Possums Pollytics

Politics, elections and piffle plinking

Now Listen Up Kev – What about this housing bizzo?

Posted by Possum Comitatus on March 18, 2008

In an act of impeccable timing, George Meg over at the The Oz on Saturday had a great article on housing affordability (which has now turned up on his blog) and is a must read.

As happens disturbingly often with Mr Meganomics ( and why the timing is impeccable), I’ll often be planning to write about some particular thing, having a number of ideas floating around my head, only to be beaten to the punch by George not only on the topic, but often on the content and sometimes on the data as well. It gets a bit tin foil hattish at times.

There is very simple root cause to the lack of housing affordability in Australia, but it is also a cause that has virtually no easy solution – Australia simply has too few large cities for the proportion of our population that chooses to live in an urban environment. As a result, the supply of desirable urban locations to live – be they inner city or hilltop or hinterland or bayside locations relatively near a city centre – is swamped by the enormous demand. Desirable locations lead the charge in house price growth which pulls the price of all suburbs up with it, generally in decreasing amounts the further away one gets from the suburbs with a high desirability premium.

But since we can’t really change this situation over any time frame shorter than the very long term, even if we were to attempt to, the policy options left to address housing affordability issues become more complex as a result of our policy options being forced to try and affect the affordability ends from policy angles that aren’t necessarily the root cause of the affordability means.

As always, we should probably look at the data first and for those non-economists reading I’ll walk you through what I’ve done each step of the way. I’ll divide the posts into Part 1 and Part 2. Part 1 will develop a ratio of the real median house price to the real annual average male full time ordinary earnings, where both are adjusted for State based (rather than national) inflation, and both denominated in 2007 dollars so we can see how the real state of housing affordability has changed over the last 25 years.

In Part 2, the next post, we’ll get to the policy options.

PART 1

The two key metrics that are the foundation of housing affordability are income and house prices, with interest rates floating around as a third lesser order, though still important issue.

One of the most useful indicators of housing affordability is what’s called the median ratios – the ratio of the median house price to the median wage. What it tells us is how many times the median wage it costs to buy the median house. But there are also two things that should be taken into consideration when measuring housing affordability over time – the spatial distribution of wages and house prices (such as how the relationship between the two in different states plays out) as well as adjusting both for inflation to give real values, which in turn provide more meaningful results.

Unfortunately, I couldn’t get access to median wage data on a state by state basis over a decent time span in a timely fashion (which will become part of a larger bitch and moan I’ll have in another “Now listen up Kev” post in the near future – better national organisation of data sources to assist productivity growth), so instead of using median wages, we’ll use average full time male ordinary earnings from the ABS. The problem with this measure is that it gives an impression that the “average person” earns more than they actually do compared to using the median wage measure. This happens because high income earners skew the average upward. This is IMPORTANT to keep in mind. So while not perfect, it will still give us a consistent feel for the data over time even though “average” is slightly higher than the median (which is the income amount that exactly 50% of the population earns more than and 50% earns less than)

If we have a look at the annual average full time male ordinary earnings over the period since 1983, you might notice something that makes it a pretty useless measure in its current state:

amwen.jpg

A lot of the useful information we need here gets washed out by inflation. So what we need to do is deflate these state based nominal wage measurements by state based CPI to give us a measure of what the real wage levels in the states over time have been, but “real” in terms of local CPI rather than the national aggregate of CPI.  This is a bit of an unusual approach mind you, but IMHO results in a more accurate measure of “real wages” for the purpose of looking at state based housing affordability than using simple national measures of average wages and consumer price inflation. Once we do this, we end up with a dataset that measures the average wage over the last 25 years, but which is denominated in today’s dollar terms.

awer.jpg

So what this allows us to do is to say, for example, that in 1998, the real wage in NSW in today’s dollars was $55000 a year. It lets us see how real wages have changed over the last 25 years now that the average wage has been adjusted for inflation.

