Two sides of a growth

Two sides of a growth

by | 4 Jul, 2018 | Australia, economics, income, Inflation, medium read, social issues

With all the talk of wage stagnation, you’d be forgiven for thinking Australia lives in struggle town. Yet, incomes have increased so rapidly that today’s full-time median wage would put you in the top quartile 20 years ago!

Real growth

While growth slowed down over the past couple of years, Australians’ income is coming off two decades of boom. The average full-time wage (inflation adjusted) has increased by 41% over the period. This means that even with the increased cost of living, the average Australian worker can now buy almost half as much more stuff than in the late 90s.

But averages only paint a slither of the picture. More impressive is how the increase has permeated across all income levels (albeit to different degrees).

When spreading fulltime workers across an earning continuum, the past two decades have basically moved everyone up at least 20 percentile points.

Today’s median income (the 50th percentile) would put you above the 75th income percentile in 1996. And you only need to be around the 65th percentile to have an income equivalent to that of the top 10th percentile in 1996. Potentially most importantly, today’s poorest 10th percentile earns more than the 30th percentile did in 1996.

Does this mean Australia has eradicated the bottom 20 percentile of workers?

It depends on how you look at it.

A graph may paint a thousand words, but which words depend on your point of view.

Seen through a prism of ‘absolute’ progress, the graphs above suggest Australia has improved drastically. People are richer, and those on the lowest wages are much better off than they used to be.
Those primed for this view of the world will no doubt take that message from this story and have a reinforced idea that the world is getting better; we’re on the right path.

Relative growh

However, seen through a ‘relative’ prism of equality, the graphs highlight the growing gaps between the “haves and the have nots” (even if the have nots have much more than the have nots used to).
The boom was not felt equally.

While the median income increased by 35%, the income of the top decile increased by almost 50%. Meanwhile the 10th percentile increased by 25%. In 1996, the 90/10 percentile ratio was 255%. 20 years later the gap widened to 305%. While the real difference is narrowed by the taxes upon this incomes, it’s fair to say that income inequality has increased.

Real vs Relative

Most people are much better off than before. Yet, many still feel worst in comparison to those around them. The progress and improvements in our lives pale in comparison to comparisons themselves. This may be explained by behavioural economics better than the traditional variety. Perhaps comparing ourselves to those around us might be easier and more front of mind than accurately remembering the past. Perhaps it’s our bias towards feeling losses harder than gains. Whatever the case, I don’t think enough attention is being paid to all the things we have, and too much is being focused on what we’re missing out on. Should we not find a way to enjoy the situation we are in, and not let “comparisons be the thief of joy”1.

We have never lived in an age of such generalised affluence.Our standards and expectations are beyond what any previous generation dreamed of. The growing income, and more importantly wealth inequality are hugely important issues. But we should acknowledge the other side of the graph. Partisans often ignore one point of view fearing it will diminish their own. But ignoring the progress, or overly focusing on the negatives, misleads people to thinking we’re worst off than we are. We start feeling self-pity and fail to acknowledge our place in the world. We should continue to work towards a fairer world, but not at the cost our capacity to enjoy what we have.

Australia is not only at its richest point in time, it’s also among the richest in the place (world).  Perhaps by acknowledging how far we’ve come, we can start paying more attention to helping those beyond our coast lines.

We should fight to make this a better world, but we should not ignore the fact that our world, our time and place, is heaps good.

 

Sources:

All income data from :

ABS’s Employee Earnings and Hours, Australia

2016: http://abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6306.0May%202016?OpenDocument

1996: http://www.ausstats.abs.gov.au/ausstats/free.nsf/0/CE23DC841D70810FCA25722500073754/$File/63060_0596.pdf

1: Disputed quote from Theodore Roosevelt – https://en.wikiquote.org/wiki/Theodore_RooseveltQuote from

They don’t make rates like they used to

They don’t make rates like they used to

by | 9 Apr, 2017 | Australia, economics, housing, income, Inflation, social, social issues

Australian mortgage affordability has not changed in over 20 years.

This statement needs a pinch of caveats and a blanket of context, but when all is said and done housing costs have been surprisingly steady.

I didn’t want to write about housing affordability so soon after we checked our privilege, but a Fitzsimmons article in the Sydney Morning Herald piqued my interest. In it, Fitzsimmons focuses on two key affordability ingredients: interest rates and house prices, concluding that “younger Australians definitely have it tougher when it comes to housing affordability”.

