Terrific pair of long term housing charts, via Freddy Hunter of Realty Bubble Monitor.

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Home Price / Family Income Ratio: Overpricing of Median Home

click for ginormous charts

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New Home Price median detached from the Affordability Trend

Category: Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Realty Bubble Monitor: Long Term Price & Affordability”

  1. GeorgeBurnsWasRight says:

    What is the reason that there’s so much difference in the “fair price” of a home with Australia at 3.2 times wages, Canada at 2.7 times, and the US at only 1.9 times? If the answer is that’s the historic trend, I still think there needs to be an explanation of why this trend is so different in these relatively similar economies.

    Thanks for any answers on this.

  2. You have to look at what the wages cover — in the other nations, heath care is provided. And, the non-US countries have higher taxes.

    So the income ratio will vary — look at the trend, not the numbers

  3. ironman says:

    Well, as long as we’re looking at real estate bubbles in the same nations:

    Australia
    Canada
    UK (England)
    USA

    I will say that I’ve revised, but not yet published, my view of the Canadian housing situation. Based on what I’ve learned since first developing the analytical technique presented in the posts above, I would argue that Canada’s real estate market entered into the inflation phase of a bubble between 2001 and 2002, although not directly.

    What I mean by that is that the Canadian real estate market is behaving rationally in response to an economic bubble acting outside Canada’s housing market. Kind of like how textbook prices rise alongside the cost of a college education in the U.S. The bubble is in U.S. higher education, but textbook prices are going along for the ride.

    I suspect something similar is happening in Australia, although its origins predate the data used in my analysis, which is suggested by Freddy Hunter’s data.

    As for what’s taking the Australian and Canadian housing markets for a ride, my best guess is that it’s a result of their trade with China, which would explain why Australia’s housing bubble would appear to have begun sooner and become much larger than the other nations, as indicated by Hunter’s data.

    Or in other words, the main economic bubble driving all this is to be found in China, with housing prices in other countries following in response.

  4. Pool Shark says:

    Uh, O’ CANADA!!!!

  5. seanpj says:

    There’s some ambiguity in the income parameter of these charts. I assume that ‘income’ in US, UK, CA refers to the income of a home buying entity, which is mostly a (2-earner) family. Australia states ’2-earner family’ explicitly. Is that right?

  6. Petey Wheatstraw says:

    Then, there’s this:

    Foreclosures Rise; Repossessions Set Record

    http://www.cnbc.com/id/39192246

  7. stiltdancer says:

    This graph is meaningless without interest rates being factored in. This will screw up any trends.

    How much did the monthly payments change?

  8. nickgogerty says:

    actually hides the problem. the income levels for the US are not median incomes, but average. the ratio should use the median incomes, otherwise it gets skewed. Using a 1.9 ratio and median incomes indicates more us real estate trouble ahead. with a median household income of closer to $50k and a mean of $68. The 1.9 multiplier indicates house values of $95 & $129k which would represent a huge drop.

    http://www.census.gov/compendia/statab/cats/income_expenditures_poverty_wealth/household_income.html

    http://nickgogerty.typepad.com/designing_better_futures/2008/04/housing-afforda.html

  9. gusgus says:

    Regarding Canada and Australia, I wonder if their appreciating currencies play a role in the rise in housing prices? An appreciating currency is viewed as enriching every citizen of that country, and that enrichment must materialize somewhere. Should it not materialize in housing?

  10. Petey Wheatstraw says:

    OT, but relevant:

    From CNN Money:

    “The nation’s poverty rate jumped to 14.3% in 2009, its highest level since 1994, and the 43.6 million Americans in need is the highest number in 51 years of record-keeping, the government said Thursday.”

    And with only 10% unemployment!

    Gotta’ love the New Accounting.

    Now, about housing costs as a multiple of income . . .

  11. rktbrkr says:

    In spite of the US aiding home ownership with favorable tax treatment etc the US lags far behind the other anglophones.

    Perhaps high property taxes in the US force a lower ratio (but I have no idea about property taxes overseas)

    Looking at these charts I’m thinking it was the type of financing much more than the absolute high prices that blew up the US RE market. Greshams law at full bore, unqualified homebuyers forced into foreclosure, & distress sales a few years after the bubble, driving out qualified potential buyers as the volume of foreclosures sent all marginal home prices into a power dive – after the sand state builders had overbuilt to satisfy the demand of unqualified buyers. All pricing is at the margin and the foreclosures created a bad imbalance.

