Record mortgage stress ahead of rate cut

[J Martin]

There are a couple of other things that should be taken into consideration for the rent vs buy equation.....
What if IRs drop by 1.5%-2% ?
What if disposable income continues to increase at 6% pa (as it has for the last 20 yrs) - roughly in line with house prices incidentally ?
And rents increase by 10%pa for 3 yrs, because of lack of supply ?

All great points keith and we are certainly heading into interesting times

The 6% disposable income is misleading in regards to FHB's for a number of reasons. HEC's debts and the financial impost of forcing of young people onto private health insurance take away any net higher disposable income for the first 10 years or so in the workforce. The average uni educated 20something would be hit with an extra 75 or so a week to cover the cost of these things, certainly a fair offset against cheapening travel and consumer goods.

Taking it further, do you feel 6% will continue into the future on the back of slowing world demand(and consequent wages growth) and higher food, fuel and utilities cost. Combine that with a falling $AU(more expensive imports) and increasing chinese inflation(a contributor to cheap imports) and I can't see disposable income increasing much into the future.

The other two issues require a crystal ball.....Unfortunately I don't have one....

 

[keithj]

The 6% disposable income is misleading in regards to FHB's for a number of reasons.

The RBA doesn't think so....

An alternative way of looking at affordability for younger households is to consider trends in the real income that this group would have had after servicing a mortgage of a given size (Graph 6).12 The data indicate that real residual income of this group would have fallen between the early 1980s and early 1990s, but then would have increased through to 2006/07. For the 25-year period from 1982/83, expenditure on servicing a mortgage would have grown faster than income. But the real residual income available for other goods and services would nevertheless have grown, by around 0.5 per cent per annum. So the increase in housing prices has not in aggregate terms resulted in a fall in real spending on other goods.

Graph 6 tells the story in real terms for FHB.

Using 6 times income as a yardstick is misleading, but obviously newsworthy .

HEC's debts and the financial impost of forcing of young people onto private health insurance take away any net higher disposable income for the first 10 years or so in the workforce. The average uni educated 20something would be hit with an extra 75 or so a week to cover the cost of these things, certainly a fair offset against cheapening travel and consumer goods.

Hmmm.... first time I've heard of HECs & private health insurance as reasons why houses are to expensive. My private health insurance costs < $25pw for a family of 4. This is a 'normal' expense - it hasn't risen by more than a $5 per week recently. What proportion of 20 somethings have health insurance ?. Re HECs - what proportion of FHBs is this relevant to ? Wouldn't these well educated HECs debtors have higher paying jobs ?

Taking it further, do you feel 6% will continue into the future on the back of slowing world demand(and consequent wages growth) and higher food, fuel and utilities cost. Combine that with a falling $AU(more expensive imports) and increasing chinese inflation(a contributor to cheap imports) and I can't see disposable income increasing much into the future.

CPI has been 3% ish for 20 yrs, wages have grown at 4%ish.... this adds up to 6% increase in disposable income pa. Which of these do you think is likely to change ? I can see CPI being higher for a couple of yrs & wages similar, then likely a reversion to 3% CPI & 4% wages, and associated 6% disposable increases.

 

[J Martin]

I'm happy to be proven wrong. I'll have a bit a look at the report, but from what I can gather, it's looking at household income. The proportion of two income families has increased in that time. What you are comparing now is different than what is being compared to the past. Let's look at average ordinary weekly earnings(or simply average wage) vs house prices to give a more accurate indication. Just to point out, there's no disagreement from me at all that for the average two income household on $100,000 or more, they'd have no problem paying off a $300,000 or more mortgage. These are not the people who should be considered in mortgage stress territory.

In every major city, you'd be hardpressed to find a house for 3x average weekly earnings(about $55,000 or house price of $165,000). Going back as little as 5 years ago, and for that matter at every time throughout Australian history, I can tell you that you could. But I don't think this is what we disagree on. I think we all agree that houses prices are much more unaffordable than in the past. You seem to be stating that this is okay, because you can buy the same amount of stuff with that smaller disposable income(because that stuff is relatively cheaper). Therefore the net detriment of higher house prices is offset by cheaper "stuff", meaning net sum=0. My point about HECs and private health insurance are not simply related to housing affordability, but that they shave points off this "increase in disposable income". HEC's is about $50-60 a week for 10-15 years on an average wage. I haven't done stat's, but I'd imagine $60 per week would more than offset a 6% increase in disposable income.

