Laying property price myths to rest

26 January 2013

Jacob Saulwick - The Saturday Age, January 26 2013

In New York they are building tiny apartments less than half the size of cricket pitches. This week the city's mayor, Michael Bloomberg, announced the winner of a design competition to build an apartment tower housing apartments of 300 square feet. In Australian parlance, that's 28 square metres. That's a portaloo block. That's half a tennis court halved, then halved again, then halved again, with a balcony. 

"We have a shortfall now of 800,000, and it's only going to getworse," Bloomberg said of the city's dwelling stock. "This is going to be a big problem for cities with young people." 

It has become a commonplace that in big cities in Australia - cities with young people - there is a housing crisis. In this context the term refers to a different sort of housing crisis to the one that swept through much of the US and Europe, where prices dropped and millions were kicked out of homes because they could not meet repayments.
In the Australian context, the term refers to the opposite sort of housing crisis - where people struggle to get into homes in the first place because they are so expensive. It is more a New York style of housing crisis.
Demographia, a research firm, has a knack of winning headlines with yearly reports demonstrating just how unaffordable Australian cities are. The most recent iteration hit the papers this week, with its assertion Australian houses were the world's third least affordable, behind Hong Kong and Canada.
But if house prices are an allconsuming conversation topic here, they are also the subject of misrepresentation, of which Demographia's survey is a prime example. Don't get me wrong. It is obviously very expensive to live in big cities such as Sydney and Melbourne. It is expensive, and fast becoming more so, to rent. And it remains, in raw terms, expensive to buy. Just not the way Demographia described it. 
The ratio of median income to average dwelling prices is the most commonly cited measure used to
demonstrate how expensive Australian property is. Across the country, this ratio reached a peak of about seven (meaning dwelling prices were worth seven times median annual income) in 2003-04. In capital cities, the ratio was above eight. In Sydney it was above nine.
Historically, this looked high. In the mid-1980s the ratio was about three. The ratio also looked - and looks - high in international terms. This is where Demographia's surveys, which always place Australia at or near the apex of the world's least affordable cities, get their popular bite. 
But Australian house prices are not international outliers. A Reserve Bank paper last month compared the ratio of incomes to house prices in Australia to a range of comparable countries, but used a different measure of income. It used an average measure of income from the national accounts (which can therefore be compared to other countries' national accounts) that was different in a number of respects from median income, one of which was in including income deposited in
superannuation accounts.
This sounds strange, because people generally do not use superannuation income to buy and payoff a house. But it is needed for a fair international comparison, because in places without advanced super systems people still save for their retirements but in ways that are included in national accounts measures of income.  And when you use these national accounts measures, Australian
house and apartment prices are pretty much in the middle of countries like France, Belgium, Germany, Canada, Norway and New Zealand.
"The price-to-income ratio for Australia is now broadly in line with other comparable countries, having risen relative to other countries since 1980 when it was at the lower end of the distribution,"
the Reserve Bank said. (US prices remain atypically low, probably because the country's population is spread through major cities and towns across the entire country, as opposed to concentrated in coastal cities like Australia.)
The Reserve's research, therefore, challenges the fallback assumption that Australians face peculiar housing and apartment prices. What's more, the market has been flatlining (or slipping) for three years. The size of the average home loan, for instance, has remained flat since 2009. This has
never happened before. Since the early 1990s - when the Bureau of Statistics started recording the figures - there has never been three years of flat growth in the size of home loans. (Real estate agents say house prices are soon to kick off again. They have been saying that for three years and, you know, who can you trust?)
But the bigger problem with reports like Demographia's is that they blinker a view of what real housing problems. 
What reports like Demographia's fail to capture - and what terms like "housing crisis" and "mortgage stress" in fact only obscure - is the variety of ways in which people respond to what is not so much a crisis as a market. There are some people in Australia facing a housing crisis. They are homeless. They are couples and individuals facing retirement in a private rental system that
offers scant solace to those with little independent income or savings. 
Otherwise, people are making choices that invariably respond to the incentives and prices in a big city housing market. These choices can be uncomfortable - moving back with your parents to save for a mortgage, living in a smaller apartment than you might like. But these are only crises in the sense that seasonal rain is: they can be a drag but they are manageable.
People respond to the Australian housing market every day in decisions about where to live, who
to live with, about what to go with or without. What's been missing is a similar flexibility and responsiveness on the part of government to help those who genuinely need it; to ensure that if you're going to live in an apartment the size of a New York shoebox you can be sure it is well made and that you won't regret the investment; or if you are going to move somewhere with more space, you will have the roads, busways and train stations to ensure that a decision compelled by the housing market doesn't require cutting you off from the rest of the city.
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