Through 2013, DFA has been highlighting the systematic long term deterioration in housing affordability in Australia. Not a bubble, but something much more structural, driven by easy credit AND artificial limitations on land supply. Demographia has just published their 10th global affordability survey. Australia features as one of the most expensive places around the world for residential property, based on Q3 2013 data.
The survey covers markets including Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, United Kingdom and United States. It ranks 360 metropolitan markets. Their basic premise, is that if housing costs exceed three times annual household incomes, then there is institutional failure at the local level.
Their method is based on rating affordability using the “Median Multiple” of house prices and income, which is widely used to evaluate urban markets, and which has been recommended by the World Bank and the United Nations. They do not consider mortgage costs, because interest rates vary, whereas the price for a property is more stable. The benefits of applying a standard methodology over time are obvious, especially, when the long term averages are in the 2.0 – 3.0 range. Significant deterioration in affordability is noted wherever land supply has been restricted by policy intervention. They note that:
“virtually no government administering urban containment policy effectively monitors housing affordability. However, encouraging developments have been implemented at higher levels of government in New Zealand and Florida, and there are signs of potential reform elsewhere”.
They use the following ratings:
Severely unaffordable geographies included Australia (6.3), New Zealand (8.0), and Hong Kong (14.9). Sydney (9.0) was the fourth least affordable major market. Highly elevated Median Multiples were also recorded in Melbourne (8.4), Auckland (8.0) and London (7.3). Trends over time are interesting:
The range of affordability across cities shows significant variations:
In Australia, all urban markets in the study are rated as Severely Unaffordable.
Each of Australia’s major markets has been severely unaffordable for all 10 years of the Survey (a distinction shared only with New Zealand, with its single major market, Auckland). Each of Australia’s major markets, with the exception of Sydney had housing affordability within the 3.0 Median Multiple norm during the 1980s, before the widespread adoption of urban containment policies, which is referred to as “urban consolidation” in Australia. The overall Median Multiple was 6.3 among the major metropolitan markets. Housing affordability deteriorated markedly in Sydney, from a Median Multiple of 8.3 to 9.0 in 2013. Melbourne also experienced a substantial loss in housing affordability, from a Median Multiple of 7.5 in 2012 to 8.4 in 2013. Adelaide (6.3), Perth (6.0) and Brisbane (5.8) were little changed from last year. Among all markets, Australia’s Median Multiple remained at a severely unaffordable 5.8. After major markets Sydney (9.0) and Melbourne (8.4). Port Macquarie (NSW) was third most unaffordable, at 8.1, followed by the Sunshine Coast (QLD), at 8.0 and the Gold Coast (QLD) at 7.7. None of Australia’s markets was rated either affordable or moderately unaffordable. The land rich Pilbara mining region of Western Australia was generally more affordable than the rest of Australia, but both markets were seriously unaffordable. Karratha had a Median Multiple of 4.1, Australia’s best, while Port Hedland had a Median Multiple of 5.0. Other seriously unaffordable markets included Gladstone (QLD) with a median multiple of 4.2, Townsville (QLD) and Mildura (VIC) with a Median Multiple of 4.5 and nine others.
Critics of the Demographia studies claims that the Australian data on household incomes or house prices are not correct, and that there are special circumstances in Australia, especially the urban concentration, which make it unique. However, my research, and even the RBA confirm affordability issues here.
My own view however is we need a deep and thorough review of housing policy in Australia, including land use and affordability, because unaffordable housing is already having poor social outcomes. Plot sizes are shrinking, and last week we highlighted the trade-offs made by first time buyers, if they can get into the market at all! In the 2010 Demographia report, Dr. Tony Recsei, Save Our Suburbs, Sydney, said:
During the 18th century, especially after the industrial revolution, rural dwellers desperate to make a living streamed into the cities, converting many areas into overcrowded slums. However, as the new economic order began to generate wealth, standards of living improved, allowing an increase in personal living space. Unless we are vigilant, high-density zealots will do their best to reverse centuries of gains and drive us back towards a Dickensian gloom.
I would make a less poetic point, high housing costs, costs the economy because it blots up spending power, and distorts economic outcomes. It forces lending into uneconomic and unproductive avenues, and can force poor policy. Time for a rethink!