Adam Schwab should stick to his day job and quit writing factually flawed missives about housing.

Schwab’s key argument is that Australian “dwelling prices are almost nine times disposable income”, which is “extremely high by international and historical standards”.

As with most of the things Schwab writes on this subject, his facts are way wrong. If he had exercised a modicum of due diligence, he might have checked the Reserve Bank of Australia’s latest estimate of Australia’s dwelling price to income ratio, which can be found here.

Based on the RBA’s estimates, Australia’s capital city dwelling price-to-income ratio is just under 4.5x (more recent data puts it at 4.8x). Now how on earth does that reconcile with Schwab’s estimate of 9x incomes? Of course, it does not.

Schwab makes two key mistakes. First, the national median dwelling price is not the $480k he claims. If we take every single home sale in Australia since, say, March 2008, which RP Data collects directly from the Valuer Generals’ offices (and represents over 99% of all sales nationally), Australia’s median dwelling price is about $360k. As at June 2009 it was about $370k.

So this is more than $100,000 less than the number Schwab quotes.

Why is he wrong? Because the data he quotes only relates to the more expensive capital cities (where household incomes are also higher), and 40% of all homes in Australia are not located in the capitals.

The second mistake he makes relates to his disposable income definition. The best definition is that which is employed by the RBA to calculate the dwelling price-to-income ratios linked above. This measure is based on the ABS-compiled National Accounts and not the “survey information” that is also published by the ABS. To quote the RBA:

For income, our conventional measure is household disposable income before interest payments and excluding unincorporated enterprises obtained from the national accounts … To make it per household, we use the number of households, which is reported by the ABS in their Australian Demographic Statistics release … This provides a yearly time-series of the number of households.

Combining the national median dwelling price in all regions, and including all property types, of $370,000, with the RBA’s disposable household income definition, Australia’s dwelling price-to-income ratio today is slightly above 4x, which is less than half the 9x estimate that Schwab proposes is so offensive.

Accordingly, Australia’s housing is not unusually expensive by international standards.

This perfectly correlates with:

  1. Australia’s internationally high home ownership rate of 70%;
  2. Australia’s incredibly low mortgage default rates, which is a fraction of overseas levels; and
  3. the fact that the value of Australian housing has been rising, not falling, indicating that households are having little trouble affording to purchase properties.

As I recently noted, few issues galvanise public debate as effectively as house prices. It must have something to do with the fact that unlike, say, salaries, houses are transparent and ubiquitous. No matter where you live, somebody close by always has a bigger and better place. And, for better or worse, that fact is shoved in your face.

It may be that much of the emotion and misinformation that accompanies the housing debate can be traced back to comparative justice. Imagine, by way of contrast, how we would feel about salaries if folks walked around town with their pay levels plastered on their foreheads.

For the zealots such as Adam Schwab, the frustrating truth is that the hard facts on housing do not support their hyperbole.

Peter Fray

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