Saw another great article on Microbusiness site that I thought was worthwhile sharing.
By Ross Elliott, author of The Pulse
Discussions about housing affordability focus almost exclusively on
the price of the real estate, movements in which are monitored by
multiple organisations on a seemingly daily basis. There is
comparatively little discussion about people’s incomes, which are
equally as important as prices in determining what can and can’t be
reasonably afforded. The income profile of what most Australian’s
actually earn paints a sobering picture which could more often be taken
into account in debates about housing and affordability.
It’s becoming fashionable again for business lobbies to complain
about Australia’s high wage structure. It explains, they’ll argue, why
we lost Holden, Ford, Toyota, and (almost) Qantas, among other things.
And yes, Australia’s wages are high by competitor standards – but so are
our costs. One of the most fundamental of needs, along with food and
clothing, is shelter. And it’s the cost of shelter relative to incomes
which has been stretched to beyond reach for a large proportion of young
Reducing minimum wages or reducing wage growth further, if at the
same time allowing housing costs to further escalate, will only make
this situation worse. Arguably, if we could substantially reduce the
cost of supplying new housing, this would relieve upward pressure on
wages and work towards improving our global competitiveness – along with
repairing living standards for working and middle class families,
rather than eroding them.
First, here are some of the facts on the infrequently discussed
income side of the equation. (I am again indebted to the team at Urban Economics for making these available. These are top line numbers only: if you want more detailed analysis, please contact Kerrianne Bonwick).
Nearly two in three of all Australians earn less than $52,000 per
annum. It doesn’t much matter whether it’s Brisbane, Sydney or
Melbourne; the proportion is roughly the same. It’s not much. Slightly
more than another one in every eight earn from $52,000 to $78,000 per
annum. Roughly eight in ten Australians earn less than $78,000 per
Problem? It is if you’re trying to buy into the housing market. Take a
modest house of say $400,000 (very modest depending on location). A
worker on $50,000 – and these represent nearly two thirds of all workers
remember – is facing a price multiple which is 8 times their gross
Basically, two thirds of us are stuffed in terms of
affording even a modest $400,000 property if we weren’t already in the
market. A more reasonable price multiple of say 5 times income would
require an income of $80,000 per annum or more. But there are less than
15% of Australians who fit this category.
But wait, shouldn’t we count household, as opposed to personal,
incomes? A good point, particularly for younger families and young
couples, where dual incomes are the norm due to necessity.
But even based on combined household incomes, a third of all
households earn less than $52,000 per annum. Another 14% to 15% earn
between $52,000 and $78,000 and another 11% or 12% earn between $78,000
and $104,000. A reasonably healthy 30% of all households bring in a
combined $104,000 per annum or more, but seven in ten bring in less than
Taking our modest $400,000 home again, and roughly half of all
household incomes fall short of the $80,000 mark required for a
price-to-income multiple of five. For one in three of every households,
their combined income means a price to income multiple of eight times.
They are pretty much stuffed, still.
Hang on, isn’t it more relevant to focus on the demographic that’s
more likely to be trying to get into the property market, because older
people and retirees, who already own or are paying off homes, may skew
the figures? Absolutely: this is the key demographic, especially if
you’re a developer of new detached housing product – which is what this
cohort mainly wants to buy to raise a family in (as opposed to the
apartment they might rent while pre-children).
Personal income profiles of the 25-34 year old age group are pretty
much in line with the Australia wide picture. More than half earn less
than $52,000 and roughly eight in ten earn less than $78,000 per annum,
which means eight in ten of this age group – who are at the peak of
their family formation potential – would be faced with a price multiple
of more than 5 times incomes on a $400,000 property, and more than half
would be faced with a price multiple which is eight times their income,
None of this is great news. For developers trying to provide
affordable new housing in new greenfield estates in urban fringe
locations, the reality of these income profiles can’t be escaped. I had
the privilege of visiting one such estate in south east Queensland
recently and what I saw was absolutely first class product at very good
entry level prices in a very well designed environment. No ‘McMansions’
here – just quality new detached three and four bedroom homes, on small
lots, priced from around $350,000 – and in some cases less.
But even at $350,000, only around 15% or so of the target 25 to 34
year old demographic could afford to get in with a price multiple of
less than 5 times an individual’s income. That proportion would rise
taking into account combined incomes for this age group, but it won’t
rise beyond around a quarter or a third. The reality is that more than
half this age group would find an entry level $350,000 home would be six
times their combined incomes or more. It would be tough going.
Granted, interest rates are currently very low and some governments
are offering stamp duty and other concessions to first time buyers. But
these are having next to no impact on this market. Rates of first home
buyer activity are at generational lows. And interest rates won’t stay
this low forever. A significant rise in variable home loan rates could
tip a substantial number of families in this age group from the ‘just
making it’ basket into the ‘we’re stuffed’ basket.
Since the ‘do nothing’ policy approach doesn’t seem to be working,
what could be done to turn the situation around? Basically, it’s a
simple formula between incomes and prices. You either increase incomes
or reduce prices. The first probably isn’t an option unless incomes can
gradually creep up with inflation and with productivity gains over time.
But what could also happen is the cost of supplying new
housing (not referring to existing stock) could be reduced. New housing
is heavily taxed and over regulated (the same cannot be said of
existing stock). Something like a quarter to a third of the cost of the
new home in an urban fringe location is due entirely to various taxes,
charges and compliance costs (which do not apply to existing stock). It
is also affected by the rapid escalation in land costs due to policy
induced supply constraints in areas of ample available land (the same
can’t be said of existing stock in mostly built-out inner or middle ring
areas). Most of these additional costs of supply owe themselves to
policy changes made since the early 2000s – precisely the time when the
affordability gap began to widen. It does seem a compelling place to start.
We should aspire to a more competitive Australia but this policy
effort cannot just focus on labour costs because our incomes, while high
by competitor standards, are now generally insufficient to cover one of
the basic necessities of life: shelter. We have made this happen
because policy makers have deliberately increased the cost of delivering
new housing with new taxes, charges and compliance costs, all justified
on esoteric planning or sustainability principles but impossible to
justify on social equity or economic grounds.
These policy changes were made to suit political agendas at the time:
they were not needs-based or market-based policy changes. (It also has
to be said the political agendas at the time were in the hands of Labor
State governments, starting with Bob Carr in NSW but which spread
rapidly to other jurisdictions. Why Labor Governments introduced
policies which hurt people on working wages is as mystifying to me as
why Liberal Governments have continued to maintain the same policy
positions, with little amendment).
The gap between the cost of supplying even relatively basic housing
on the urban fringe, and the incomes of the people who in past
generations could afford it, will continue to widen unless regulators
and policy makers begin to grasp the wider economic consequences of
policy-inflated costs for new housing supply.
Footnote: why a five times multiple? There is no strong reason. The authors of the global housing affordability report Demographia
will argue that affordable housing should be around three times
incomes. Moderately unaffordable they define as between 3 and 4, and
between 4 and 5 is defined as ‘seriously unaffordable.’ The multiples of
7 or 8 times incomes, which we’re seeing in Australia, are off the
scale. But for the purpose of argument, if even relatively high (by
international standards) multiples of 5 times incomes seems like a
utopian dream, it illustrates how far incomes need to rise or costs of
new supply should fall before we get even close to the situation that
prevailed for most of our history. It’s a big challenge.