The Australian housing bubble: the view from the OECD

Here on the Brown Couch we love charts and graphs. So here are a couple more, this time generated from data from the OECD that measure movements in house prices in OECD member-states. (I don't believe these data have been reported by the Australian media – you saw them here first at the Brown Couch!)

We'll be looking in particular at Australia, the United States and the United Kingdom. The latter two countries – the US especially – are often reported here as having experienced a house price bubble (which is now collapsing). Have Australian house price movements been so very different?

The OECD data are interesting because they several things all at once. First, they give us two ways of thinking about the level of house prices, by comparing house prices with rents (Figure 1: house prices to rents ratios), and house prices with incomes (Figure 2: house prices to incomes ratios).

Second, they show how much these ratios vary, in any given year, from the long-term average ratio for each country – that is, the average ratio of prices to rents, and prices to incomes, over a 35-year period. In other words, the data show whether prices are out of whack from their long-term relation to rents and incomes.

Third, they adjust the long-term average ratio for each country to a base of 100, so we can compare movements in the ratios in the different countries.

Hopefully all this will become clearer when we look at the graphs:

(Figure 1: House prices to rents ratios, Australia, US, UK. Source: OECD Economic Outlook No 84 and Economic Outlook Interim Report March 2009. Click on the image for a better view)

So what does this tell us? It tells us that from around the turn of the century, house prices in the United States, home of the sub-prime bubble, moved out of whack from their long-term relation to rents by about 30 per cent, but lately the relation has moved back close to the long-term average. In the UK and Australia, house prices moved even more out of whack: in each country, they got out of whack by up to 80 per cent. Last year in the UK, the relation started sharply coming back into line, but there's still a way to go. In Australia, house prices are still out of whack from their long-term relation to rents by 70 per cent.

(Now, one might object that what this shows is not that Australian house prices are too high, but that rents have been, and remain, too low. Hardly – rents have kept up with inflation, and lately have increased more than that. Figure 2 also shows that the trouble is on the house price side of the ratio.)

On to figure 2:

(Figure 2: House prices to incomes ratios, Australia, US, UK. Source: OECD Economic Outlook no 84 and Economic Outlook Interim Report March 2009. Click on the image for a better view)

Similar story here: US house prices significantly moved out of whack from their long-term relation to incomes, but this movement seems modest when compared to the movements in the UK and in Australia. And again, the US's and UK's respective house price to income ratios are moving back towards their respective long-term averages, while Australia's has yet to move back.

(Anticipating another objection: don't these graphs also show that house prices getting out of whack has been an international phenomenon, so no single decision or policy by national governments can be blamed for the problem? That's true, but it does not get Peter Costello off the hook. While the world caught the bug for gambling on house prices, in Australia Peter Costello was, as we have previously described him, like the tout at the door to the casino, offering punters free chips (ie tax breaks) if they borrowed up big and played.)

We're used to talking about a US or UK housing bubble; we should call Australia's recent history of house price movements a bubble too. And we should welcome their return to something more like their long-term relation to rents and incomes, after being so far out of whack.

The Adventures of SCSSHBCDAC: a tragic tableau

Previously, the intrepid investigators from the Sydney City and Suburbs Sewerage and Health Board Crowded Dwellings and Areas Committee braved late-nineteenth century Clarence Street's lodging houses, where they encountered numerous nude lodgers and a drunken landlady.

This time they report on the rented houses of the inner city, and some of its children.

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Fifth Day, Monday 22 November 1875.

Met at the Volunteer Club at 3 pm; commenced our inspection by visiting two houses close to the corner of Kent and Margaret streets, No 190 and 192, the property of Mr Samuel Lyon, of Woolahra. These houses are 18 inches below the level of the ground in front, and about 4 feet below it at the back; each contains two rooms on the ground floor and a small attic in the roof, and rents at 11s a week. There is one closet for both houses, with water laid on, but with direct action; the bedrooms are hot and close in consequence of deficient ventilation. One of the tenants told us she had been unwell for some time and that she attributed her ill-health to damp, arising from the floor, from which their was an unmistakable stench, proceeding from some collection or other of offensive matter, or from some foul surface drainage. These houses were not in good repair or at all in a tidy condition and, us usual, we were told that the landlord would not lay out a penny upon them.

We next proceeded to Miller's Buildings, owned by Mr Dickson, undertaker. There are fourteen houses in the court, containing two rooms each, 11 x 11 ft, with a small attic above, and let at 6s a week; there are four water closets for the fourteen houses. From one of these houses two children were removed the same morning by the police, almost in a state of nudity, unwashed, and uncared for, and literally covered with vermin. The filthy condition of the room from which these unfortunate little outcasts were rescued may be better imagined than described. We were strongly advised by the residents in the court not to enter it, and we contented ourselves by peeping in. Some rags, the colour of dirt, scattered about the place, a rickety chair, and a pretence for a stretcher, constituted the furniture of the apartment. The bare walls and floors, begrimed with dirt, completing the dismal picture. On the door-step was a heap of human excreta, covered with an old straw hat.