I think this is where I break rank. I personally don't feel that productivity gains(in the form of higer wages than CPI), should be used to bid up housing. We should actually have MORE disposable income because of these productivity gains. But if the RB thinks differently. Anyway, /end rant.

Good points keith. I appreciate hearing them.

 

[keithj]

What you are comparing now is different than what is being compared to the past.

OK. We're talking about 2 different measures - average gross wages as a multiple of median house prices (the tabloid yardstick), and FHB disposable income as a multiple of 30th percentile house price (the RBA yardstick). Both measures have been shown reasonable correlation over the last 20 yrs..... up until recently... when median prices outstripped average wages. However, the FHB disposable income has continued to be correllated to 30th percentile house price.

Reasons for this include -

• Nobody buys a 50th percentile house unless they have a large deposit (a lot more than 20%)... usually from the sale of the previous PPOR (a below median 3x1)..... certainly not FHB.
• FHB have increased their disposable income faster than previous generations
• Low CPI relative to wage growth... leading to higher disposable income

I think we all agree that houses prices are much more unaffordable than in the past. You seem to be stating that this is okay, because you can buy the same amount of stuff with that smaller disposable income(because that stuff is relatively cheaper).

Not at all. They are more unaffordable using the 'tabloid' yardstick... but not using a slightly more sophisticated RBA yardstick.

The point I made earlier is about expectations - 20 somethings have higher expectations. Their mindset is - I can afford a brand new car & plasma.. therefore I should be able to afford a new house. The supply of plasma and cars is unlimited & falling.... OTOH houses.....

My point about HECs and private health insurance are not simply related to housing affordability, but that they shave points off this "increase in disposable income". HEC's is about $50-60 a week for 10-15 years on an average wage.

What's changed ? Hasn't this always been the case ? It's not an extra expense - it's always been an expense that's increasing at roughly CPI.

I think this is where I break rank. I personally don't feel that productivity gains(in the form of higer wages than CPI), should be used to bid up housing.

I think people should use their additional disposable income to buy whatever makes them happy.... newer car, bigger plasma, better house than the Jones,....

 

[keithj]

Commentators misusing the measure

*Exerpt*

On average, families across Australia are paying 38.9 percent of their income in mortgage repayments. Those paying more than 30 percent of their income are considered to be in mortgage stress.

According to page 6-7 of the RBAs Housing Affordability in Australia Background Notes many commentators are misusing the definition of mortgage stress....

...
How do we square the relatively benign picture on arrears with the apparent sharp decline in housing affordability such as shown in Chart 5? The explanation largely lies in the fact that real incomes of Australian households have been rising quite strongly. This has allowed households to devote a larger proportion of their income to housing, while still maintaining their living standards more generally. For example, a typical household that in 1996 was devoting 30 per cent of its disposable income to debt servicing would today be able to devote 47 per cent of its disposable income to debt servicing while still having the same standard of living in terms of being able to buy other goods and services. This, broadly speaking, is the outcome that has occurred. It is not surprising, therefore, that some commentators who use a fixed benchmark for housing stress – such as housing repayments exceeding 30 per cent of income – are finding that more and more households are exceeding the benchmark.

I should also point out that the 30 per cent benchmark is sometimes applied more loosely than was intended by those who initially proposed it. The benchmark dates back to work done for the Australian Government’s 1991/92 National Housing Strategy. That work recommended that 30 per cent of income be adopted for the maximum level of housing costs for households in the bottom 40 per cent of the income distribution. Some commentators have since begun to apply it to all households, including those with very high levels of residual income. More generally, the rise in real incomes since the early 1990s has substantially changed the basis on which the 30 per cent benchmark was calculated.

The *Except* is presumably one of those commentators that are misusing the measure.

The whole of the report is only 12 pages (with lots of pictures)... it covers house prices, housing affordability, housing loan arrears and the rental market and is well worth a read.

 

[J Martin]

We are still talking about gross disposal "family" income. This is not a true yardstick across time due to the increase in participation of women in the workforce. Are there any stats where we can look at gross disposable individual incomes v 30th percentile houses across time.

