Claims that Australian cities are the most expensive in the world are less about facts and more about a master-class in media manipulation.
Here’s a case study in manipulating the media like a boss.
I’m talking about the Demographia survey of housing affordability. You probably heard about it, even if you don’t remember the name. This is a study that, year after years, says that some of Australia’s property markets are the most expensive in the world.
And it was grabbing headlines like a machine about a month ago.
The key take-home was that Sydney was the third most expensive city in the world, behind only Vancouver and Hong Kong.
Oh the humanity!
What a disaster. Sydney was third, Melbourne was 6th. What’s become of our cheap and easy lifestyle? Who do we blame? Is it banks? Is it immigrants? Is it investors?
The media gorged themselves on righteous indignation.
But did anyone actually look into this ‘third most expensive city in the world’ tag? It doesn’t look like it.
So I strapped on a dear-stalker hat and did a little detective work.
It starts with the top ten list. This was the one doing the rounds, and the media was only too happy to reproduce it without question:
Demographia’s Top 10 most unaffordable city markets:
- Hong Kong
- Vancouver
- Sydney
- San Francisco
- San Jose
- Melbourne
- London
- San Diego
- Auckland
- Los Angeles
Now what do you notice about this list? If you’re like me, you’re struck by what a narrow band of countries we’re talking about – Australia, NZ, the US, the UK and Hong Kong.
So what, expensive housing is only an Anglo thing? What is this, the Commonwealth games of expensiveness?
Where’s China for example? Shanghai is notoriously expensive. No Munich? No Paris?
Well, turns out there’s a reason for that. When I tracked down the report, it turns out this isn’t a global survey. The only countries in the survey are:
Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States.
So it’s a bit of a stretch to have a look at just ten (!) specially selected countries and then talk about such and such city being the most expensive and unaffordable city in the WORLD!
It’s not a global contest, no more than world-series baseball is.
I mean how can you just leave out the entire European continent?
But that doesn’t stop the media. Sydney is third most expensive city in known universe.
But have a look at the countries from our tiny sample that don’t make the top ten. Ireland isn’t represented and neither is Japan.
Well, Ireland has just gone through a total property bust, driven by dodgy bank practices and massive over-supply. Japan has been in recession for like 20 years.
So our cities are more expensive than theirs. So what? It’d be completely surprising if that wasn’t the case.
I went down to my local kindergarten the other day and participated in their sports carnival. Based on the results of the Under-5’s, I declare myself to be the fastest man in the world.
The results get even more bizarre when you flip the results and have a look at what cities they think are the most affordable.
What’s the 11th cheapest, most affordable city in Australia?
Port Hedland.
Port Hedland, with a median housing price of $818,000 is one of the cheapest markets in Australia.
Hey?
How is a market where million dollar properties are the norm, ‘affordable’.
Funny results like this riddle the Demographia survey because the methodology they use is very basic.
They simply compare median reported incomes with median reported prices. Port Hedland does well because median reported incomes – at $163,700 – are high.
I’ve written before about the dangers of using such a basic measure, particularly if you’re going to use it to talk about ‘unaffordability’ of ‘bubbliness’.
Income is not the only determinant of house prices. We’ve seen increases in the income/price multiple over the last twenty years because there have been massive structural shifts at play.
The biggest of those is a trend decline in interest rates. Interest rates have fallen to record lows since peaking in the mid-90s. Each year they fall further, and open the way for people to take on larger and larger debts.
Debt servicing gets easier every year. That means that the same income can support more debt, and therefore higher house prices.
Increases in house prices is exactly what you’d expect.
Add to that the end of inflation, financial sector liberalisation, and a host of supply-side blocks in our major cities, and suddenly the ‘affordability’ question gets very complicated.
But all power to Demographia. They’ve pulled off a massive media coup with very little.
(If you’ve got a spare 2 minutes, take a look at their website. Straight from 1992! Who are these guys?)
Taking publicly available data from a small survey of countries, they’ve generated front-page headlines in every major city across the English-speaking world.
Seriously, they should win some kind of PR award for this.
And what’s their agenda? Will they look like a mix of developers and academics pushing for an end to urban growth boundaries in our big cities.
