'Residential Housing Affordability Levels Australia: extremely advanced stage in Business Cycle'

? Copyright 1993 - 2023, Donald Evan Gilbert

None of my work can be used by: chatGPT Microsoft or any AI-powered Software whatsoever. All Rights Reserved. If you want to use it you buy it.

TITLE

'Residential Housing Affordability Levels Australia: extremely advanced stage in Business Cycle'

TARGET AUDIENCE

ALL Stakeholders, including: Retail Tenants/Landlords, Treasury, Reserve Bank of Australia, Minister of Finance, Finance and Investment Sector, Valuers and Property Professionals.

BACKGROUND

There has been much bleating in the Australian media, advocates for an against our residential affordability levels (renting and mortgagors) over the last few years and more so since Central Banks have started raising interest rates.

This is an area that has never been central in my work, however, I have always taken an interest in areas allied to my work over my Property Economics career.

In over the years and in recent months I have done some basic research in regards to residential property; sufficient to make reasonable comments on LinkedIn and sometimes on our Facebook page “Affordable Housing for All Australians”.

This brief research should leave both advocates for and against and other stakeholders under no misunderstanding where Australian Housing Affordability sits.

BASIC RESEARCH AND FINDINGS OVERVIEW

I have sought to link several pieces of research: mortgage levels and rents for 2.0 bedroom apartments in Australian capital cities from SQM (it is their most recent evidence) and from NUMBEO; to average European rents for two bedroom 90.0 square metre average units. The latter NUMBEO covered both Australian and European data. There is also pivotal research by the International Monetary Fund (‘IMF’) and the Reserve Bank of Australia (‘RBA’).

I have chosen 2.0 bedroom apartments, as I believe the data metrics sits in the middle of the wide range of what the residential market comprises of. It is a reasonable sample vs high end luxury housing and or a one bedroom studio apartment for example. And the data is available and SQM overlaps with NUMBEO. ?

In short, as I am doing this analysis I hope that my findings are wrong! This Big Picture Indicators certainly suggest that our Australian residential sector is off on a limb. Here is very interesting background reading in my very first paper that have certainly stood the test of time; refer to RBA management of Monetary Policy below and or consequences: ?https://leaseconsultant.com.au/papers-article/economics-a-most-useful-tool-for-the-valuer/

One of the big differences in Australia, is that income is taken as gross income, whereas in Europe gross family income is based on gross disposable income. It is a very large difference.

Another worrying finding, is that from the Reserve of Australia’s research, since circa 1990, they are fully aware our Housing Loan Commitments and the link between House Prices and Household Debt was / has been spiraling out of control since at least 2015. They did nothing about it. They used limp wristed arguments to justify further decreases in our interest rates during Covid; and to add fuel to the fire, encouraged Australians to keep buying.

Of particular interest to me, is that I have claimed to have kept Glenn Stevens the former RBA Governor in the loop with articles since circa 2004 that went to RBA info email address. Secretary / Receptionist who I called several times informed me that he was interested in my views about Australian Interest Rates leading up to the GFC quite tightly ref. Figure 1. Below.

Figure 1: RBA Cash Rate since 1989

This is clearly evident where Australia was out of step with the rest of the World. We went into the GFC with:

1.????A significant Government surplus (circa $70.0 billion) we were the only Government in Western World with a surplus;

2.????Previous Treasurer Peter Costello used massive surpluses to start Future Fund; perhaps this was taxpayer money which the Civil Service was NOT entitled to;

3.????A large “reserve” with High Interest Rates which Central Bank could use to stimulate our economy. During GFC they reduced our interest rates from circa 7.15% to say 4.0% whereas USA had been on 4.0% for a long time; at 4.0% Australia still ammunition to go lower; the USA and rest of Western World had no-where to go, but lower.

## 25.3.2023 What this means is that RBA Policy at the time was holding back on the availability of Cheap Money and or holding Asset Prices in check whilst USA and the rest of the world had had far lower interest rates. The USA were peddling Collateralized Debt Obligations around off bad bad lending practices (exactly what I believe has been happening in Australia) which were one of the main reasons that we had the GFC.