There are many ways of measuring housing affordability, but I find Fitzimmons’ measure of choice to be more relevant than most. What proportion of a household’s income is spent on mortgage repayments. According to the article, in the late 80s and early 90s:

“When interest rates were 17 per cent, the proportion of household disposable income that went on the interest payments for the home loan was 6.1 per cent. It’s currently 6.8 per cent.”

These figures metaphorically killed my cat. If interest repayments are below 7%, then why all the commotion?

I believe the article is wrong about the figures, but nailed their consistency.

 

(Data sources for graph in notes below.)

 
According to data from the Australian Bureau of Statistics, households spent around 24% of their disposable income, on average, on mortgage repayments in 2010. Over half of which went to paying off the interests alone. Mortgage costs as a percentage of gross household income (I’ll use gross instead of disposable from here-on-in as it’s more readily available) have been steady since at least 1993, bouncing between 19% and 23%. Some of this fluctuation may even be ‘margin of error’ as the figures are roughly +/- 2%.  So servicing mortgages now appears at worst as affordable as back in the 90s and 2000s. At best about 4 percentage points lower than in the mid-90s. Repayments were a little smaller in the 80s but the difference is not as big as I expected (15% in 1984 and 18% in 1988-89). Some of this difference is also cushioned by decreasing costs of related items such as furniture and household equipment, which has halved in relative cost compared to 1984 (down from 6% of household income to 3%).

Also, while the outlay in the 80s was smaller, a larger proportion of the repayments were spent covering the interest rather than going towards decreasing the debt.

 

 
What about outside of our beautiful borders?

Affordability seems to me more relative than absolute. Australian mortgages may not have changed much in the last decades, but how do we compare to other countries? Lacking an internationally recognised standard for such a measure I was only able to research other rich English speaking countries (my French, Arabic and Chinese aren’t quite up to scratch). And from what I gathered, repayments here are comparable to those in Canada, UK, USA and NZ.

 

 
None of this talks about people’s difficulty in breaking into the market, nor how hard it is for low income families to afford a home of their own. But it does suggest that Average Aussie Anne’s situation is not special. Housing has been at similar levels for a while, and it is also at similar levels in other similar countries. So, either the level of affordability is fine, or it’s equally un-affordable elsewhere/else-time.

Also, if the situation is so similar in other countries which have very different taxation systems, with or without such policies like Capital Gains, Negative gearing, and building controls, then ‘solving’ this may not be as easy as some suggest.

 

Sources

  • The Graph 1 is made from 2 different sources:
  • The Household Expenditure Survey, detailing Interest and Principal Payments separately.
  • The Housing Occupancy and Costs Survey which only provides a total amount. This survey only has “housing costs”, which also includes rates, etc. To account for this, estimates for non-mortgage costs are derived by subtracting the value of “Owner without a mortgage” from “Owner with a mortgage”. It isn’t perfect, but I believe it accurate enough for this purposes.
  • Australian data:
    http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6530.02009-10?OpenDocument (various years)
    http://www.abs.gov.au/ausstats/abs@.nsf/PrimaryMainFeatures/4130.0?OpenDocument
  • USA:
    https://www.census.gov/programs-surveys/ahs/data/interactive/ahstablecreator.html#?s_areas=a00000&s_year=n2011&s_tableName=Table10&s_byGroup1=a7&s_byGroup2=a1&s_filterGroup1=t2&s_filterGroup2=g1https://www.census.gov/programs-surveys/ahs/data/2005/ahs-2005-summary-tables/h150-05.html
  • UK:
    https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/compendium/familyspending/2015/chapter4trendsinhouseholdexpenditureovertime
    https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/compendium/familyspending/2015/chapter2housingexpenditure
  • NZ:
    http://www.stats.govt.nz/browse_for_stats/people_and_communities/Households/HouseholdExpenditureStatistics_HOTPYeJun16.aspx
  • Canada:
    http://www5.statcan.gc.ca/cansim/a47
    http://www12.statcan.gc.ca/nhs-enm/2011/as-sa/99-014-x/2011002/tbl/tbl03-eng.cfm

Is it time to check our (housing) privilege?

Is it time to check our (housing) privilege?

by | 29 Mar, 2017 | Australia, economics, housing, Inflation, social issues

1.

The Australian real estate market is off the charts. International comparisons recently published by The Economist confirmed Australia and New Zealand’s housing costs outpaced Europe and North America over the past few decades.

Fortunately for most of us, there are simple solutions which Australia is well placed to take advantage of.