That’d obviously be a win-fall for developers, but I think it is pretty obvious that our planning laws aren’t working, and supply side blocks are a big reasons why prices have risen as much as they have in recent years.
So I’ve got some time for that.
But as for claims that Sydney is the third most expensive city in the world? We need to take that with a massive grain of salt.
And our media should learn to do the same.
Jorge Fallas says
Well, The Economist has a wider group of countries. You can look at their interactive graphs here.
http://www.economist.com/blogs/dailychart/2011/11/global-house-prices?zid=295&ah=0bca374e65f2354d553956ea65f756e0
And I must say it does look very scary for Australia. For example, the price to rent ratio, while not as high as Ireland reached before their implosion, it is sure in territory where other countries passed before their bubbles deflated.
And that is the hart of the matter: There IS a bubble in the Australian Real Estate market. HOw or when will it pop, that is the question.
Steve says
Why worry about Australian house price growth? South Africa is the stand out performer according to the economist web site. It looks like it has grown by about DOUBLE Australia’s growth in house prices.
Jorge Fallas says
You are looking at nominal prices. South Africa has had high levels of inflation. Currently triple those in Australia. Better look at Real Prices for comparison between countries. Or ratios like prices to rent or income.
steve says
Even using real prices South African (and HK) prices have grown MORE than Australian prices. Surely they are more likely to be in a bubble than Australia? Why aren’t we concerned about house prices in these countries instead of the incessant focus on Australia. I think we need a bit of perspective in this debate.
Jorge Fallas says
These are the charts for Real Prices. I do not see South Africa’s growth. But the reason Australia is single out is of course becasue we live here. And the strategy to load a lot of debt to buy such poorly diversified protfolio, with tax breaks, is insane and counterproductive to prospective home owners
Sowrabh Behl says
Regardless what you say Jon or whatever fancycharts you show, as I am the Gen X/Y (one of ’em! always forget which is which!) I can tell you that buying a house consumes more then 3/4 of my entire income. that’s pretty unaffordable if you ask me.
Yes, renting is cheaper. Yes, its cheaper when living with room mates etc etc. Doesn’t change the fact that its clearly unaffordable to buy a home.
Adam says
To be more precise, house prices specifically in the area you want to live are high and arguably unaffordable. If you are buying a house that consumes 3/4 of your income then you are buying a property you can’t afford most likely in an area you can’t afford to buy in. That is poor choice on your part.
And that is a different kettle of fish to “house prices are unaffordable”.
I am Gen X, have earned only a slightly above average wage my whole adult life and I own 6 properties and am about to buy a 7th. I bought my first property where I could afford to live not and not where I thought it would be nice to live but where I could clearly not afford to.
No one promised you the right to live in exactly the suburb you want for whatever price you think you should have to pay. You do realise all those trendy sought after suburbs in Sydney were the shitsville outer suburbs no one really wanted to live in when most of the baby boomers bought. People bought there because that is where they could afford to live. That is the main reason they paid “alot less multiples of incomes to buy their homes”
Sowrabh Behl says
Hold on.
I live in western sydney in one of the cheapest suburbs available. I also bought just before last years epic house price rise. Hardly due to ‘poor choice’. I’ve been forced to make that decision due to the cost.
I’m not sure where you live, but it doesn’t sound like Sydney.
While its great that you have brag rights about 7 properties – i think its also worth mentioning is that you probably bought these many years ago before the most recent price rises which has really stretched most people’s budgets.
Your obviously flipping the equity you have ‘gained’ to buy more properties.
Anyone who got into the market early could have made money. the point is not back then, but affordability right now.
Adam says
My first property was a small apartment in Beverly Hills in Sydney which I bought in 2006. I sold that and bought in Menai in Sydney in 2010. I gained bugger all equity from the first property. I don’t know if it was a bad property, a bad area or what but after all buying and selling expenses I made a grand total of $10k from that property. I almost would have been better off putting my money in the bank.
But you know what, buying what you can afford at the time and later on moving up to a better place in a nicer area is what people have been doing for generations.
Since then I have never refinanced to access equity to buy more properties. I have saved my ass off, bought positive cash flow properties and used that cashflow to buy more.
And sorry to be brutal but no one has forced you to buy in Sydney. You choose to work and live in Sydney. If you can’t afford one of the cheapest suburbs in Sydney then it is a poor choice to live and buy in Sydney.
