximately) buying homes every year, if they can't afford those homes?
3 - Why are our mortgage default rates some of the lowest in the western world if people couldn't afford their homes?

I discuss the issue of Australian housing affordability in my blog below...

Shadow's Blog - The Australian Housing Market. Part 1: Demographia Debunked

To summarise briefly, houses are not purchased using wage income alone. Houses are purchased using wealth. A better measure of a household's ability to afford property would be to consider household discretionary income and total wealth. This would include non-wage income (such as income from interest, shares or other investments), and wealth stored in other assets (such as shares or equity in existing property) that may be liquidated or borrowed against in order to fund a new property purchase.

Cheers,

Shadow.

 

[rugrat]

-Don't change the goalposts, this is not done in other markets. The point of Demographia is to compare cities across the world.

-These people have to live somewhere. They DO live somewhere - probably low end housing that likely correlates with their incomes. The fact that they can afford to rent but not to buy points to a price/rent bubble. The trouble is that has persisted so long and been covered by capital gains many no longer see it as a problem.

And I am saying that How they measure the demographia to compare' is flawed!

So because 'flawed goalposts' are used to measure other countries, we should continue to use flawed goal posted to look at the situation here???? Well now that just seems stupid.

We are talking about housing 'affordability' here. What good does it do to include those who cannot 'afford' even the cheapest house anywhere because they are below the poverty line. These are people who are often in housing comssion, paying miniscule rent; living at home with parents; rooming with friends; living in caravans, paying the maximum rent they can afford to live in a small dodgy place.

I was one of these people for years. I wanted to buy, but my only income was centrelink payments - about 10k p/a. You cann't buy ANY house on that. Hell, the only way to buy a car on that was to save up 1k (hard work when you are on that kind of income) and buy the crappiest *****box you can possibly stretch you money to cover.

I could afford to 'rent' but not to buy - that isn't abnormal. Especially when paying the rent would occaisionally mean I had to choose between $10 petrol for the bike so I could ride to uni, or buying enough pasta and canned tomatoes to eat for the fortnight.

 

[dan c]

Problem:
Median wage; takes into account ALL wages, even those who live below the poverty line and wouldn't be able to 'afford' a house if the prices were are record lows.

100% agree. My grandparents' household income is about $25,000. They, and the thousands of people in their position, drag down the median household income figure, increasing the house price-to-income ratio.

Even though they won't be buying a new house any time soon.

 

[bene313]

Why are we assuming the wife earns less than the husband or cannot get a job that pays a good wage or god forbid, she likes working

I know a guy who is a stay at home dad. He loves it. Gets to go surfing everyday he tells me. Believe me he is the envy of all his friends.

Oh well, a man can only dream.

 

[jaycee]

Problem:
Median wage; takes into account ALL wages, even those who live below the poverty line and wouldn't be able to 'afford' a house if the prices were are record lows.

Median house price; takes into consideration ALL houses, even those whom only high end earners would be able to afford.

Median income v Median Price: National averages are not truely representative. Different states, different regions, different cities and townships all have different median prices and incomes.



To be a more reasonable indication of housing 'affordability', the low end income earners should be excluded at the very least. Those relying on pensions and centrelink payments, or earning below the poverty line have never had a hope of finding property 'affordable'.

In addition, these medians need to be localised. It is impossible to look at Australia as a whole. Different markets exist for both property prices and income.

Canberra, for example has a very high local median income level - even higher if you disclude those who fall below the poverty line. Our Property prices are also very high, however for the average 'household' income here it isn't actually too bad (and statistically 'most' households here in Canberra are Dual income.)

If you look at a small regional city like Armidale, NSW, on the otherhand. The median income is significantly lower, even without including those who live below the poverty line. The propertion of the population that does live below the property line is HUGE (the university being the main industry, with students making up a large portion of the populations. I am not sure about current median housing prices in Armidale - I am well aware however that despite the median, the prices 'range' greatly. I could buy comparable 3bed houses in different areas; one for $120k the other for $450k - the difference being local. Personally I would buy neither. I would consider the $450k overpriced, and the $120k is in an area I definitely would want to avoid. So it isn't about 'affordability' as much a 'desirability'.

I do think 'affordability' often boils down to what people are 'willing' to afford, not what they actually can afford.