And lo low LOWER Opportunity Cost of Cash causes many other Metrics to start rising (Gilbert, D. 1993 - 2023).

Figure 2: Housing Loan Commitments and Housing Prices and Household Debt

Since the GFC from Figures 1 and 2 Australia still had some order from circa 2010 – 2013 then we lost the plot. Our Loan Commitments and or House Prices and or Household debt have spiraled out of control.

As recently as March this year, our Governor looked a Government Inquiry in the eye and said there is nothing wrong.

We need to add the following into the mix:

1.????Residential housing became a “commodity” subsidized by the taxpayers in circa the mid-90s;

2.????Respective State and Federal Governments have further cajoled / subsidized / pulled / pushed / added more subsidies into the mix which have raised house prices;

3.????Coming off already a very high base, our Local / State and Federal Governments have used housing as a cash cow;

4.????The People (us ordinary people) have been “conditioned” to believe that:

a.????Share markets only ever go up;

b.????Their superannuation (pension funds) will only ever increase;

c.?????Recessions / downturns / depressions do not exist;

5.????Points a – c are false. Do any Google search and see how many recessions / depressions there have been say for the last three centuries. Research for several of my 2009 – 2020 papers supports steep downturns;

6.????As my 1993 paper (Gilbert, D.) above suggests; we are very deep into an extremely long growth phase.

Let us now look at some real numbers to see how Australia compares, with in my opinion a far more mature / measured / less gung-ho / dismissive / sometimes arrogant (it won’t happen here; this is Australia) market.

SPECIFIC RESEARCH AND FINDINGS – refer IMF, SQM and NUMBEO

I have used SQM as a good reference point for recent 2.0 bedroom apartment rents in Australia. The reason is that our rentals have spiked up in recent times.

I have referred to Australian Bureau of Statistics (‘ABS’) as a reference point for: Gross family income; average 2-bed apartments rents (most recent); NUMBEO’s rent yield; their rent burden; their mortgage to income; their affordability index, and their price to income levels.

We can compare some of Australia’s Capital Cities (CBD data) with a sample of European cities ?simply selected at random including: Rotterdam, Eindhoven, Basel, Dresden and Amsterdam. I have chosen the Netherlands, German and Switzerland cities perhaps they have better “controls” in place. ?

As stated, in the first instance, Australia has used Gross Income; the Europeans Disposable Family Income. I remember posing this question on LinkedIn recently. A really important point could be, that RENTERS are more likely to be in lower income brackets! That would also exaggerate the numbers!

The rental burden in European Countries (IMF) range from 25.0 to 35.0%. whilst the research is reasonably dated, I do not believe it would have radically spiked up; only in Australia as we do it with intense Copycat behaviour!

Figure 3.

Conversely to that, our rent burden for two bedroom apartments is: Sydney (66.3% of gross income); Melbourne (35.6%); Brisbane (38.0%); Perth (26.4% and Adelaide (47.6%). Quite clearly these seem stretched by comparison.

Residential Rent Yields in five randomly selected European cities on disposable income are:

Table 1.

Australian rent yields on far far higher percentage of income are stretched. Whilst the ABS Family Income is from 2021 figures have not spiked extensively, and they would be masked by the fact they are gross and not disposable income:

Table 2.

The Gold Coast figure, includes many holiday apartments which are / could be second homes to many. During and after the GFC many of these apartments were forced sales.

The next three figures are really quite interesting which pits the European Mortgage to Income levels, an Affordability Index and a Price to Income Ratio for comparison purposes against our Australian Capital Cities.

? Table 3.

?Table 4.

?CONCLUSION

You be the judge and or whilst I am copyrighting it, feel free to use this piece of material only as a reference point as long as you acknowledge me for this work.

?It should be born in mind, that these figures include a whole market.

One must conclude that only Australia and Australian Authorities have put us in this position.

We must either rectify this now, otherwise the Train Wreck will get bigger and bigger. Aka Japan has never recovered since 1988; the A-REITs seem to be heading for a big correction; the USA Residential Market saw a 40.0% decrease off its peak following GFC and without taking a measured approach, our economy will stifled with far too much money subsidizing property; and property in general. ?

Copyright ? Donald E Gilbert 2023