Economists just don’t know why this chart looks as scary as it does.
Is there a chart that keeps me up at night?
Now people sometimes call me a ‘Property Pollyanna’ – they say I’m always looking at the property market through rose-coloured glasses. Everything is always good!
But that’s not true. When I say it’s always a good time to buy, I mean it’s always a good time to buy a good deal, not just buy ‘anything’.
And while it’s true that right now the market is certainly going higher, and there are a bunch of factors lining up behind the property market, that’s not to say that it’s a one-way street, or that I’m blind to the risks that are out there.
Risks like this one. This is the one chart that keeps me up a night right now:
This monster is real household disposable income per capita.
Ok, there’s a lot going on, just in that title alone, so let’s unpack it.
Ok, so it’s household income. That is, it’s how much households, whether they’ve got one income or two (or three or four – I’m a modern guy), are earning.
It’s disposable income in the sense that non-discretionary items have been taken out of it. You don’t have a choice whether your going to pay your electricity bill or your rent, so this is the income that’s left after these things have been paid.
And it’s ‘real’ in the sense that it is adjusted for inflation. It’s what household disposable income would have looked like if the price of stuff never went up. It helps us understand how much purchasing power our income has.
Ok, so that’s what we’ve got: how much purchasing power do households have after they’ve paid for their essentials?
And what’s it telling us?
Well, this chart is telling us that household purchasing power hasn’t increased in 9 years! It increased solidly for 15 years (and for generations really, if we had the data), and then just hit a brick wall in 2011.
That is, households are no wealthier now than they were in 2011. And it doesn’t look like it’s improving anytime soon.
This scares me.
Why? Well, household income growth is essential for house price growth. This chart shows us how much wiggle room households have to spend more on their mortgage and bid up house prices.
Now, as I said, the outlook for property is still bullish. Falling interest rates increase purchasing power, regardless of what’s going on in wages, and the housing shortage means that people will pay more to secure a home, and then just cut back on other spending items.
So prices will keep going up.
But the wages and income data are still concerning.
The other thing that’s strange in all this is that economists don’t really know why wages aren’t increasing. The economy’s been doing ok. Wages should have been going up. Ross Gittins at the Age sums up the general confusion here. Maybe it’s decreasing Union power. Maybe it’s the unwinding of the mining boom. There’s no clear answer.
This is both concerning and comforting. It’s concerning that we have such a blindness around such an important part of the picture, but it’s comforting in the sense that mysteries in economics don’t tend to last long – they correct one way or the other.
So my base-case scenario is that wages and household income start to pick up in the near future, and that will add support to house prices.
But I can’t say with any certainty when that will happen.
And until then, this chart remains just downright scary.