  12. formerlawyer says:

    Background on Canadian Property Taxes can be found in the second part of this issue paper:

    http://www.statcan.gc.ca/pub/75-001-x/75-001-x2003007-eng.pdf

    They comprise the bulk of municipal funding and form approximately 8-10% of the total tax burden in Canada.

  13. Malachi says:

    Will the real estate bubble burst in Australia? Over the last several years I have moved from the US to the Uk and now onto Australia. I listened skeptically as lots of people in the UK explained how the market there was different and immune to the real estate price crash that was happening in the US. It turns out it wasn’t different, just delayed.
    Now I’m hearing some of the same arguments in Australia. Continuing population growth, zoning laws around major cities like Sydney that limit development, booming economy. Most people here seem to be quite bullish on real estate and are confident that the price crash up north has missed Australia. However prices relative to income are crazy high.
    And I’d like to add that I really appreciate and enjoy this site.

  14. rktbrkr says:

    Canada property taxes sound like a bargain compared to US and should allow for a higher ratio.

    Average property taxes in 1998 were highest in Central Canada ($2,230 in Ontario and $2,030 in Quebec) and lowest in Newfoundland and Labrador ($640).
    „
    Income taxes far exceed property taxes. In 1998, the majority of families paid less than 5% of their income in property taxes while spending 10% or more on income tax. Overall, income tax averaged more than seven times the property tax bill.
    „

  15. To George Burns: the trend lines represent each nation’s price/family income ratio … not fair value. I would speculate Canada’s exceeds the USA mainly due to enforcement of the National Building Code and its reflection of harsh winter conditions compared to more temperate zones. Most Canadian homes have a full basement, adding to construction costs. Thus the USA new home trend is similar to the Cndn avg. Note very few neighbourhoods are ever demolished for new development.

    To Sean: ratio tracks median gross family income (approx 1.5 x’s avg) where available; the USA data reflects a working spouse.

    To Stilt: agreed an affordability factor would be ideal and have attempted hybrids, but avg price seems to self-correct to some degree as mtg rates increase/decrease … akin to used cadillacs & lincolns rising/falling with gasoline prices.

    To Nick: USA ratio reflects median income … not mean. The pdf link at your website is for New Homes … not existing. See the 2nd chart for new construction metrics.

    To Broker: property taxes avg 1.25% of market value in Canada. Bubbles often reflect new larger universe of neophyte demand – in short, idiots bought dotcoms shares @ triple digits, oil futures in triple digits & were vulnerable candidates for subprime mortgages.

    To Malachi: yes Oz realty bubble is hissing. Realty bubbles must correct for any economy to get back to fundamentals. In short, overpaying for homes is an assault on a consumer’s ability to purchase durable goods, holidays, clothing, etc etc. When home prices are high … the rest of the domestic goods & services suffer incrementally.

    Note: These charts are updated at each month end… along with our Recession Meters.

  16. Pharos says:

    As an Australian house prices are close to my Heart. While I would never say never to a bubble or its bursting I think there are really important structural differences which inform the behaviour of Australians with regard to housing. I think we’ll see a real fall in housing but nominally I can’t see a crash.

    For those interested I wrote about this the other day. http://spotlight-onmarketsandeconomics.blogspot.com/2010/09/housing-bubble-myth.html

  17. Maseratij says:

    Elizabeth Warren is on the web giving a lecture where she talks about the pressures on the consumer. I have not been able to find it again or any reference to it. I remember though how she went through how much cheaper things were for consumers, groceries, fuel, clothing, travel right down the line everything had been cheaper of time. ……Except for housing and childcare. She showed what an incredible suck it was on family resources. Her argument being that most women were working to pay the increased mortgage and the childcare to do so. With very little net for most families to the bottom line.

    A national after school and summer program may have been a good place to spend stimulus money perhaps. Well the money is gone now, sucked from a generation by our best and brightest capitalist financiers. I hope they do “good things” with money.

  18. CA renter says:

    Maseratij Says:

    September 16th, 2010 at 7:43 pm
    Elizabeth Warren is on the web giving a lecture where she talks about the pressures on the consumer. I have not been able to find it again or any reference to it.

