Valuation of Australia’s Housing Market Stabilises
* National Home Prices 4.6x National Disposable Household Incomes
* National Median Dwelling Price is $405,000
* Home Price-to-Income Ratio will Not Fall Back to pre-2000 Levels
The nation’s most comprehensive “home price-to-income ratio” index, which offers important insights into the valuation and affordability of Australia’s $3.5 trillion housing market, has stabilised at levels broadly in line with its average since December 2003. And as ANZ’s team of economists recently concluded, there are few reasons to expect this ratio to decline substantially in the future.
Following the release of the March quarter ABS National Accounts, the award-winning residential property research house, Rismark International, estimates that average Australian home prices across all metro and non-metro regions (and, critically, including all property types) are 4.6 times average Australian disposable household incomes.
Rismark’s analysis draws on Australia’s largest property sales database, which is supplied by RP Data, and the ABS’s household income estimates.
Australia’s home price-to-income ratio has fallen slightly from the (upwardly revised) 4.7 times estimate as at December 2009, and is a little higher than the average ratio since December 2003 of 4.4 times (see chart).
Source: Rismark International
Rismark estimates that the national ‘median’ dwelling price based on sales in all regions throughout Australia, and encompassing all detached houses, semis, terraces and units, is $405,000. The ‘trimmed mean’ dwelling price, which is analogous to the ‘average’ as opposed to ‘median’ home value, is a higher $431,129.
HIA data shows that there are currently 8.54 million households in Australia, which, given the latest ABS National Accounts figures, means that average disposable income is $93,926 per household.
It is important to note that this income estimate is the ABS National Accounts measure as at March 2009 divided by the total number of households. It represents the total disposable wage and investment income generated by all members of the household and should not be confused with simpler estimates of average wages or median incomes.
Echoing earlier Rismark analysis, ANZ’s economists recently argued that it would be unwise to presume that Australia’s home price-to-income ratio will revert back to the circa 3 times levels experienced 10-20 years ago. They note that while nominal mortgage rates averaged around 14 per cent in the 1980s, they have averaged just 7 per cent during the last decade. This is in large part due to the success of the RBA in anchoring inflationary expectations within its 2-3 per cent per annum range since the advent of the RBA’s formal ‘inflation target’ in the mid 1990s.
In this context, ANZ’s Paul Braddick commented, “The halving of mortgage interest rates almost fully explains the measured rise in the house price to income ratio leaving the house price to income ‘mean reversion’ argument appearing myopic at best.”
Rismark is able to accurately calculate both an ‘average’* and a ‘median’ Australian home price-to-income ratio across all regions and property types. This is a key development as previously the likes of Rismark and the RBA had to compare ‘median’ homes prices to ‘average’ disposable household incomes because of the absence of quarterly median income data (dividing the ABS National Accounts data by the number of households only furnishes an ‘average’ as opposed to a median).
During the GFC, Australia’s average home price-to-income ratio fell to a low of 3.9 times as dwelling prices declined while household incomes remained surprisingly stable care of the government’s fiscal stimulus and a peak unemployment rate of just 5.8 per cent. However, the robust growth in dwelling prices since the start of 2009 has seen the ratio of prices to incomes restored back to a level slightly higher than its post-2003 average of 4.4 times.
Rismark’s analysis demonstrates that Australia’s home price growth has tracked purchasing power quite closely. For example, if we take overall disposable household incomes between 2007 and 2009, total growth was 11.5 per cent. In comparison, capital city house prices have risen by nine percent. Perhaps more interestingly, the rest of state housing markets, which account for 40 per cent of all home owners, have yielded just 3.2 per cent capital growth between end 2007 and end 2009. On a per household basis, the disposable income growth over this period was about 7.6 per cent.
In contrast to claims that Australian home prices are 7-8 times incomes, Rismark’s analysis suggests that the true ratio across all regions and all dwelling types is nearly half this estimate. This in turn implies that Australian housing is not as expensive as is commonly suggested.
The cost of Australian housing is a topical subject for the public and the media. In the past, people have made many egregious mistakes when trying to work out the ratio of home prices to incomes. These errors have included:
• using ‘house’ prices as opposed to ‘dwelling’ prices (around one quarter of all homes are not detached houses—they are apartments, semis, and terraces);
• comparing capital city house prices to incomes deriving from households located in all metro and non-metro regions (incomes are higher in the capitals);
• comparing dated 2007-08 median income estimates from the ABS to house prices in 2010 (the ABS provides much more timely quarterly income data via the National Accounts); and
• using wages rather than total disposable household incomes, where the latter includes more than one worker per household, and earnings on savings and investments.
Rismark’s home price-to-income ratio index replicates the methodology recently used by the Governor of the RBA with two modifications: first, Rismark makes the more correct comparison of home prices located in all regions across Australia with the incomes of households situated in those regions (the RBA contrasted capital city home prices with all-regions incomes); and, secondly, Rismark is now able to compare ‘average’ (as opposed to ‘median’) home prices with “average” incomes.
The home sales data used in Rismark’s index derive from Australia’s most comprehensive residential property database (sourced exclusively from RP Data), which captures 100 per cent of all sales transacted across the country.
*The average calculated by Rismark is a ‘trimmed mean’ similar to the measure used by the RBA when estimating inflation. A simple average results in volatile estimates due to occasional valuer general data entry errors. The trimming process results in the truncation of only the top and bottom 5 per cent of prices within the price distribution.