FWIW - I am kinda faced with the issue of affordability myself at them moment. I am expecting my fourth child at the end of the year and as such our 3 bed house is becoming very small. Four bedrooms in Canberra jumps out of our 'affordable' price range, especially with our now decreased servicability.

I am aware however that prices are not about to change, so instead I am looking at ways that I can make it more affordable for myself to upgrade. I can do this by saving a bigger deposit and borrowing less and by increasing income, there is also renting the property out before moving into it (creating cashflow for servicibility, and significant deductibility to reduce initial costs - ie, stamp duty). We can also be looking in cheaper areas even though they may not be our first preference of where to live. So that is what we will do.

Heaps of people on govet support pensions have morttgages, to exclude them would be to lie about the truth !

 

[Aaron Sice]

guys,

my experience with working out demographics in regional areas has led to some startling assumptions and inclusions into stats that don't rightly belong.

for example, median wage is based on those on the dole and getting rent assistance.

how on earth you can use these included stats to work out affordability ratios is beyond me. but the only way to remove them from the stats i was working with is to sit down and strip out mining money and dole money - THEN you are left with the real average wage of the every day person aspiring to own a home

for example - one NW town i was looking at had these figures.

ABS stats
Median Wage $2200.00+ per week.
Median Rent $74.00 per week.

This says there's no affordability problem for renters in Newman. Then why is it so expensive on the ground?

Because this takes GIHA, DHW subsidies into account as well as dole money. Mining money skews the income side of things.

So i removed anyone on a pay higher than a senior policeman/nurse.

and i removed anyone on an income under $250pw, along with approximately $74 per week in rental assitance.

these were the revised stats.

Median Income - $1002.00 per week
Median Rent - $1000 per week.

it's all ther eon excel so you can just add your own little column there to do the maths yourself.

THIS IS WHY YOU CANNOT USE 'TAR BRUSH' MEDIANS TO CALCULATE ANYTHING. EVERY REGION IS SPECIFIC AND YOU CAN ONLY USE REGIONAL MEDIANS TO CALCULATE REGIONAL AFFORDABILITY.

if you don't understand how the stats are calculated, then stop bleating about it.

jaycee,

Heaps of people on govet support pensions have morttgages, to exclude them would be to lie about the truth !

of course! but they're not likely to upgrade to a median priced home, are they? they wouldn't even meet serviceability criteria. their pensions haven't been indezxed for decades, so chances are they will remain in the house they bought decades ago. therefore, they should be removed from the stats.

 

[jaycee]

guys,

my experience with working out demographics in regional areas has led to some startling assumptions and inclusions into stats that don't rightly belong.

for example, median wage is based on those on the dole and getting rent assistance.

how on earth you can use these included stats to work out affordability ratios is beyond me. but the only way to remove them from the stats i was working with is to sit down and strip out mining money and dole money - THEN you are left with the real average wage of the every day person aspiring to own a home

for example - one NW town i was looking at had these figures.

ABS stats
Median Wage $2200.00+ per week.
Median Rent $74.00 per week.

This says there's no affordability problem for renters in Newman. Then why is it so expensive on the ground?

Because this takes GIHA, DHW subsidies into account as well as dole money. Mining money skews the income side of things.

So i removed anyone on a pay higher than a senior policeman/nurse.

and i removed anyone on an income under $250pw, along with approximately $74 per week in rental assitance.

these were the revised stats.

Median Income - $1002.00 per week
Median Rent - $1000 per week.

it's all ther eon excel so you can just add your own little column there to do the maths yourself.

THIS IS WHY YOU CANNOT USE 'TAR BRUSH' MEDIANS TO CALCULATE ANYTHING. EVERY REGION IS SPECIFIC AND YOU CAN ONLY USE REGIONAL MEDIANS TO CALCULATE REGIONAL AFFORDABILITY.

if you don't understand how the stats are calculated, then stop bleating about it.

jaycee,



of course! but they're not likely to upgrade to a median priced home, are they? they wouldn't even meet serviceability criteria. their pensions haven't been indezxed for decades, so chances are they will remain in the house they bought decades ago. therefore, they should be removed from the stats.

I see your point, probalby not likely, epseically in areas like you're mentioning I guess where it ain't cheap by many people's standards who might earn a lot more...

