Leith van Onselen posts this chart comparing housing wealth to disposable income. Australia and New Zealand are the worst offenders, with ratios close to 5:1, while the US never reached 3:1 even at its sub-prime peak.
7 Replies to “Australia & NZ: Housing wealth to disposable income”
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What do you mean housing wealth? Market value of housing- perhaps?
M S Boyd
Housing wealth is total value of residential housing. When divided by Disposable Income this will give an average value per $ of disposable income.
What is the significance of this? Do you mean that people are putting too much of their money into their house, and not keeping enough for living on?
Houses are overvalued if the ratio is 5:1.
I don’t think I understand this properly as the figures seem ridiculous to me. If disposable income is one’s net (after tax earnings) and housing wealth is the value od the average residential property, than this chart should be in the range of 10-12 times. How could in the US this ratio never been above 3:1???
Please explain those terms again!
Wiki defines it as: “Disposable income is total personal income minus personal current taxes.”
St Louis Fed shows US Disposable Personal Income as $12 trillion for the 2012 calendar year.
Comparing Australian and US housing multiples is meaningless (apples vs oranges):
For the reasons explained below, the net result is, US house prices move like a share market – strong surges, sharp falls. Australian house prices move in steps – strong surges, stubborn elongated stalls. Lower volatility results in higher multiples.
In more stable, less volatile markets like Australian Real Estate, owners have far more faith in their investment, so are prepared to pay higher multiples over the whole economic cycle. Less volatility/risk = higher P/E’s.
Due to accountable loan recovery, on average, Australians are more careful about committing to a property on the buy side, and far more committed to hanging on when prices fall, because they have to pay any shortfall.
In the US, due to non-recourse lending, houses are like risk free shares: Have a risky flutter, even if prices are a bit high. If it works out you profit. If it doesn’t and values drop, you’re not liable for the shortfall. Just jingle mail the keys back to the bank and move out. Banks dump the stock, causing a crash. The non-accountability of its speculative owners, allowing them to desert their investment consequences, leads to higher highs than its volatility/riskiness justifies, and causes exaggerated volatility/risk/lows when booms end, compared to more stable, accountable real estate markets like Australia’s, so of course US houses should trade at lower multiples over their whole economic cycle. More volatility = lower P/E’s.
The above justifies higher multiples in Australia, but not as high as they have become. I suspect we are in for an elongated stall in real values??