What is interesting here is how real wages declined during the 80’s as a result of the Accord being used to control inflation, as well as how the long term benefits of that started to flow through after the 91 recession when real wages took off. Also interesting is how up until 2000, WA and NSW real wages walked virtually in lockstep with each other once they were adjusted for the inflation levels that were occurring in each State.

We can do the same thing for state based median house prices and adjust them for State based CPI to give us a “real” value of how house prices have changed over time by State, as well as measure the whole thing in terms of today’s dollars.

First off though, the nominal, unadjusted data of median house prices, by State, over the last 25 years:

nhp.jpg

After we adjust the data for State based inflation and place it all in 2007 dollar terms we get:

 rhp.jpg

What is really interesting here in terms of housing affordability is that real house prices remained virtually frozen over the period from 1990 through to 2000. It wasn’t until Howard started stuffing around with halving the capital gains rate and things like the first home buyers grant that real house prices started to accelerate.

Now we can create our ratio by simply dividing the real house price by the real average wage, by state, and we get:

ratiosrhprw.jpg

This real ratio tells us by how much the price of housing has increased in real terms. It also highlights in real terms just how much the NSW market has dropped over the last couple of years.

Next up – Part 2, policy options.

39 Responses to “Now Listen Up Kev – What about this housing bizzo?”

  1. aidan said

    Shouldn’t you be using (median?) household income? Presumably more households are two income these days and this has lead to an increased ability to service a mortgage.

    Just sayin’

  2. Possum Comitatus said

    Aiden, half way up the post it says:

    “Unfortunately, I couldn’t get access to median wage data on a state by state basis over a decent time span in a timely fashion (which will become part of a larger bitch and moan I’ll have in another “Now listen up Kev” post in the near future – better national organisation of data sources to assist productivity growth), so instead of using median wages, we’ll use average full time male ordinary earnings from the ABS.”
    :mrgreen:

  3. Good stuff, Possum, but no Tassie? Not asking in indignation, but being obviously interested in “all aspects of politics in the Australian federation’s best state” http://www.tasmanianpolitics.blogspot.com/ was just wondering.

  4. Possum Comitatus said

    It’s unfortunate Peter, but I couldn’t get median house price data on Tassie that I would consider reliable, and their state based CPI is really iffy because of the general small size of the place.

    Tassie always gets the rough end of the stats pineapple because of its size.

  5. aidan said

    Yeah I noticed that. Average household wage then. Emphasis on the household.

  6. David Richards said

    Sorry to stir the poss – but isn’t mode a better indicator of what the majority of people earn and also the price at which most housing is sold?

    I always said it was Howard that stuffed up the housing sector.. thanks for verifying that poss. Economic vandalisnm of the highest order. It would be interesting to see where house prices would be were it not for his ham-fisted wrenching of the economic levers.

  7. aidanpbh said

    Mode would only work if you aggregated the data into income ranges.

    Median is a robust measure of central tendency. It is the one to use.

    But the point I was making is that HOUSEHOLD income is the kicker, the one to look at. When the wife and I were looking to buy a house (both well paid full time professionals) the bank was willing to lend us $450K+ without batting an eyelid. When we asked what they would lend us if we dropped down to one income (planning to start a family) the amount they were willing to lend was $110K. One income pays the costs, the other services the mortgage. Two incomes can afford to service MUCH bigger mortgages.

  8. swio said

    “Australia simply has too few large cities for the proportion of our population that chooses to live in an urban environment.”

    I think you’ve hit the nail on the head there. Not many people realise this but Austalia is one of the most highly urbanised countries in the world. It sounds crazy for a country as big as ours but its true. When you look at Australia’s environment compared to Europe and America it starts to make sense. In Europe you can practically walk from village to village all the way across the continent. In America its not much more spread out. In Australia you can’t do that. Why the difference? Agriculture. You get more food out the same amount of land in the EU and US than in Australia. Our dry conditions mean we get alot less food from the same square acre of land, which means less people per square kilometer which means our country towns are much more spread out. What this means is that having our population spread out into smaller country towns the way it does in the EU and US is not going to work.

