Keen & Joye on House Prices

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Whit­ney Fitzsim­mons’ inter­viewed Chris Joye and myself on house prices for the ABC’s Busi­ness Today last week, and the 11 minute seg­ment ran last Fri­day. The Busi­ness Today site does­n’t allow you to embed a giv­en inter­view, so I’ve saved it onto my blog for view­ing here.

I made one stuff-up, as can hap­pen in an interview—I said that house prices had risen 20 per­cent “last year” when I meant “under the influ­ence of the First Home Ven­dors Boost”. The actu­al peri­od of the rise was from March 2009 till March 2010 (and it was an 18.8% rise in nom­i­nal terms and a 15.5% rise in real terms).

Whit­ney also got one datum wrong in her questions—that a fore­cast­er had pre­dict­ed a 0.5% fall in house prices—which I dis­missed; in fact he had pre­dict­ed a 5% fall in prices, which is more in the ball park of what I expect. Whit­ney cor­rect­ed this in her intro, which was record­ed after the inter­view.

Chris and I did­n’t have one debate I expect­ed, on whether house prices are expen­sive when com­pared to incomes. We’ve since had that at a debate today at the Port­fo­lio Con­struc­tion “Bub­ble, Bub­ble, Toil and Trou­ble Sum­mit”. Chris trot­ted out his com­par­i­son of house prices to incomes which asserts that the house price to income ratio in Aus­tralia is only about 4.4 to one (ver­sus the Demographia esti­mate of 7.1), and that the ratio has­n’t changed all that much in recent years.

I dis­pute Chris’s cal­cu­la­tions, and I was asked by The Age to do longer range com­par­isons of house prices to dis­pos­able incomes, which gave me the impe­tus to see what the long range data shows (most of Chris’s sta­tis­tics go back no ear­li­er than 1982, the year before the First Home Ven­dors Grant was intro­duced and began to dis­tort the mar­ket).

My chart com­pares the medi­an house prices in Syd­ney and Mel­bourne to aver­age house­hold dis­pos­able income per house. This com­par­i­son there­fore includes the impact of chang­ing demographics—the trend from one to two income families–and it records house prices against the income actu­al­ly avail­able on aver­age to pay the mort­gage. It also avoids the fal­la­cy of com­par­ing house prices to forms of “income” that sim­ply can’t be used to pay the mortgage—such as the imput­ed rental “earned” by own­er-occu­piers by liv­ing in their own home rather than rent­ing.

The inputs to this cal­cu­la­tion are:

• The ABS medi­an house price series for cap­i­tal cities, which began in 2002 (ABS 641602);
• Nigel Sta­ple­don’s cal­cu­la­tions of medi­an house prices in Syd­ney and Mel­bourne from 1880 till 2005 (Long Term Hous­ing Prices in Aus­tralia and Some Eco­nom­ic Per­spec­tives);
• The ABS data on Aus­tralian pop­u­la­tion (ABS 32220d­s10_­sum­ma­ry_s­ta­tis­tic­s_2006-2101); and
• ABS data on the hous­ing stock ((ABS 4102) plus Build­ing Activ­i­ty ( ABS 87520037) since the last hous­ing stock data in 2009.

The results are stark. The medi­an house price in Mel­bourne was less than 2 years aver­age dis­pos­able income per house in the 1960s, and between 1.5 and 3 times that in Syd­ney. The ratio in both cities then took off under the influ­ence of the prop­er­ty bub­ble inspired by the sec­ond incar­na­tion of the House Price Ven­dors Grant in 1988, to reach a lev­el of 2.5 in Melbourne—still not par­tic­u­lar­ly high—but 4.5 in Syd­ney.

Prices then went side­ways com­pared to incomes until 1997, when the lev­el of lend­ing for hous­ing final­ly kicked in and start­ed house prices ris­ing again—so it is clear that ris­ing debt played the major role in set­ting off the bub­ble.

Then the Howard Gov­ern­ment first rein­tro­duced the First Home Ven­dors Boost (as a tem­po­rary mea­sure to get the hous­ing indus­try over the impact of intro­duc­ing the GST) and dou­bled it in 2001 (to ward off a feared reces­sion), and the price took off even more—reaching an all-time high of 8 in Syd­ney and hit­ting the 4.5 range in Mel­bourne.

A cor­rec­tion began in Syd­ney in 2004—more by dis­pos­able income ris­ing than by nom­i­nal house prices falling—with the ratio falling to 5.5. The ratio instead flat­lined at the 4.5 lev­el in Mel­bourne.

The final stage to date in this act was Rud­d’s dou­bling of the First Home Ven­dors Grant, which turned around the trend for the ratio to fall with yet anoth­er mini-bub­ble. The ratio rose again to 6.5 in Syd­ney, and hit the all-time record of 5.7 in Melbourne—thanks to the Vic­to­ri­an Gov­ern­men­t’s tur­bocharg­ing of the Fed­er­al grant with its own give­aways.

Is that a bub­ble? Is the Pope a Catholic?

Over to Whit­ney’s inter­view of Chris and me.

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