Firstly, I have received a lot of curious emails expecting me to go on a rant and rave about the recent “changing of the guard” in Canberra.
Here is my contribution. Gillard out, Rudd in, Labour to lose by about 10 goals… Hey it’s footy season after all.
More importantly, Liberals to win and property boom to continue.
That’s what I want to talk about today, so lets not waste time on B.S. and get on with it.
You’re probably really confused with the subject line of this email… but don’t be, I will explain.
One of the surest signs that property is about to swing into a boom phase is an improvement in affordability. And if you look at the data, house prices are the (relatively) cheapest they’ve been in a long time. Says to me it’s going to be a very big boom.
“But Jon! Houses are crazy expensive. My two adult kids are living in cardboard boxes under a bridge on the train line!”
Sorry, just had to get that out the way up front. Something like that’s bound to come up every time I say that property is “affordable”.
I’m really enjoying the comments I get on these posts. Often I’m amazed at how much our readers know. And humbled. Why are these brains reading a hack like me?!?
And I love the diversity of opinion that sometimes comes through. But I often find that comments like that aren’t based on data. It’s just a general ‘feeling’, based on personal experience, or something they read in the paper… once. I don’t remember when.
But not me. I talked to my cousin who’s daughter just bought a house AND I did some research into the statistics.
Let’s take a look.
There’s a few different measures around, each doing it slightly differently. The starting point here is the Adelaide Bank/Real Estate Institute of Australia (REIA) affordability measure.
This measure just compares a measure of household (family) income against average loan repayments.
You can see there’s been a pretty solid trend decline in the share the mortgage eats up of family income over the last three years or so. On this measure, it’s around the best it’s been in 10 years.
Affordability is improving.
Same story if you go to the CBA-HIA Housing Affordability Index. This is based on CBA’s measure of house prices against the ABS measure of wages.
It’s a smaller window of time, but again, it’s showing three years of consistent improvement. In fact it’s the best it’s been since the GFC gave prices and interest rates a knock on the head back in 2008.
But there’s something a little unsatisfying with both of these measures. Because what they do is take “total” income measures, which means they ignore the trend decline in the relative share the “basics” take up of our income.
“Disposable Income” – income that’s left after all the essentials have been taken out – is going to be a better measure. Why? Well, it’s your disposable income that determines your ability to service a mortgage. Once the basics are sorted, how much can you spend on repayments?
And if we’re interested in knowing to what extent people can support a run up in prices, this has to be your best measure.
Chris Joye, in a piece he did for the AFR earlier this year tried to cut it up this way. This is what he found:
So we’ve got the same story again. 3 years of steady improvement in affordability.
But look at what’s happened to the level. Mortgage repayments are down to 21 percent of disposable income. Affordability is the best it’s been since the late 90s!
Yes, yes. Your son’s in a box. I heard.
Does it make sense? We know house prices have come a long way in the past 15 years or so?
But so have incomes. And so have incomes relative to the costs of the ‘basics’.
So houses might be ‘expensive’ in a level sense, but the average household is very well placed to afford them. And that’s what matters.
And you can also see that the peaks in the series – when affordability was at it’s worst –was just before downturns in the market. The troughs in the series – when affordability was around where it is now – were just before the booms.
I think you see where I’m going with this.
Affordability improves just before the boom. We get a slow patch in the market. House prices fall or go sideways, but incomes keep rising.
I mean, over the last three years, house prices have been flat, but incomes have increased 11 percent. At the same time we’ve had 200 basis points worth of rate cuts. Of course affordability’s improving.
And improvements in affordability mean that people can afford to spend more on their mortgage. Then, unless supply is outstripping population growth, people can, and will, bid up the price of property.
This is the mechanics of the market. The mechanics of a boom. It happens every time.
And it will happen this time.
And if we’re talking affordability, then we also really need to factor what’s going on with rents – because the other option to owning a house is renting one.
On that front, the Adelaide Bank / REIA measure is the best we’ve got. What we can see is that there has been very little change in the affordability of rentals. In fact, over the past 6 months or so, it has worsened sharply, as rents started picking up again.
So renters will soon be wondering why they’re paying more and more for rents, when the alternative is so darn affordable.
It’s a potent cocktail. Expensive rents, affordable houses, interest rates at 50-year lows…
It’s everything a boom needs.
Quick. Tell your kids in a box to get themselves a house!