We have long argued that Australian real estate prices are at unaffordable levels.
Global reports confirm this, with the 2010 Housing Affordability Index from The Economist putting Australian real estate as the most unaffordable in the world (at over 60% over-valued).
It is, of course, easy to prove ones own argument by finding information and statistics that support it.
So, we set out to disprove ourselves, by finding current expert opinion from reputable sources.
ANZ, one of Australia’s largest banks, has recently released The Australian Housing Update.
It argues that the general methodology behind the (numerous) global reports is inaccurate as, in measuring ratio’s between house prices and relative income, the outcomes fail to take interest rates into account.
So far, so plausible.
The ANZ report states that housing affordability is ultimately dependent on debt servicing costs of which interest rates are a key driver.
The report shows that mortgage interest rates in Australia in the 1980’s averaged around 14%, however, since 2000 the average has been close to 7%.
This is where I take issue.
Whilst the figures they use are accurate, ANZ (no doubt quite keen for Australian’s to continue borrowing and not get cold feet about their debt levels) fail to take stock of the bigger picture.
Australian household debt has skyrocketed since the 1980’s (yes, I’m using a time period they introduced) and has indeed risen much faster than household disposable income.
In the 1980’s the average Australian household held debts totaling around 40% of their disposal income. To be specific, in December 1986 the ratio was 44.1% and just twenty years later in December 2006 the ratio had accelerated to 158%. This represents an increase of 258%. According to the Reserve Bank of Australia, household debt in 2010 is 166% of income.
The ratio of personal debt to income in Australia is indeed one of the highest in the world – higher even than America and the UK. For every $100 we earn, we owe $130. Credit and charge cards account for $40 billion of the debt.
The 1980’s are often referred to, particularly by baby boomers, as being the most difficult period in recent times as interest rates were in excess of 18%. In saying that, think of today’s credit card interest rates, some exceeding 20% and the purchasing of more general goods on credit is far more prolific today than it was 20 years ago.
As such, whilst in 1989-90 about 6% of an Australian’s wages were used to service a mortgage, today it is around the 9.3% mark. This is an increase of 55%.
So, we remain of the opinion that household debt levels cannot be pushed up much further and housing affordability remains a major concern.
As household debt remains at such dramatic levels, the pressure on housing affordability and thus real estate prices will not simply retreat.
Let us know where you think the market is heading!