    ————–

    It was an excellent lecture by Elizabeth Warren…I have it bookmarked.

    You’re probably looking for this:

    http://www.youtube.com/watch?v=akVL7QY0S8A

  19. Expat says:

    How much longer will mortgages be at 4.6%? Two years? Five years? Or seven years, just in time for the average owner to move out? Today a $160k mortage will cost $820 a month. In five to seven years, when mortgage rates are back up at 9%, that same mortgage will cost $1300 a month. At 12% it will be $1250. Those were mortgage levels back in the late 80′s and early 90′s.

    Affordability today means nothing to affordability in seven years. You cannot transfer your 4.5% fixed mortgage to a new buyer. If you bought a house today for 200k with 20% down, you are paying about $820 a month just for the principal and interest. If mortgages go up to 9%, a buyer who can afford the same nut will be able to borrow only $102k, dropping your home value by 70k!!!

    And yet, despite a near ZIRP, house prices continue to fall. Watch out for the real collapse when interest rates rise.

  20. Maseratij says:

    Yep, Thank you very much. Funny what you can not find on the internet, even when you know it is there.

  21. winstonw says:

    I’m an Aussie.
    Our property growth has different supply and demand issues to the USA.

    Demand:
    - Population growth has been highest in OECD for over a decade. 1.5-2% pa. Migration makes up >50%.
    - Gen XY want an inner city life, rather than one on urban perimeter where infrastructure is not keeping up with popn growth. This is pushing prices particularly in inner and mid ring suburbs. Australia is the most urbanized continent in the world.
    - Gen XY are not forming families until later, and more of them want to live on their own in their 20s.
    - Baby boomers are staying in houses later into retirement. Not enough retirement accommodation is being built near infrastructure.
    - The average household size is now under 2.5 persons.

    Supply:
    - for the population growth, constrained by poor local government planning and overzealous Green building codes and zoning.
    - migrants settle mainly in major capitals, where non mining jobs are and ethnic enclaves.
    - banks have tightened lending to developers, wanting as much as 105%+ pre sales on apartment complexes and 60% loan to value ratios.
    - local govts have contributed to land price inflation by increasing headworks costs, up front. This is because State govts have cut local govt revenue, and pressure is on locals to fund themselves via property.

    Banks:
    - undoubtedly, asset price inflation over the last 10 years has been primarily driven by lenders.
    Banking deregulation led to lax capital reserve requirements.
    Banks have found it easy to source foreign capital which has risen from 12% of bank funding to 25% in the last 15 years.
    - non bank lenders also increased post de regulation. This put pressure on banks to loosen LVRs, post codes, lo documentation loans.
    - despite that, our banks balance sheets and leverage did not get out of control like in the US.

    Govt:
    - govt first home buyer grant and stamp duty concessions.
    - negative gearing on residential investment property.
    - temporary relaxation of foreign ownership of Australian resi property saw increase in Chinese buyers.

    Culture:
    - interest and expenses on investment property are tax deductions in Australia. There’s been a massive increase in leveraging into property investment by Mum and Dad investors, spurred on by wealth gurus. works well until Ponzi leaves the building.

    Prognosis:
    - Aussie banks are now 25% reliant on foreign wholesale funding to sustain mortgages at current levels.
    That puts us as at severe risk of external shock (risk-off by foreign lenders).
    - If inflation continues, many Australians will not afford higher rates. Current rate is around long term average of 7.25%.
    - Banks have moral dilemma in trying to sustain profits vs driving house prices higher.
    - Best outcome is flat prices in nominal dollars for 10 years while inflation is permitted to go to 5%.
    - Population growth needs to be wound back as the interest bill on the foreign debt is growing, fueling CADs and Net Foreign Debt, and preventing investment in infrastructure.

  22. winstonw says:

    P.S.
    Aussie mortgages are full recourse, hence when we are stressed by higher interest rates or unemployment, we tend to cut lifestyle and prioritize the mortgage. This puts a floor under prices moreso than in the US.

    we have variable rate mortgages here too.

    Many Aussies take an interest only loan, and refinance every 5 years or roll to P&I. This allows us to borrow more.

    Debt service ratios were also loosened by the banks. used to be 30% but now common to see 45%.
    LVRs were up to 105% but have dropped back since GFC.

  23. Malachi says:

    Thanks Winston.