The numerator: Gross disposable family income can be increased in one of two ways.

Increases in a second party participation of the workforce
Increase in "real" disposable income due to wages growth outstripping CPI.

Unfortunately, neither of them say anything about house prices. They talk of affordability. House prices and affordability are different concepts.

What the RBA is saying, is that house prices have increased(even in the 30th percentile), but affordability stays the same because real disposable income has increased. So what, you say?

Well of my two points above, you need to strip second party participation from the figures, because it skews the numerator. Some would disagree on this point, but we are talking of affordability here. So because a women now works 10 or 20 hours per week more on average, yet the house price affordability index stays the same implies that all the extra work has gone into making affordability the same. In other words, it's being propped up by that extra participation. I hardly call that a relevant gauge of affordability.

You can't state that house prices have increased, but it's ok because disposable income has increased, if that increase was brought about by increased family participation. i.e extra work for the same result.

On the point of HEC's, while it doesn't affect CPI, it affects disposable income for approximately half the working population of FHB age. You lose 7-10% of your post tax disposable income for 10-15 years, and I hope this was taken into consideration when looking disposable income measures.

 

[keithj]

Are there any stats where we can look at gross disposable individual incomes v 30th percentile houses across time.

I'm sure it wouldn't be to hard to find the raw data & put together your own spreadsheet.

What the RBA is saying, is that house prices have increased(even in the 30th percentile), but affordability stays the same because real disposable income has increased. So what, you say?

Well of my two points above, you need to strip second party participation from the figures, because it skews the numerator. Some would disagree on this point, but we are talking of affordability here. So because a women now works 10 or 20 hours per week more on average, yet the house price affordability index stays the same implies that all the extra work has gone into making affordability the same. In other words, it's being propped up by that extra participation. I hardly call that a relevant gauge of affordability.

But that's reality... and I don't see it changing any time soon. You appear to be saying that we should have an affordability guage that doesn't correspond reality ?????... and ignore the extra affordability from dual incomes - which is likely to be the norm in the future.

If you go back 150 yrs, 95% of the population was living hand to mouth, with $0 disposable income... and the whole family was working. Affordability then was infinitely worse than it is now!.

You can't state that house prices have increased, but it's ok because disposable income has increased, if that increase was brought about by increased family participation. i.e extra work for the same result.

I'm not actually stating that 'its OK'... I'm stating that that's the reality... households can afford more expensive houses if both of them choose to work.

You're stating that it's from 2 sources - higher disposable income & dual household income. I think you agree that a single wage earners disposable income has increased at ~6% pa for 20yrs+ ? There are many other reasons why any affordability gauge can be considered wrong at some point in its life.... mostly because things change all the time (IRs, tax rates, dual incomes, demographics, govt policy...). There are several threads here about it - do a search.

If you want a debate about whether it's right or wrong that dual incomes should be needed to afford a 30th percentile house, then I'll be bowing out..... social issues hold no interest for me.

If couples didn't choose to pay for an expensive house then they wouldn't both work.

On the point of HEC's, while it doesn't affect CPI, it affects disposable income for approximately half the working population of FHB age. You lose 7-10% of your post tax disposable income for 10-15 years, and I hope this was taken into consideration when looking disposable income measures.

It's the RBA who put the figures together, they're pretty thorough, so I'd guess that it's taken into account. I think HECs and health insurance are irrelevant.


But getting back to the original point....

Can we agree with the RBA that using the tabloid yardstick is misleading for several reasons, and that 30th percentile houses have never been more affordable to FHB households ?

 

[Witzl]

i'm giong to agree with you KeithJ.... im one of those FHBers, and if i bought a REASONABLE home with my partner, it is very easily affordable even with the current higher than average interest rates.

I dont believe the whole "unaffordablity" BS. Its just total garbage IMO.
We are joe average FHBers - both on average incomes, with some consumer debt. We could EASILY afford to buy a decent $350-420K home, and have plenty of money left over to live.

Sure, if we wanted to live in a 4x2 in the hills, we would be stretching it.... but common, that IS being unrealisitic with expectations, which unfortunately many people my age and in my position are.