Sowrabh Behl says
Apart from loathing in your own supremacy I don’t see how your contributing to the discussion.
As I said – you bought these properties long ago, which could have been far more affordable then they are now. We are talking about TODAYs value. Not 1990’s values. Prices are far higher multiples of average income then they have been before.
Plus I don’t think your understanding the point of the argument. What I’m saying is that its ALREADY UNAFFORDABLE for a vast majority of people my age (NOT just me) and what your saying is no one shouldn’t have the right to live where they work even after earning a pretty good income?
I think those properties you own are going to your head.
Anyway, since this is going no where I won’t be replying further.
Adam says
How is 2006 supposed to be 1990’s prices? It’s no wonder you are struggling when you can’t seem to comprehend simple things like what decade 2006 is in.
And frankly the prices today are not that different to 2006 or 2010.
My point is you can moan and bitch about not being able to afford to live where you want or you can just go out and do something.
Obviously you have a ready made excuse for everything and enjoy bitching more than how much you might enjoy getting ahead in your life so have fun with that.
No One From Overseas says
Sowrabh,
As far the immigration continues and jobs are lost on the western side of the country due to mining boom is over Sydney is up for growth.
Overseas people are coming with a suitcase and in ten years time they have more (become investors) than most of the fourty years old Australian born. I am not talking about rich investors from China but people coming with no money.
You people should not aim for million dollar property but buy a unit in Blacktown. If you cannot afford that contribution minimum 20% + cost you truly should move out to counry nowhere. And when your child want to go to school you should look into the mirror and sp….. yourself.
Then in the main time we will buy a few other properties and in other 10 years time will have a six figure passive income (which will be inherited by our descendens).
Sowrabh Behl says
Let’s just say I already have a property in the nearby area.
No One From Overseas says
Which you cannot afford.
Whithout beeing to personal can you give details of the property?
By the way no one is forced to buy anything!
Sowrabh Behl says
I can afford it, but only because I have a rental income from a granny flat which cuts my repayments drastically. but my parents wouldn’t have to take these kind of measures to afford it.
No One From Overseas says
Your parents probably worked harder and longer hours than you do. And most likely spent less on holidays and so on.
Should try the old Europe where people comute 2 hours to and from job (4 hours in total) and work part time beside the full time job and weekends. Do it for the next ten years and see how moch your debt is still. Probably will be NIL.
And in Europe the house price is not cheaper than here compared to an average salary which is about 1/5. But the petrol is more expensive then here about $1.60 (just down from $2). iPhone is about 3 month salary!
If any complains here you may consider to move there instead of country nowhere.
Rusty says
Sydney house prices have always been expensive. 27 years ago when I bought my first home interest rates were at 17.5%. I was paying $2.5K per month to service a $170K debt. Consumed over 3/4 of my monthly income at the time
Sowrabh Behl says
good point Rusty. However, I think average income was around the $35k mark in that era. And if you look at the $170k debt then that means its just above 4.5 your average income.
Problem is – average income is now $60k and average debt (and thats not even including any pensioners otherwise it would be MUCH less) when buying a house now is around $600k which means that people are buying houses 10 TIMES greater then the average income – which is a scary statistic.
John from Perth says
The Labour party must be using the same statistician to tell us that Australia doesn’t have a debt problem!
nomoresciencedenial says
Public or private debt? Nominal or as compared to GDP or revenue? http://www.theguardian.com/business/grogonomics/2014/jun/09/government-debt-it-all-depends-on-how-you-look-at-it
Mark says
If you somehow think that property in Sydney is not absolutely absurd, then you can’t be helped.
It is an absolute disaster waiting to happen!!
Consider this….. Do u really believe that those houses in America that you are heavily promoting for 55k, with 8 or 9 k a year rental yield, were always only valued at 55k????
Or in 2007, were those same houses trading for 100-150K, on 6-7% yields?????
Hmmmmmmmmm
Yes, investing at 1.5% yields, in the expectation that some greater fool will come along further down the line, and be happy to buy the place from me at an even higher price, and accept just a 1% yield, well that all makes perfect sense!!!!
I promise you, this will all end badly.
Mark