 

[rugrat]

I know a guy who is a stay at home dad. He loves it. Gets to go surfing everyday he tells me. Believe me he is the envy of all his friends.

Oh well, a man can only dream.

What does he do with the kids while he is surfing???
Generally being a stay at home parent means you are too busy with the children to pursue leisure activities which children are unable to participate.


I know a couple of SAHD's here in Canberra, their wives earn significantly more money then they did. I think it is great to see SAHD's, but they still aren't that commonplace.

 

[jaycee]

What does he do with the kids while he is surfing???
Generally being a stay at home parent means you are too busy with the children to pursue leisure activities which children are unable to participate.


I know a couple of SAHD's here in Canberra, their wives earn significantly more money then they did. I think it is great to see SAHD's, but they still aren't that commonplace.

Compared to people who work 40 hours a week and still have hobbies, I'd have thought this dad might have MORE spare time than LESS ?

 

[Deltaberry]

And I am saying that How they measure the demographia to compare' is flawed!

So because 'flawed goalposts' are used to measure other countries, we should continue to use flawed goal posted to look at the situation here???? Well now that just seems stupid.

We are talking about housing 'affordability' here. What good does it do to include those who cannot 'afford' even the cheapest house anywhere because they are below the poverty line. These are people who are often in housing comssion, paying miniscule rent; living at home with parents; rooming with friends; living in caravans, paying the maximum rent they can afford to live in a small dodgy place.

I was one of these people for years. I wanted to buy, but my only income was centrelink payments - about 10k p/a. You cann't buy ANY house on that. Hell, the only way to buy a car on that was to save up 1k (hard work when you are on that kind of income) and buy the crappiest *****box you can possibly stretch you money to cover.

I could afford to 'rent' but not to buy - that isn't abnormal. Especially when paying the rent would occaisionally mean I had to choose between $10 petrol for the bike so I could ride to uni, or buying enough pasta and canned tomatoes to eat for the fortnight.

Absolutely, why are we excluding the bottom rung of people who earn an income...? Does not make any sense to me. Might as well exclude anyone earning sub $70k then. Oh look the new median is $200k.

 

[rugrat]

Compared to people who work 40 hours a week and still have hobbies, I'd have thought this dad might have MORE spare time than LESS ?

But then WHERE are the kids?????


Sorry, I'm trying to figure out if I have missed something that is obvious to everyone else? Because I want to know the secret! I would kill for some free time

I am a SAHM, and I can tell you unequivocally that the only time I get to spend doing anything without my children within armshot is when my DH is home from work to watch them while I do whatever (gym, got to work myself, etc). Being a stay at home parent, is being a full-time carer. 24hrs a day. No sick days, no holidays, no time off - unless the other parent is home to watch them: because kids need to be watched CONSTANTLY. If I go to the beach and have a surf, who is watching my kids??? Hell, I cann't even go to the toilet without at least one of them following me in there.

Unless maybe he is a SAHD of school aged kids???

 

[jaycee]

But then WHERE are the kids?????


Sorry, I'm trying to figure out if I have missed something that is obvious to everyone else? Because I want to know the secret! I would kill for some free time

I am a SAHM, and I can tell you unequivocally that the only time I get to spend doing anything without my children within armshot is when my DH is home from work to watch them while I do whatever (gym, got to work myself, etc). Being a stay at home parent, is being a full-time carer. 24hrs a day. No sick days, no holidays, no time off - unless the other parent is home to watch them: because kids need to be watched CONSTANTLY. If I go to the beach and have a surf, who is watching my kids??? Hell, I cann't even go to the toilet without at least one of them following me in there.

Unless maybe he is a SAHD of school aged kids???

I don't bloody know ! Perhaps at school ?

I know there are heaps of adults sporting clubs etc, how do those people do it ?

This just sound too different

I doubt the person meant the dad spends 12 hours each day surfing... anyway di

 

[rugrat]

Absolutely, why are we excluding the bottom rung of people who earn an income...? Does not make any sense to me. Might as well exclude anyone earning sub $70k then. Oh look the new median is $200k.

I am excluding those people below the poverty line. Those people who can not, under any circumstances possibly entertain the idea of buying a house no matter how low the prices may be - they have no possible hope of ever obtaining a loan on the oncome they are on. If the house prices were lowered to 20k, and they were able to get 7k in FHOG, they would still be unaffordable to this group of people. It is called a poverty line for a reason.