 

[Alex P Keaton]

According to page 6-7 of the RBAs Housing Affordability in Australia Background Notes many commentators are misusing the definition of mortgage stress....



The *Except* is presumably one of those commentators that are misusing the measure.

The whole of the report is only 12 pages (with lots of pictures)... it covers house prices, housing affordability, housing loan arrears and the rental market and is well worth a read.

cool ta
//////

 

[Alex P Keaton]

haha i love reading peoples comments in the Your say section

Your say: were rates cut too late?



funny

 

[warmed_cockles]

Not at all. They are more unaffordable using the 'tabloid' yardstick... but not using a slightly more sophisticated RBA yardstick.

That's one way to put it. Another way to put it is to call it a fudge.

Yes, according to the RBA's specific measures, it looks like houses have never been more affordable. But this pertains only to the current set of economic circumstances. A cruder measure, such as prices against income, does not try to weasel out of how large a debt is in proportion to the ability to pay using circumstances that may only exist in one snapshot in time.

Simply put, large debt is relatively fixed, economic circumstances change. A mortgage might be easy if the cost of living is stagnant, jobs are plentiful and wage growth is steady. But higher wage multiples will be less crash proof if these factors change, and I believe it is irresponsible for the RBA to analyse the situation in this manner.

 

[keithj]

Simply put, large debt is relatively fixed, economic circumstances change.

Agreed... the RBA is aware of that.

A mortgage might be easy if the cost of living is stagnant, jobs are plentiful and wage growth is steady. But higher wage multiples will be less crash proof if these factors change,

Last tightening cycle the RBA increased IRs to 17% because they knew that that level was required to dampen demand..... this time they only have to increase to 9.5% to squash consumer confidence. So higher wage multiples just makes the RBAs job easier.

and I believe it is irresponsible for the RBA to analyse the situation in this manner.

How do you suggest the RBA analyses it ? Use the crude measure that doesn't reflect reality.

The reality is that some people can afford 6 x wages because other things have changed (like cost of living) - see my earlier reference to RBA Housing Affordability

For example, a typical household that in 1996 was devoting 30 per cent of its disposable income to debt servicing would today be able to devote 47 per cent of its disposable income to debt servicing while still having the same standard of living in terms of being able to buy other goods and services.

 

[J Martin]

Another problem with the figures of family income keith is the massive variation in income between one and two income families and it's inherence nature of skewing family income figures. Yes, it's true the "reality" is that the average family income is x, and average disposable income is y. But let's put that figure "on the ground" so to speak. There are MANY 2 income FHB's who have absolutely no issue with affordability. But at the same time, there are many FHB's who earn a single average income and have huge issues with affordability. Take two FHB families, a two income, and a one income, all on average wages. You get an average family wage of $82,500. Bingo! everyone is okay and we can all go on living happy happy joy joy lives of ignorance at the RBA.

Me:But wait a second here. That average single income earner cannot afford a house, any house, besides the worst of the worst in the worst neighbourhood. Yet they could in the past?

RBA: No, no no states the RBA. Look at these figures. Affordability is fine.

Me: But hasn't the proportion of two income families increased, and subsequently increased the average figure? So what you're claiming is that even though there are millions of one income families, the fact that the repayments on a 30th percentile house, or in fact, any house, is close to exceeding their income, is irrelevant to affordability? Even though at any time in the past these subset of people could afford a 30th percentile house…

RB: No no, you can't look at one income families, that's tabloid junk figures. The average family income is great. See, everyone's doing fine.

Me: tell that to the millions of Single income FHB's today and into the future who could afford a house, any house, in the past based on a similar income, but today would have to devote 70-80-100% of their income to servicing it.

RB: But disposable income has increased.

Me: Having more disposable income doesn't help much when you need to devote 80% of your income to a 30% percentile house.

---
It's like saying that over the next twenty years we are going to see a massive rise in incomes for a proportion of the population. The average income goes up dramatically, but those left behind certainly don't see it. Because the 'average' has gone up relative to the past, has absolutely no bearing on the reality for millions of those left behind. To make a blanket claim that we're all better off because of this is fallacious and frankly, wrong. This is the trap the RBA is making with affordability.

