Housing affordability returns, but for how long?

Property Observer

Today I am going to dive into the latest affordability and daily house price data.

According to Rismark International analysis, Australia’s "all regions” dwelling price-to-disposable household income ratio stabilised at four times in the final quarter of 2011. This represents a 12 per cent fall from the ratio’s post-GFC peak of 4.6 times in June 2010.

The December dwelling price-to-income ratio of four times is the lowest the benchmark has been since June 2003, and is yet another indication of the substantial improvement in housing affordability that materialised over 2011 (see chart).


Beyond the favourable conjunction of rising incomes and declining house prices, affordability has been boosted by the RBA’s bold decision to cut its cash rate twice, in November and December 2011.

While banks subsequently clawed back circa 10 basis points of this interest rate relief in February, housing conditions nevertheless appear to be stabilising. This has been evidenced in better home loan approval volumes, with Australia’s largest mortgage broker, AFG, reporting its biggest February month on record.

There have also been some tentative signs of solidity in the new daily house price index data published by RP Data-Rismark in concert with the ASX. Following a fall in prices during the seasonally soft month of January, home values have staged a rebound in February and March (see chart).


In 2011 the median Australian dwelling price fell by 4.8 per cent from $420,000 to $400,000, based on Rismark’s analysis of Australia’s largest database of home sales. In contrast, disposable incomes on a per household basis advanced by 5.3 per cent.

In order to calculate total disposable income on a per household basis (i.e. accounting for multiple income earners per household as opposed to simply average earnings per individual), Rismark takes the ABS National Accounts’ aggregated estimate of disposable household income and divides by the number of households each quarter.

To compare like with like, Rismark produces a "trimmed mean”, or "average” dwelling price in addition to its standard median dwelling price (the household income estimates are quarterly averages rather than medians).

There are some non-cash line items in the National Accounts computations of disposable household incomes that may not be relevant to purchasing power. One of the principal non-cash variables is "imputed owner-occupied rents”. Stripping these out as best it can, Rismark’s research implies that the dwelling price-to-income ratio has fallen from a peak of 5.2 times to 4.5 times today (see final chart below).


Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark International. The above article is not investment advice.

This article first appeared Property Observer on March 13. Republished with permission.

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Good one Chris, maybe adjust that yellow line down to the next 2.5x income support level and then we may get a turnaround (Housing affordability returns, but for how long? March 13).
As long as people are in denial about the house price trend, they will keep falling. You are one my contrarian indicators, so thank you. When you are despondent I will buy a paper and get in the car for Saturday inspections.
If housing affordability was all that mattered, we would never have gotten into this mess in the first place (Housing affordability returns, but for how long? March 13).
Meanwhile, other figures show some states are already in recession, unemployment will creep up a little, stock on market is increasing, bank foreclosure sales are expected to rise this year, the number of days taken to sell a property is increasing, auction clearance rates have fallen back under 60 per cent, mortgage volumes are falling, and the ratio of net new mortgages is steadily falling to 1.0 and maybe under.
To Glen (March 13, 1.56pm), my sincere sympathy is with you if you're trying to pick Australia's housing market by the use of technical charts alone (Housing affordability returns, but for how long? March 13). I think it's fair to say that Australia's fortunes have increased somewhat since 2000 and before, especially relative to the rest of the developed world. Why wouldn't this flow through to a higher dwelling versus disposable income ratio? Keep waiting for the mystery signs to tell you to buy buy buy; you might be waiting a while
If housing affordability is good then surely more is better? That would seem to be when it returns to the historical trend from 1993 to 2000 at 2.5 to 3.0 times income (Housing affordability returns, but for how long? March 13).
Meanwhile, regardless of how 'affordable' the stats say houses are, there are very few buyers who are prepared to come up with the money.
Whether it's borrowed or not, investors will only put their money in when they think the market is going up or at least not costing them money each year. And it fell by 5 per cent last year.
Until prices recover there will be few buyers. Until there are buyers who think we've bottomed there will be no recovery. If in the meantime there are more and more sellers who'd rather get out now while they can, the market will keep moving down.
It might not crash like a waterfall but a glacier is made of the same stuff, goes the same distance down and erodes just as much.
Glen Sigvart (March 13, 1:56pm), back in the 1990s people used to complain just as loudly when the ratio was only 2.5x. Some people are destined to never own property and people who always complain how expensive it is fall into that category.
Housing was flavour of the last decade for the uneducated investor across the globe, it was a successful one way bet (Housing affordability returns, but for how long? March 13). The house of cards is now collapsing as debt is contracting and over leverage is shown for the noose it really is.
Frugality is the new greed in most developed countries, this is now being played out in Australia (haven't you noticed retail collapsing?), just like other Anglo-sphere countries.
Don't say you weren't warned!
I finally decided to check out these falling house prices. Are you kidding me? $650,000 for an old, average size timber home in Albion? I thought I was going to pick up 3 for that price.
I don't see a need for emergency selling, thanks (Housing affordability returns, but for how long?, March 14).
'I think it's fair to say that Australia's fortunes have increased somewhat since 2000 and before, especially relative to the rest of the developed world (Housing affordability returns, but for how long? March 13). Why wouldn't this flow through to a higher dwelling versus disposable income ratio?'
Seeing as this is a RATIO (not absolute value) then if Australia's fortunes had increased somewhat then if anything the ratio should have decreased (as wages growth would have outstripped house price growth) What you saw from 2000-2010 was the reverse!
If the ratio of wages to house prices increased from 2000-2010 its clear that house price growth was above wage growth. The only way for this to happen is if credit issuance for mortgages during the same period accelerated.
The critical statement here is that this is all based on "dwelling price-to-disposable household income". Disposable household income includes all the kids living at home but contribute considerably to the total disposable household income (but can't afford to move out due to high house prices), but not contributing to the payment on the house. Now if there was a graph showing household debt to the disposable income of those that are actually paying the house off, you might get another story (Housing affordability returns, but for how long?, March 14).
Christopher Joye, what is "disposable household income" now, $2300 per week? Please give me the answer (Housing affordability returns, but for how long? March 14).
Thankyou and have a nice week.