Household income and property prices – improving affordability ahead

Thought I'd share a really interesting article from Christopher Joye on the relationship between household disposable income and property prices in Australia.

To summarise, Joye points out that:

  • Rismark research found that Australia’s dwelling price-to-disposable household income ratio has fallen from 4.6 times in June to 4.4 times in September 2010 - meaning that at a macro level, property is becoming more affordable
  • In the 12 months to September 2010, disposable incomes per Australian household rose by 6.8 per cent while the cost of the median dwelling across all Australian regions increased by 6.6 per cent.
  • Rismark predicts that disposable household incomes will continue to grow more rapidly than dwelling prices over the next 6-12 months - subject to interest rates
  • Australia’s dwelling price-to-income ratio in the September quarter is exactly in line with its average of 4.4 times since the end of the last cycle seven years ago. On this basis, there appears to be little evidence that housing market valuations have become more stretched in recent years, as is commonly claimed.
  • Rismark documents a remarkably robust and statistically significant relationship between Australian housing prices and disposable household incomes since 1993 (on a per household basis) - its worth checking out the accompanying chart

Australian house prices and disposable income_Rismark

  • Because of the boom in the prices of Australia’s key commodity exports, such as iron ore and coal, the nation is benefiting from a large income shock. This is reflected in the striking differential in the real gross national income (GNI) and real gross domestic product (GDP) growth rates over the last year. In the 12 months to September 2010 real GNI rose by 7.2 per cent compared with just 2.7 per cent growth in real GDP

Key takeouts for me:

  • if we are set for a "large income shock" (income growth) and the correlation between house prices and disposable income is correct, what does this mean for property prices in the near term as wages growth picks up speed?
  • our future is now intimately linked to the urbanisation process underway in China and India. Watch these economies closely...

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