    As far as I’m concerned, there is only one solution to the housing crisis and that is to build more cities. It sounds a bit weird because you tend to think that a city is something that grows rather than is built but we’ve already done it once. Canberra is a very successful articficial city. We can solve our housing problems by building another Canberra or two in each of NSW, Victoria, Queensland and maybe WA. Of course that will be really hard and take about 20 to 30 years minimum.

  9. Thomarse said

    Need not be totally new cities either, but self contained (i.e. has jobs and services) clusters around the margin of the main cities. Like Monarto was meant to be a satellite city of Adelaide back int he Don Dunstan era.

  10. Andos the Great said

    Swio: I think might have been what Possum was hinting at when he said “we can’t really change this situation over any time frame shorter than the very long term”, although I could be wrong…

  11. classified said

    Carefull, scaper… will be here with his Sim City(the Desert edition) soon😉

  12. JP said

    Swio @ 8:

    Well, yes and no. The bits of Australia that most of us live in are not really dry at all.

    On the coast east of the Great Divide, our rainfall is greater pretty much anywhere in the US/European foodbowls. For example where I live on the NSW Mid-North Coast, we have twice the rainfall of Provence in France but only a tenth of the population density.

    And water isn’t a limiting factor on expanding the population, either. Most people around here comfortably supply their own water (and many their electricity) from their roof. That’s 100% scalable infrastructure. We have oodles of spare fibre optic capacity to our telephone exchange, and if the Council bothered widening our road to actually have a sealed lane in each direction instead of just one down the middle, it could easily handle ten times the minimal amount of traffic (by urban standards) that it now carries.

    It’s ludicrous that when so many rural areas could support a greater population with minimal impact (and indeed a positive impact on the economic viability of small and medium-sized rural service towns) our governments want to just add another few hundred thousand lots to dormitory suburbs on the fringes of our larges cities. Just today the NSW government has announced that for rail infrastructure to NW Sydney alone, that decision will cost $12 billion, not to mention the costs that will arise from paving over Sydney’s largest and closest market gardens.

    What IS limiting non-urban population growth is zoning policies. There are large areas of my shire where a property must be over 100 acres (40ha) to have a building entitlement, and then only for a single dwelling. A 100 acre property could easily support a dozen families with minimal loss of productive land, but we don’t allow it.

    And the other obvious limiting factor is access to services. People don’t want to move out of the cities if that means settling for a second rate education for their kids, or a health system that just ships you back to the city when you get really sick. If infrastructure spending was focussed away from the cities, then the people would follow. And building infrastructure is cheaper rurally, too – everything from land costs to construction salaries are lower outside the cities. Typical light rail costs about $12 million per kilometre to establish. So for the $12 BILLION price of the NW metro in Sydney we could have 1000km of light rail. This would be enough to provide high quality public transport within Lismore/Alstonville/Ballina, Woolgoolga/Coffs Harbour/Sawtell, Port Macquarie/Laurieton, Maitland/Cessnock/Kurri, Goulburn, Wagga, Albury, Bathurst/Orange, and Dubbo. But instead we get a line from Epping to Castle Hill with a northern extension that will be scrapped, and a southern extension to the city that will blow out massively in cost (you read it here first😉

    I agree though that new cities are inevitable – and if well designed, desirable – solutions. And there are plenty of places with good access to water but little agricultural value that we could use for that, too, without tacking them onto the edges of our biggest cities, then paying to route their infrastructure through (or under) a sea of $500k homes. Sheesh!

    [Sorry JP – you were in the spam bin for a bit…. Poss]

  13. Su H said

    You hit the nail on the head when you referred to the 1st home owners bonus. As a conveyancer, at the time, I saw the jump in prices in my area almost immediately. 1st home buyers paying too much with their $7,000 dep. to get into a home of their own. Easy finance at low interest so Mortgage free owners purchased not 1 or 2, but 3 or 4 cheap properties instead of putting it into super or savings. Up go the prices – off we go on the merry go round. Of course, we were all told by Messrs Howard and Costello that the bubble would go on forever – silly to believe them wasn’t it.