More wretched objects of destitution than these poor little children, who were in such a filthy state that while their case was being considered they had to be kept in the police shed, being unfit to enter the precincts of the Court, can scarcely be imagined.

From this place we crossed over to Sussex-street, and inspected the Harbour View Terrace, a property consisting of six houses, owned by a man named Wincks. The first house in the court has a water closet to itself, which is just 6 feet from the front door, about half that distance from the corner of the house, and stinking frightfully. The rooms are 11ft x 11 ft, and 8 ft high. In one of these rooms a sort of baby-farming on a small scale seems to be carried on. We saw a woman feeding an infant of three months old with a bottle, its mother being 'out too often to attend to it.' The whole atmosphere of this area was sickening, and habits of the occupants so slipshod and dirty that any newcomer could scarcely fail to become speedily demoralised.

Finished our visiting at Market-street, at 6 pm.

*

Next episode: In Opium's Thrall!

Proverbial multiple-bird killing spree

While the Easter holiday caused things to become a little quiet here at the Brown Couch, there has been plenty of news recently about renting. This post will be the single stone in my attempt at a proverbial multiple-bird killing spree.

First, a rarely-sighted headline, courtesy of the Herald:

Good news for renters in sought-after suburbs

Good news indeed – the Herald's economics writer and Brown Couch regular Jessica Irvine goes on to report:

THE tide has turned on Sydney's upper rental market, as properties lie vacant and landlords are forced to slice asking prices by as much as 20 per cent.

The figures are not exactly new – they come from the Rent and Sales Report released last month – and they are used rather selectively – the Housing Minister, David Borger, used the same report to claim that rents had increased by 20 per cent in western Sydney.

But what is interesting is the narrative; that there is now a story to be told about straightened demand (wage restraint, job losses, general caution) and even increased supply (as owners of unoccupied properties start to think they really should try to get a bit of revenue out of their 'investments') leading to expectations of lower rents.

Of course, nothing's affordable if you're out of work, and the Sunday Telegraph reports that Fujitsu Consulting estimates that if the unemployment rate rises to 7.5 per cent, up to 183 000 renting households (68 000 of them in New South Wales) will fall into arrears and face eviction. And if unemployment reaches nine per cent, those numbers increase to 216 000 and 79 000 households, across Australia and in New South Wales respectively.

The report seems to suggest that this is as much a tragedy for the landlords as it is for the tenants:

With many of Australia's 1.9 million landlords needing the rent to cover mortgage payments, few give the tenants much extra time to pay arrears and tenants can find themselves on the streets within weeks.

Indeed, landlord may be left with 'little choice but to evict the occupants' of their investment.

Well, maybe there are some other choices available. Maybe landlords can try reducing rents for tenants who become unemployed.

That's not such an outlandish suggestion. After all, if landlords do evict 216 000 households, to whom are they going to rent all these vacant properties? If they will rent only to employed persons, these persons will be faced with a considerably increased supply of available properties, and can expect to drive a harder bargain – hence lower rents. Or the property might be rented to another unemployed person, who can afford only a lower rent.

And finally, another report from Irvine in the Herald, this time about suggestions that house prices at the lower end of the market are being kept up not just by the First Home Owners Grant and Boost, but also by the Federal Government's National Rental Affordability Scheme (NRAS). The scheme pays developers a subsidy of $8 000 per annum for new rental properties that are let at submarket rents for 10 years. Reports Irvine:

Analysts warn that the scheme, intended to increase the supply of cheap rental accommodation, is contributing to a boom in house prices under $500,000, making home purchase more expensive.

I follow that argument, but there's a couple more things to keep in mind. The NRAS is a finite scheme: there's 50 000 subsidy 'packages' available, and a competitive application process to get them (contrast the FHOG and Boost, of which any number can be given away, just as long as you suspend your critical faculties and get in quick before 1 July!). The NRAS is also for new supply only (again, contrast the FHOG and Boost). Both these things should be counted against any inflationary potential.

But more importantly, NRAS delivers some much-need low-cost rental accommodation, and keeps it low cost for at least 10 years. The FHOG and Boost will end in tears; NRAS will make a much more positive contribution to the housing system.

The State of Supply, part 2: the rental market

In the previous post, I had a look at the National Housing Supply Council's recent State of Supply Report, and in particular its estimate that the Australian housing system presently needs another 85 000 dwellings in order to house the homeless and get an efficient vacancy rate for the rental market.