 

[warmed_cockles]

Agreed... the RBA is aware of that.
Last tightening cycle the RBA increased IRs to 17% because they knew that that level was required to dampen demand..... this time they only have to increase to 9.5% to squash consumer confidence. So higher wage multiples just makes the RBAs job easier.

They only increased them to 7.25%. They still haven't got a hold of inflation, and their forecasts are mostly ones of hope (they haven't made a correct inflation forecast so far, and I don't expect them to this time). By continually reducing their upper bound, they are boxing themselves in and rendering themselves powerless - much like the Fed has done and the Bank of Japan. Looking at CPI as a measure of inflation is reactive and silly. Other things, like growth in the money supply, should also be monitored and used for determining the price of money.

Ian McFarlane, former RBA governor, has himself said that central banks should look at asset price growth when determining rates.

How do you suggest the RBA analyses it ? Use the crude measure that doesn't reflect reality.

It reflects reality over a number of different scenarios that may eventuate in the future. It is a much more careful and conservative measure than looking at disposable income against repayments - these things can change far more quickly than debt and household income can. I'd expect the RBA to be more conservative.

The reality is that some people can afford 6 x wages because other things have changed (like cost of living) - see my earlier reference to RBA Housing Affordability

Cost of living is reflected in CPI. It is increasing quite quickly - very much outside the bounds of what the RBA desires.

The problem with current monetary policy, is that it ignores debt growth - which is most sensitive to interest rates - and only reacts to CPI changes. But debt can grow quite large in a low CPI, low interest rate environment, and when the inevitable CPI increase occurs, you have a geared up society struggling with the cost of living, also having to battle an increase in the cost of money!

Essentially - they didn't raise rates early enough, and when they had to catch up, they rose them too fast.

The RBA will not be able to get inflation under control, and this problem will linger for a while. I believe they are conducting bad policy, and their analysis on housing affordability merely reaffirms this belief.

 

[keithj]

Another problem with the figures of family income keith is the massive variation in income between one and two income families and it's inherence nature of skewing family income figures.

If you're going to start talking about the huge variation in incomes both between single FHB and couples (that the RBA averages), then also include the huge variation in house prices. Not ALL FHB are expected to live in exactly a 30th percentile house. Some will live in 40th, some in 10th.

Who do you think gets to live in the 1st percentile house ? Someone must.... and it'll probably be one of those 20 something FHB you posted about early on in this thread.

80 yrs ago, my MILs mother (a FHB then) bought a 1st percentile block of land & built a house... that is now a ~80th percentile house.

 

[keithj]

They only increased them to 7.25%. They still haven't got a hold of inflation, and their forecasts are mostly ones of hope (they haven't made a correct inflation forecast so far, and I don't expect them to this time). By continually reducing their upper bound, they are boxing themselves in and rendering themselves powerless - much like the Fed has done and the Bank of Japan. Looking at CPI as a measure of inflation is reactive and silly. Other things, like growth in the money supply, should also be monitored and used for determining the price of money.

I accept you have your opinion that the RBA is wrong, I disagree with it & have no wish to convince you otherwise

It reflects reality over a number of different scenarios that may eventuate in the future. It is a much more careful and conservative measure than looking at disposable income against repayments - these things can change far more quickly than debt and household income can. I'd expect the RBA to be more conservative.

What scenarios do you think the RBA should anticipate & how likely do you think they are ?

The RBA made this statement....

For example, a typical household that in 1996 was devoting 30 per cent of its disposable income to debt servicing would today be able to devote 47 per cent of its disposable income to debt servicing while still having the same standard of living in terms of being able to buy other goods and services.

Are you expecting disposable income to fall (both as a %age and in nominal terms) ? or just stop growing as quickly ? or continue to grow at roughly the same rate as house prices have for the last 20 yrs ? or something else ? Are you expecting people to stop spending their disposable income on stuff that makes them happy ? And will it be CPI rising much faster than wage growth ? or something else ?

Cost of living is reflected in CPI. It is increasing quite quickly - very much outside the bounds of what the RBA desires.

Agreed.... however, it's forecast to fall within the bounds by 2010...and the RBA is acting accordingly. We'll just have to see what happens......

The problem with current monetary policy, is that it ignores debt growth - which is most sensitive to interest rates - and only reacts to CPI changes. But debt can grow quite large in a low CPI, low interest rate environment, and when the inevitable CPI increase occurs, you have a geared up society struggling with the cost of living, also having to battle an increase in the cost of money!

