Affordability debate warped by outmoded benchmarks

Posted on 26/06/2008  

Media is preoccupied with the cost of housing. Affordability is the pet theme of current affairs television and talkback radio, and The Australian has published 63 stories on the subject in the past three months. Even the tabloid press in capital cities has waded in. Yet few of them have nailed the reasons it's more difficult for Australians to buy their first home.

A common benchmark defines "housing stress" as a situation where more than 30% of a household's income is used for shelter. This is the figure used by many popular media "surveys", which then go on to rate causes of poor affordability as including higher interest rates, government taxes & charges and high levels of household debt. Traditional affordability indexes produced by the REIA/Deposit Power and the HIA/Commonwealth Bank calculate that average Australian families are spending between 35% and 40% of household income on home loan repayments.

Property researcher Michael Matusik reveals that the 30% benchmark commonly used to define affordability was produced by the Federal Government for a 1992 conference aimed at developing a national housing strategy. However, it was only ever intended to be applied to lower-income households.

The common use of Census data to define weekly household income should also be under scrutiny, according to Matusik. One in eight people did not state their income in the 2006 Census, resulting in a lower median household income than is actually the case. Matusik says that if income data produced by the Australian Taxation Office is used instead, it provides a more accurate picture. For example the median household income in Queensland was $1,030, according to the 2006 Census. The ATO's figure for 2006 is $1,250 - 21% higher.

Matusik then outlines the Reserve Bank of Australia's three alternative approaches to defining affordability:

1) Surplus income after debt servicing: Rising incomes mean households are able to meet rising loan repayments (devoting as much as 47% of their income to debt servicing) while maintaining (and even increasing) living standards.

2) Household income in the age bracket of typical first-home buyers (25 to 39). The RBA calculates that on this basis the typical first-home buyer could afford one third of the dwellings offered to the market in the last 12 months. Matusik takes this further and suggests this figure could be as high as 40% in Queensland. (The Census approach is to lump all age groups in together for household income purposes.)

3) Investment assets and income: Traditional methods of measuring affordability do not take into account the ratio of household debt to (investment) assets, a common measure used by share investors to assess the level of risk.

"These three measures suggest that housing affordability is not as dire as many fear," Matusik writes in a recent report. He points to a very low level of housing loan arrears (0.3% in 2007). Australia has low unemployment and incomes are growing at a steady pace.

Matusik says housing affordability is "constrained" but not, as the latest salvo of media reports suggest, at crisis levels. "Borrowers are well placed to replay their loans," he concludes.

Nevertheless, we remind readers about a survey published in The Economist which showed Australia is high on the list of countries where housing prices are far above the level that can be explained by economic fundamentals. This could well lead to potential buyers considering not only "can we afford this home?", but also "is this good value at the price?"


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