  14. Geoff said

    Does the fact that house sizes increase by 20% each decade cancel out a lot of the growth?
    Also with the home occupancy rate having fallen a lot due to families “breaking up” since the change of divorce laws in the 70’s – there are many 3 bedroom homes with a single boomer sitting on thier own!

  15. JP said

    [Sorry JP – you were in the spam bin for a bit…. Poss]

    Not surprised with a rant like that🙂

    [And it happened again!]

  16. Ronin8317 said

    The house prices went ‘crazy’ after 2000, and the trigger is the 50% discount on capital gain tax and the $7000 First Home buyer scheme. ($14,000 for NSW at that time, since the State also hand out another $7000). The plan to avert a housing slump due to GST turned into an building boom. This is helped by the low interest rate and easily accessible credit from lenders. During this period, a lot of baby boomer got sucked into investment seminars which offer you untold richest from buying investment properties. This is the root of the problem.

  17. […] Possum starts a two-part series on housing affordability. […]

  18. […] mysterious but awesomely-brained Possum Comitatus explains how he ran the numbers, leading to this […]

  19. Rx said

    I remember the buzzword from the 1970s: decentralisation. Seems we need such a push more now than ever.

    To do that we need high-speed internet connectivity so the newly-opened decentralised areas are connected on the information highway to the rest of Australia and the world. Australia-wide high speed broadband is no less important to our future viability than first-world road or rail networks.

    Now, Labor already has that base covered as the only party with an ambitious internet plan.

    Of course we also need to tackle the inhability issues of decentralised areas: namely climate change and water rationalisation.

    I believe Labor leads the field on tackling these issues.

    As Possum said, the solutions are long-term. Fortunately we got rid of the Howard government, which was intrinsically short-term and populist in outlook.

    In the meantime I support the government with their initiatives for addressing housing affordability in the shorter term: namely the deposit savers account, opening up new land parcels etc.

    We must ride this thing out, while addressing the short and long term challenges (as the Ruddster might say).

    We should never repeat the mistake of voting in self-interested parties that seek power for its own sake, rather than for the good of the country.

  20. Rates Analyst said

    Poss, et al

    I’ve been running this problem around in my brain for a while. My thinking goes something along these lines. I’d use Maslow’s heirachy of needs as a starting point (well my memory of it anyway).

    People will first buy the absolute essentials (think food and clothing).Whatever’s left over will be used to purchase housing.

    Now, even as the average wage grows, there’s a second effect here that the average cost of essentials is not growing as fast, or at least it wasn’t during the 90s – so the discretionary portion of income that is used to purchse housing grows faster than the overall total of income.

    Under this paradigm the cost of housing should grow at the rate that discretionary income grows, not at the rate that total income grows. I know they make annual food CPI series at the ABS, if the do that state based, could you try and break the income into essentials / discretionary?

  21. derrida derider said

    Yeah, the ABS is really, really slack about making the Household Income survey data accessible as time series. Basically to do it you have to muck around yourself with the individual Confidentialised Unit Record Files, which is a very non-trivial exercise. I’ve been on at them about this for well over a decade, but they just don’t seem to “get it”.

    I’d have thought Rates Analyst was an economist, but he must have a sociology background (Maslow was a sociologist). Economists in this area usually prefer Engel curve approaches – basically a more generalisible and measurable (but much less intuitive and understandable) version of the same ideas.

  22. Matt C said

    Possum,
    I’m having difficulty reconciling two aspects of your post.

    Firstly, you state:

    “Australia simply has too few large cities for the proportion of our population that chooses to live in an urban environment.”

