Housing affordability has been in the headlines again, but this time around some seriously good research is the cause.
A new study for AHURI (Australian Housing and Urban Research Institute) strongly suggests that the traditional method of calculating housing affordability is out-dated and should be considered in conjunction with other ways of weighing up whether people can afford their mortgage or rent.
We have been banging on about this for close to a decade and this missive pulls together some of our thoughts on this matter.
The most commonly used benchmark to determine whether housing is affordable, is if it costs less than 30% of a household’s income. However, few know that the 30% benchmark was established at the Government’s 1992 National Housing Strategy and was intended to apply to lower-income households only. However, it is more often than not now quoted in reference to all households – even those on higher incomes.
Another point of contention is the source of the “household income” information. Most commentary on this issue uses median weekly family income. A family is defined as a married couple with or without dependent children. Such a definition is quite prescriptive and precludes a large number of home buyers. No consideration is given to age, for example, which provides a much better basis on which to analyse housing affordability.
Also contentious is that the income data is derived from the ABS Census and updated on the basis of movements in average weekly earnings. We remain sceptical about certain elements of the Census and the income data concerns us the most. One in eight households across Australia do not state their income on their census form; resulting, we believe, in a lower median household income than is really the case.
In our experience, using income figures sourced from the Australian Tax Office provides a more accurate picture. And the statistics here don’t lie with median household income, across Queensland for example, being 21% higher when measured by the ATO against the Census. In short, it is harder to lie to the ATO than it is to the statistical bureau.
Some better measures
The first one looks at income left over after debt servicing. This approach paints a different picture to that obtained simply by calculating the proportion of income devoted to repayments. Rising incomes have allowed households to meet rising loan repayments whilst maintaining, and often increasing, living standards. Rising household incomes mean that the 30% traditional affordability benchmark is now out-dated. In fact, given higher income levels now, households can devote as much as half of their income to debt servicing, whilst maintaining the same standard of living. The AHURI study found similar results.
Another approach recognises the shortcomings of using median incomes of all households (or families) and instead considers the incomes of households in the age bracket of typical first-home buyers. In this case, this relates to households in the 25 to 39 age bracket. When looking at the proportion of residential sales by price range and taking into account interest rates and borrowing capacity, the typical first-home buyer could afford to buy one-third of the dwellings for sale across the country. We estimate that this figure lifts to just under 40% for Queensland. Now, while this is down on the long-term average of 45%, housing affordability measured by this series appears far less stressed than the traditional measures.
The big problem here is that first-home buyers these days want everything that opens and shuts in their first home. A recent ABS study shows that three out of four first-home buyers bought either three or four-bedroom dwellings last year, with 26% buying a property with four or more bedrooms – as their first home! It probably had fully ducted air, secured off-street parking and a swimming pool, too.
A third of first-home buyers are couples and another 25% live alone.
The last measure involves taking into account investment assets and income. Ratios of household debt to assets have been much more stable over recent years than the ratios of debt to income. It needs to be noted that traditional measures of affordability fail to take into account investment income. When you do so, affordability measures appear far less stretched.
These three measures suggest that housing affordability is not as dire as many fear. This is borne out by Australia’s very low housing loan arrears rate. Whilst the housing loan arrears rate has risen over the five years, it still remains low by international comparison.
Anecdotal evidence also suggests that housing affordability is not as constrained as some would have us believe. If you remain sceptical, spend a few hours in a major shopping centre and watch how many potential first-home buyers are spending up – and big. Or visit your local airport on the weekend and see how many young couples are off for a weekend away. The same applies when dining in some of our better restaurants.
Housing affordability is at nowhere near crisis level in this country. Instead of the government giving ‘hand outs’ to first home buyers – which only lifts price – policy should address structural factors that lead to excessive housing demand and/or inadequate supply. And please don’t get me started on the baby bonus!
In the meantime, some “plain speak” is needed. Potential first-home buyers need to be told that buying your first property is not easy; it involves sacrifice and compromise to your current lifestyle.
To renters (and first-home buyers alike) paying 30% of your income for shelter is not outrageous.