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Is Australian Housing as expensive as we think it is?

Wednesday, December 16, 2009

Contrary to popular belief, new analysis of housing affordability and incomes shows that Australia’s dwelling price-to-income ratio is 4.1x

Is Australian Housing as expensive as we think it is?

Released today, 10 December, this is a summary of the most comprehensive study of its kind. There has been recent bad press about the affordability - or lack thereof - of Australian housing. This research shows that in fact Australian housing is not expensive by international standards and that our dwelling price-to-income ratio is less than half that claimed by some pundits.

RP Data Research Director, Tim, Lawless comments:

“There is a popular perception out there that Australian housing is the most expensive in the world. RP Data-Rismark’s research shows that this is patently incorrect. If we include all regions and all property types throughout Australia, the median dwelling price is only around $371,000 as at June 2009,” Mr Lawless said.

KEY POINTS:

• Based on Australia’s largest property database, and including all home sales in all regions (ie, metro and non-metro markets), Australia’s median dwelling price is estimated to be around $371,000

• Applying the RBA’s definition of ‘disposable household income’ after tax but before interest payments, Australia’s dwelling price-to-income ratio is only 4.1x

• This is less than half the 7-8x ratio often quoted in the media and by economists, and implies that Australian housing is not overly expensive by international standards

• Research is consistent with Australia’s low mortgage default rates, rising house prices, and internationally high rate of home ownership

• Australia’s housing tax regime (including CGT exemption and negative gearing) is in line with UK, New Zealand, France, Canada and Germany

• Yet supply-side local, state and commonwealth government taxes and charges now account for up to $160,000 of the cost of a new Sydney house

• Henry Review should focus on reducing supply-side taxes that are artificially raising the cost of producing new housing

It’s a $3.9 trillion part of the economy that few people understand yet is the most important financial commitment most families will make: securing the shelter they need to effectively work and live. Unfortunately, the many myths advanced about the cost of Australian housing undermine both the public debate and ensuing policy.

According to key economic commentators, Australian housing is very expensive by international standards. This mantra is recycled in the media on a weekly basis. It’s also supported by some economists who incorrectly claim that Australian property prices are 7-8x disposable household incomes.

The high cost of Australian housing is often pinned on our purportedly concessionary tax system that exempts the family home from CGT. The Henry Review should be directed at remedying this failure, some pundits say. And the RBA is advised to chase down house prices using the blunt monetary policy instrument, even though this is neither part of the RBA’s mandate, nor likely to be effective given the collateral damage that it would inflict on the wider economy (as the Treasury’s Dr David Gruenand the RBA’s Dr Guy Debelle have both independently observed).The hard empirical fact is that these journalists and economists are wrong. Before we show why, think about it intuitively.

Australia has an internationally high rate of home ownership (around 70 per cent at the time of the 2006 Census). Yet we also have amongst the lowest mortgage default rates in the world with just 0.66 per cent of the five million borrowers with a loan materially behind on their repayments. This is nearly one-tenth or one-quarter of the default rates observed in the US and UK, respectively.

Based on the RBA’s preferred benchmark, housing affordability is no worse than it has been on average over the last 28 years. Even during the recent nadir in the early 2000s, affordability was better than it was in the late 1980s and early 1990s.

Finally, Australian house prices are rising, not falling despite the fact that the deposit requirements and credit rules imposed by lenders today are the toughest they’ve been in over 15 years. Even when mortgage rates hit 9.6 per cent in 2008, house price falls were only modest.

If Australian housing was unusually expensive, you might expect to see low ownership levels, high default rates, historically poor affordability, and weak demand as manifest in negative price growth. But we do not.

In a speech earlier this year, Glenn Stevens disclosed the RBA’s estimate of Australia’s ‘dwelling price-to-income ratio’, which is a metric commonly used to compare the cost of housing around the world. The RBA found that dwelling prices in Australia’s capital cities were just 4.8x disposable household incomes, which is nearly half the ratio proposed by many pundits.

- Realestate.com.au

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