    Then, you demonstrate that the ratio of average wages to median house prices (outside NSW) has increased from around 1:2-1:4 to 1:5.5 to 1:6 in the last 8 years or so. In other words, housing has become roughly half as affordable as it was in 2000. My question is this: Do you really believe that in the last 8 years we have seen a sufficient influx of people to our capital cities to drive a shift in prices of that magnitude? I refuse to believe that is the case. I’m not disputing your initial proposition, that our population is too densely concentrated in urban centres, but I just can’t believe that that situation has developed only in the last 8 years (and to an extent sufficient to drive the price increases).

    I conclude that urban density is not the cause of the 2000-2008 (non-NSW) increase in house prices.

  23. Possum Comitatus said

    Don’t get me wrong Matt, I’m not saying that population density was the primary driver of the post 2000 spurt in real house price growth – there were all sorts of things involved in that from policy action stimulating both investor and owner/occupier demand through to land supply constraints in some places through to cheap capital costs flowing through the market resulting in prices being bid up … all sorts of things.

    But underneath all of that lies IMO the biggest, and probably unsolvable problem – too few cities.

    Within urban environments you still get a spread of population densities, but population density and geographic desirability dont always walk hand in hand because of zoning laws and development regulations. What I was getting at regarding too few cities is that every large city has a certain number of highly desirable locations around it -basically, the best bits of land around a city. But by having so few major cities in Australia, we have an effective ceiling placed on the total size of highly desirable land surrounding major metropolitan centres with all of the increased economic opportunities that major metropolitan centers provide. So any market dynamics that go on with housing (such as policy consequences, changes in the cost of capital, changes to development regulations etc) occur on top of that underlying problem, which often exacerbates the magnitudinal shifts in the market because we are effectively operating off a very limited supply of desirable geography . Basically the housing market starts off with a large, existing supply constraint and goes from there.

  24. JP said

    I agree with you, Poss, that there is a natural limit on the supply of “desirable” locations in our cities.

    But as well as making more cities, this could be addressed by making more non-urban locations “desirable” to the same market. Good IT infrastructure makes this more than possible. Already, places like Bowral, Byron and Noosa and their hinterlands are feeling the effects of this.

    Even crappy old ADSL1 makes it possible for my family to live in paradise, but still make a crust working freelance for city clients (many of whom have no idea where we are, and are shocked when face to face meetings are turned down on the grounds that we’re 600 km away down a dodgy road in the deepest bush). I lived in Sydney for over three decades and I love the place, but in terms of a “desirable” place to live our bush palace wins hands down.

    I’d imagine there’s not much of what you do that couldn’t be done from a place like here, either – so the world is changing, and our dependence on cities is one thing that will reduce (not disappear, but reduce) over this century. Maybe we need to be pushing policies that help this process along (like Labor’s national VDSL network) rather than getting the bulldozers out and building new cities just yet.

  25. Rates Analyst said

    I’m a mathematician and statistician by training, but I do have a economics degree (econometrics more than pure economics). I came across Maslow in a management course some time ago.

  26. Catherine said

    I agree with the basic idea that there is a strictly limited range of good real-estate locations in Australia but I think cultural attitudes have played a large part in aggrivating the effect on house prices. We are going to have to wake up from the quarter acre block dream – in Europe most country towns/ suburbs have significant high-rise and medium density building which aren’t being built here.

  27. 2353 said

    Not only don’t we have enough “desirable” locations in our cities (apparently I live in one of the Brisvegas’ ones and find little real difference from previous “less desirable” locations except for the rates bill :-)), we have the tradition of the quarter acre block and driving the car everywhere as discussed above. There is a cost in infrastructure and environmental terms for the provision of 4 lane highways criss crossing the countryside to support those that live a considerable distance from the CBD and commute by car daily. In a lot of cases public transport can’t compete on time, availability or pure lack of service. Why do our planners open areas up for development, wait a considerable time to introduce public transport and then expect everyone to suddenly change modes?