Yep.... it's the cycle.....

The RBA will not be able to get inflation under control, and this problem will linger for a while. I believe they are conducting bad policy, and their analysis on housing affordability merely reaffirms this belief.

You appear to be implying that people shouldn't spend their excess income on more expensive houses..... is this right ?

 

[J Martin]

If you're going to start talking about the huge variation in incomes both between single FHB and couples (that the RBA averages), then also include the huge variation in house prices. Not ALL FHB are expected to live in exactly a 30th percentile house. Some will live in 40th, some in 10th.

Who do you think gets to live in the 99th percentile house ? Someone must.... and it'll probably be one of those 20 something FHB you posted about early on in this thread.

80 yrs ago, my MILs mother (a FHB then) bought a 1st percentile block of land & built a house... that is now a ~80th percentile house.

We're talking average wage earners attempting to buy 30% percentile or less houses, and still struggling with repayments covering a fair proportion of their income. I would agree with you if we were talking average single wage earners buying average houses. I've never believed first home buyers should be able to afford the median house, and I certainly do agree that the tabloid figure of average wage to median house does not accurately represent affordability. Yet every other indicator except the RBA disposable income calculator points to affordability worsening over time.

The people who live in the 90-99% house historically were single income FHB with less than average incomes. Now average FHB struggle to afford them. Ergo, affordability has worsened.

 

[keithj]

We're talking average wage earners attempting to buy 30% percentile or less houses, and still struggling with repayments covering a fair proportion of their income.

How would you respond to the RBAs statement about typical households being able to afford 47% of wages to service debt & maintain the same lifestyle ? The RBA feels that a households income reflects reality, rather than a single wage earners.... within those averages, a low paid single wage earner is likely to be able to afford 10th percentile house, and a couple a 35th percentile... and the average comes out at the 30th percentile.

I would agree with you if we were talking average single wage earners buying average houses. I've never believed first home buyers should be able to afford the median house, and I certainly do agree that the tabloid figure of average wage to median house does not accurately represent affordability.

OK, so far.....

Yet every other indicator except the RBA disposable income calculator points to affordability worsening over time.

Since we agree that the 'tabloid' indicator is being misapplied..... what other indicators would these be ?

The people who live in the 90-99% house historically were single income FHB with less than average incomes. Now average FHB struggle to afford them. Ergo, affordability has worsened.

Can you give some sources for this assertion ? The source I used was Graph 6 in the above mentioned RBA report.

I'd guess that within that average, affordability has increased for some demographics & consequently it has worsened for some.... I'd v. much doubt if every single member was exactly on the average. Is that what you're suggesting ?

 

[warmed_cockles]

What scenarios do you think the RBA should anticipate & how likely do you think they are ?

The RBA made this statement....

Are you expecting disposable income to fall (both as a %age and in nominal terms) ? or just stop growing as quickly ? or continue to grow at roughly the same rate as house prices have for the last 20 yrs ? or something else ? Are you expecting people to stop spending their disposable income on stuff that makes them happy ? And will it be CPI rising much faster than wage growth ? or something else ?

I am expecting disposable income to change as repayment costs have also changed. Simply, the RBA shouldn't be anticipating anything based on microeconomic analysis, because these factors are subject to larger changes than the broader picture. They are responsible for the macroeconomic situation.

They did not anticipate the credit crisis, nor did they anticipate the CPI blowing out. Their forecasts have been incorrect for the past two years, and there is no reason to have faith in what they are doing now.

You appear to be implying that people shouldn't spend their excess income on more expensive houses..... is this right ?

Yes. My belief is that the basic cost of housing oneself should exist within a fixed range for the term of the loan. This is not the case at the moment.

 

[ianvestor]

haha i love reading peoples comments in the Your say section

Your say: were rates cut too late?



funny

Yes funny:

To hell with [the RBA], if Swanny cant get rid of them we can. Aren't you sick of living by their rules, arent you sick of having less disposable income every month, arent you sick of your standard of living getting tougher and tougher???? thats not how my parents lived. It's only happened after we gave the RBA full power over us.

I think the problem is the internet. After all, this only happened after the internet was invented.