In the ongoing debate over Australia’s ‘housing bubble’, the annual Demographia International Housing Affordability Survey causes plenty of arguments and a few burst blood vessels.
The survey looks at cities around the developed world through the lens of the ‘median multiple’ – that is, the median dwelling price divided by the median income in that area.
Critics argue that such a simple metric overlooks things such as the quality of dwellings in a city, interest rate levels, and long-term changes such as the rise in female workforce participation.
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The survey’s supporters, on the other hand, praise it for cutting through self-serving arguments made by the real estate and finance industries and too often repeated by media outlets who rely on those same industries for advertising revenue.
Whatever your view, this year’s edition offers a sobering analysis.
The survey points out that historically, houses in the cities studied were three or four times the median income, but that ratio has leapt in many markets well above the survey’s definition of “severely unaffordable” – anything above five times median income.
On that measure, yet again, all capital cities in Australia are severely unaffordable.
However, as the chart below shows, an interesting pattern has emerged in the past 10 years. Adelaide, Hobart, Brisbane and Canberra have hovered around the six-times-earnings mark, while Sydney, Melbourne and, to a lesser extent Perth, have seen a big divergence between incomes and house prices.
Sydney, at 12 times median incomes, is the second-most unaffordable city in the world. Only Hong Kong, at 19 times incomes, is higher.
Both those markets have been considerably buoyed by money flowing out of China, as that nation’s nouveau-riche attempt to store their wealth out of reach of any economic collapse at home.
That China effect also causes a few arguments in economic circles, because although the Chinese government is trying to restrict ‘capital flight’ from the country, wealthy people tend to have many means at their disposal for circumventing government barriers.
Economist Saul Eslake recently told The New Daily that bearish Australian economists are getting this aspect of the Australian housing market quite wrong.
The apartment construction boom of the past two years has been funded, heavily, by Chinese money. Offshore buyers are not allowed to bid for existing homes, but are perfectly entitled to invest in off-the-plan new ones, and have played a significant role in funding the apartment boom.
What people have not appreciated, says Mr Eslake, is that even a large decrease in the number of such dwellings being built would leave that industry operating at levels much higher than in the preceding decade.
Pop goes the market
So the ‘bubble’ prices that seem so obvious when looking at the chart above don’t necessarily have to ‘pop’ in the way prices did in California, Spain, Ireland and elsewhere during the global financial crisis.
That is not to say they won’t – just that what we could be witnessing is a long-term flow of foreign money into the country that prices everyday Aussies out of the market.
If that is the case, Australians will feel for the first time the same frustration that a local family in, say, Bali feels – priced out by wealthy foreigners.
In the language of economists, houses, townhouses, flats, shacks and shanties are ‘substitute goods’. If you can’t afford the one you want, you’ll take a slightly cheaper substitute.
So whether you’re in Bali or Sydney, if foreigners pour money into off-the-plan apartments they increase the stock of possible substitutes and, as the old saying goes, a rising tide lifts all boats.
The moral of the story
What this report tells policy-makers is very simple, then.
While the issue of whether or not a bubble is about to burst is an open question, what we do know is what these extraordinary price levels do to the lives of the families and individuals who have to live in such expensive houses.
As the report notes, “securing a standard of living for younger people that at least equals that of their parents and facilitates upward mobility for all must be a principal policy priority”.
When economists argue about the causes of spiralling house prices, one will point to lower than necessary interest rates, another to the influx of foreign money, another to artificial constraints on land releases, and another still to the tax treatment of primary residences and investment properties.
But whichever you think is the most important factor, the results are the same – severely unaffordable homes that are putting too many young Australians under financial stress.
If the Demographia survey is an over-simplification as its critics claim, perhaps we need a few more such over-simplifications to get a simple message through to Canberra – Australian homes are not primarily there to make speculators rich, or to store the wealth of foreigners, or to help cunning investors avoid paying tax.
They are supposed to be there to live in.