I would even go so far as to suggest that those people living below the poverty line are possibly the only ones in Australia who can honest NOT afford SOME kind of property, somewhere.

Everyone else just don't want what they can afford.

 

[jaycee]

And I am saying that How they measure the demographia to compare' is flawed!

So because 'flawed goalposts' are used to measure other countries, we should continue to use flawed goal posted to look at the situation here???? Well now that just seems stupid. How would we then compare the same data with other countries which is obviously part of the point of the measure ?

We are talking about housing 'affordability' here. What good does it do to include those who cannot 'afford' even the cheapest house anywhere because they are below the poverty line. These are people who are often in housing comssion, paying miniscule rent; living at home with parents; rooming with friends; living in caravans, paying the maximum rent they can afford to live in a small dodgy place. Because it's UNAFFORDABLE to them..AFFORDABLE to others and on average:....... Problem is, we are told and believe that the numbers are meaningful for other purposes I think

I was one of these people for years. I wanted to buy, but my only income was centrelink payments - about 10k p/a. You cann't buy ANY house on that. Hell, the only way to buy a car on that was to save up 1k (hard work when you are on that kind of income) and buy the crappiest *****box you can possibly stretch you money to cover.

I could afford to 'rent' but not to buy - that isn't abnormal. Especially when paying the rent would occaisionally mean I had to choose between $10 petrol for the bike so I could ride to uni, or buying enough pasta and canned tomatoes to eat for the fortnight.

Not disagreeing / agreeing, but there's people have for whatever reason, have a housing commission house and a mortgage, Homeswest used to sell houses to these renters.....

 

[BayView]

So i removed anyone on a pay higher than a senior policeman/nurse.

This is what I've always based my interpretation of the "average wage earner" on.

Youn can throw in the school teacher and council worker etc as well.

The $200k IT tech is not yer average, nor is a 10 year career doctor, and so on.

And of course; the stats always include the CEO on $1 mill per year. That's near the average....not.

 

[listoffallacies]

And I am saying that How they measure the demographia to compare' is flawed!

So because 'flawed goalposts' are used to measure other countries, we should continue to use flawed goal posted to look at the situation here???? Well now that just seems stupid.

We are talking about housing 'affordability' here. What good does it do to include those who cannot 'afford' even the cheapest house anywhere because they are below the poverty line. These are people who are often in housing comssion, paying miniscule rent; living at home with parents; rooming with friends; living in caravans, paying the maximum rent they can afford to live in a small dodgy place.

You are acting as if the number 3 in "affordable is when median house < 3 * median wage" has some special properties, and if you can just redefine the criteria to get the number down, then that will fix things.

It's a rule of thumb. If you want to redefine the calculations of incomes to only take into account some households, surely the figure "3" in the rule of thumb would also change?

I think you are focusing so hard on this little formula trying to wave away Australia's ludicrously self evident housing bubble you are losing sight of the bigger picture.

 

[jaycee]

You are acting as if the number 3 in "affordable is when median house < 3 * median wage" has some special properties, and if you can just redefine the criteria to get the number down, then that will fix things.

It's a rule of thumb. If you want to redefine the calculations of incomes to only take into account some households, surely the figure "3" in the rule of thumb would also change?

I think you are focusing so hard on this little formula trying to wave away Australia's ludicrously self evident housing bubble you are losing sight of the bigger picture.

You know the bigger picture ?????

I mean, err so do ... of course cause yeah I'm errr


so what is the big picture and what can we expect ? You obviously have your mind made up LOL

 

[listoffallacies]

so what is the big picture?

Australian houses are extremely expensive relative to wages, rents, historical values and other countries.

 

[lizzie]

The fact that they can afford to rent but not to buy points to a price/rent bubble. The trouble is that has persisted so long and been covered by capital gains many no longer see it as a problem.

now - this is the bit that gets me confused.

only last month i settled on two properties that rent for more than they would have cost to buy with a standard 10% deposit - and am about to put an offer on a third. all properties cost under $235,000 so deposit is not insurmountable.

are they in the sticks? nope, 2 blocks away from major shopping and transport in inner ring newcastle.

so why aren't these renters buying them? i can't answer that.

 

[Aaron Sice]

smoke in the cockpit....