    Opening up for development areas that are even further away from current major centres is not sustainable. Maybe the First Home Grant and other incentives could be skewed so that those that choose to live in areas that are less populated (or in medium/high rise locations closer to the CBD’s) are given an economic incentive to do so.

  28. David Richards said

    Medium and high density concrete towers is not the solution. Look at the disaster they have been in the UK and US. We need to decentralise, and build up regional centres. Move people fromthe capitals to the larger regional towns and thus promote them to full city status. Criticism of the 1/4 acre block in support of monstrous concrete mountains has the smell of the developer all over it. Provision of transport and other amenities should be tied directly to the creation of any new subdivisions of urban fringe land.

    The best option is to encourage people away from the capitals to the regional centres.

  29. Kooyong Will said

    Poss,

    Thanks for the article. I was wondering if you could do a 1/x plot of the last image, the reason is that it is also easier to look at when one talks of affordability (i.e. when it was more affordable the graph should be higher).

    As Poss and others have pointed out, I’ve been thinking lately that we need more cities but the devil is in the details and it would need something like 2050 planning or that somehow Australia is able to do a Dubai.

  30. onimod said

    ripper topic Possum
    I’ve been banging on about this topic as I’ve moved around a bit and lived in a few of oz’s larger urban centres. I think we need to go right back to the reasons for cities in the first place.
    When we learned to manage agriculture well enough to no longer require all of the people in a grouping to have to work in the fields it freed up people to pursue other tasks for the good of the community. The more ‘profitable’ the agriculture, so more people were able to develop other areas of the society and civilisation moved forward.
    Now these days it’s pretty hard to put the case that a large proportion of city dwellers aren’t in fact holding back the development of civilisation. Now I’m not advocating eugenics or anything like that, but I do think we need to have a bit of a rethink about what we actually want to achieve out of the modern city on a big scale as opposed to the individual pursuit of happiness that we seem to be engaged in.
    This week I think it was NSW unions tossing around stats on the evolution of travel times that similarly suggest that the efficiency of our big cities is going to continually drop without radical change. You can chase all the workplace productivity you like, but if every year we spend more time travelling, then either the society or the workplace must suffer.

  31. JP said

    I agree with Ronin @ 16 that the Capital Gains Tax discount has also been immensely infaltionary for house prices.

    In the past, with CGT only charged on gains after adjusting for CPI inflation, then if your house had gone up by $100k, it made more sense to defer sale (to give CPI a bit of a chance to catch up, thus lessening your tax bill). Now it make more sense to sell immediately as otherwise you’ll get taxed on increases even if they are less than the CPI rate.

    Now from a policy perspective, getting rid of the CGT discount is up there next to getting rid of negative gearing in the “too hard” basket. People would squeal that they had expected to be taxed at 15% when they entered the investment, and would feel dudded.

    But what about a budget announcement that for residential investment properties purchased after July 1, 2008, the CGT discount would only become availble after 5 or 10 years, instead of just one? After all the CGT discount was meant to differentiate saving from speculation. For other asset classes, such as shares, it could be argued that a one year investment is not speculative due to the volatility of the sharemarket over a year. But who honestly believes that selling a house after 13 months is anything but speculative? Why on earth should such opportunistic, non-productive gains be taxed at half the rate of the average wage?

    I’ve got no problem with residential property being treated differently from other asset classes, because residential property is one of life’s essentials. It’s not essential that everyone have access to shares, collectibles, or art. But everyone needs a house. Investors should not be privileged by the fact that the demand for housing is one of life’s constants.

  32. pligg.com said

    Now Listen Up Kev – What about this housing bizzo? « Possums Pollytics

    Possum analyses the housing affordability thing.

  33. […] Comments pligg.com on Now Listen Up Kev – What about this housing bizzo?JP on Now Listen Up Kev – What about this housing bizzo?onimod on Now Listen Up Kev – What […]

  34. […] online discussion on some policy specifics might want to visit Possum Pollytics, which has a few posts on the topic. One of those pointed to a recent easy to read and fairly short speech on the Reserve […]

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