I also observed that there are about ten times that number of dwellings – about 830 000 – currently sitting unoccupied outside the housing system. All this goes to show that our housing supply problem is not an absolute shortage, but rather that our supply of dwellings does not go to satisfying the housing needs of all our community.

The Council offers another perspective on this problem, this time specifically in relation to rental housing. To do so it reproduces part of a body of research by Judy Yates and Maryann Wulff about the supply of rental dwellings, and particularly low-rent dwellings, and how they are distributed amongst households of different incomes.

They find that are just 91 000 dwellings let at rents that would be affordable for Australia's 237 000 low income renter households: a shortfall of 146 000 affordable dwellings. (This also means, conversely, that the rental market has a surplus of dwellings let at rents that would be affordable for households further up the income scale. For example, there are 739 000 dwellings let at rents that would be affordable for Australia's 363 000 'low-moderate' income households.)

They also show that of these 91 000 affordable dwellings, 56 000 are occupied by households with higher incomes (that is, 'low-moderate' incomes or higher), which increases the shortfall in dwellings affordable for low income households to 202 000 dwellings.

The occupation of lower rent dwellings by higher income households has an effect on the supply of affordable rental housing further up the income scale too. When this factor is considered, low-moderate income households do not in fact enjoy a surplus of affordable rental dwellings; they also suffer a shortfall of 49 000 dwellings.

This is a clever piece of analysis, but I must admit when I first encountered it I found it a bit difficult to get my head around. I hope the following explanation, in the form of two imaginary exercises, helps.

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Exercise 1.

Imagine that you've invited a person from each of Australia's private renter households – all 1.47 million of them – to a suitably large and well-catered venue.

'Thanks for coming,' you say over the loudspeaker, 'now, let's get into five groups.'

'Everyone with a low income – that is, a weekly income of $385 or less – you're in Group 1.' (Group 1 forms and has about 237 000 members.)

'Group 2 is low-moderate incomes – from $386 up to $771'. (Group 2 has about 363 000 members.)

'Group 3 is moderate incomes – up to $1 287'. (About 379 000 members.)

'Group 4 is moderate-high incomes – up to $1930'. (About 268 000 members.)

'And those with even higher incomes, you're Group 5'. (About 223 000 members.)

'Right', you say. 'Now, you'll notice that there are 1.47 million chairs of various colours on the other side of the room.' (It is a big venue.) 'Each chair represents a dwelling in the Australian private rental market, colour-coded according to the affordability of its current rent.'

(Chairs. Imagine they're rental houses)

'The blue chairs are the cheapest; these – and only these – are affordable for Group 1. Next are the red chairs, which are affordable for Group 2; then orange, affordable for Group 3; yellow for Group 4; and the black chairs, which are the most expensive and are affordable for Group 5 only.'

A quick scan of the room shows that there are many red and orange chairs, and relatively few of the other colours.

'Now,' you say, 'everyone in Group 1 move to a blue chair.' This they do, except there are far too few blue chairs: just 91 000 for all 237 000 of Group. About 146 000 members of Group 1 remain standing.

'OK', you say to them, 'take a seat on the red chairs. Now, Group 2, please also move to a red chair.'

And they do, and they all find a seat – in fact, there are 230 000 red chairs left over.

Next, Group 3 moves to the remaining red chairs, and then the orange chairs – again, there's plenty of orange chairs left over. It works out similarly for Group 4 and the yellow chairs. Finally Group 5 seats itself in the remaining yellow chairs and the few black chairs.

*

Exercise 2.

'OK, everyone stand up again,' you say over the loudspeaker. 'That exercise was all very well, but in the real world, the allocation of rental housing isn't such an orderly business: low income households don't get first pick, and high income households don't always confine themselves to high-rent dwellings. So this time, everyone find a chair – and if you want a cheaper chair, go for it.'

A whirling stampede ensues. Blue chairs are nabbed by fleet-footed members of all groups; red chairs, too, are snapped up by members of Groups 3, 4 and 5. When the dust settles, you ask Group 1 members to raise their hands. Only 35 000 of them are in the blue chairs - 202 000 of them are elsewhere. Of Group 2 members, 49 000 are now sitting in unaffordable seats.

*

Back to the Council's report. The analysis also shows that this problem – of supply and distribution of affordable rental housing – has been getting worse over the years. Over the ten years to 2006, a total of 236 000 dwellings were added to the rental housing system – most them let at more than $300 per week (the equivalent, in other words, of our orange, yellow and black chairs). Over that period, the number of low-rent dwellings – our blue and red chairs – declined by 125 000.