 

2. Banana republic

When Cyclone Larry hit the Australian shores in 2006 it sent bananas sky high. As the winds decimated the plantations prices increased 600%; from around $2 to $12 a kilo in a matter of weeks. Cyclone Yasi repeated this feat five years later, reaching prices of $15 a kilo.

I love banana smoothies as much as the next guy, so I have rather unpleasant memories of 2006 and 2011. Not a single banana smoothie or pancake in sight, as we all avoided prices akin to today’s smashed avocados.

I, like many of my fellow sufferers, turned to foreign cook books in search of alternatives. I experimented with mango lassis and opened my heart and mouth to strawberry crepes. And while I often dreamt of cavendish fields and lady finger delights, the alternatives had benefits too.

The following years’ harvests were back to normal, and so were the prices. Banana smoothies regained their place upon the thick-drink throne, but I also continued to indulge on the occasional lassi and added crepes to my repertoire.

 

3. How about them apples

The House-Price Index (HPI) used for comparisons such as The Economist’s includes houses, apartments and other dwelling types. To measure inflation accurately the HPI mirrors the ratio of dwelling types found in the local housing stock. Across the EU roughly 42% of people live in apartments. In Canada and the US the figure is 25% and 21% respectively. Australia, on the other hand, only houses 10% of people in apartments.


One could argue that Europe is structurally different to Australia, with ancient cities and smaller landmasses. But Canada and the US are both quite similar to Australia when it comes to land mass, age and culture. Yet, Australia’s housing stock is half as likely to include smaller units. When you consider that another 6% of Americans (on top of the 21% in units) live in small dwellings such as mobile homes, caravans, etc, Australian’s propensity for houses seems even more like an outlier.

While Ireland and the UK have similar housing ratios to Australia, the majority of them live in “semi-detached” houses, meaning they share at least a wall with their neighbours (terrace and row housing). 90% of Australians, on the other hand, live in fully detached homes; back-yards, front-yards, side-yards. This type of housing has much larger land lots.

Over the past few decades, Australian house prices increased roughly 20% faster than apartment prices. This difference is more pronounced in sought-after areas such as the inner city suburbs where land is at a premium. Due to the compounding effect over a 30 year stretch, this difference in speed means that houses in Stonnington went up 13 times but apartments only increased 7 times.

 

4. A home among the gumtrees

Such is Australians’ addiction to land (or disdain for apartments) that people choose to live an hour away from the CBD than being stuck in an apartment. In 2015, the average price for a house in Nillumbik Shire was $50k to $70k more than the average apartment in City of Yarra or Melbourne Council ($696k vs $640k and $624k). Nillumbik is roughly 40km from Melbourne’s CBD, and around an hour by train. Similarly, houses in Knox and Maroondah Shires (about 30 kms east of the CBD and 1 hour by public transport) are $80k more on average than the apartments in City of Yarra, and about $50k more than in Port Phillip($682k). Port Phillip is not only just a few kms from town, it’s also on the beach.

The average price of an apartment in the blue LGAs (as depicted in the map below) is cheaper than the average house price in the red LGAs. Houses in the yellow LGAs are cheaper still.
This phenomenon is not limited to big families and households. According to the 2011 Census, only 30% of lone person households in Melbourne lived in apartments, and 17% of 2 person households. Australia wide, only 26% of 1 person households and 14% of 2-person households live in apartments.

 

5. Compare the pear

Of course these comparisons are a bit strange. Suburban homes have more rooms than inner city apartments. They have yards and land; all good things for some. On the other hand, apartments are close to employment, cultural and retail opportunities, not to mention public and social goods, such as hospitals, public transport, etc, etc. And while the majority of people seem to choose houses, apartments make fine homes too; 42% of Europeans seem to cope.

As the house price index mirrors the local housing stock, the Australian HPI is 90% weighted towards houses. This pretty much hides the lower speed at which apartments increase.

But potentially more importantly, the difference between house prices and apartment prices may be inflated due to houses making better investments. If people bought houses purely for their liveability and not with an eye to their resale value, then perhaps the difference in price would be smaller. Perhaps some of the Australian “housing affordability issue” can be put down to being an “investment affordability issue”.

Some might say that apartments are not the Australian way. Many have fond childhood memories of backyard cricket and jumping over sprinklers to keep cool in summer. However, cities like Melbourne have tripled their population since the 50s, and doubled since the 70s. As the population increases houses need to be built further and further away from city centres in order to stay affordable. This is clearly the current thinking as the Victorian Government recently announced the rezoning of 17 new suburbs to house 100,000 new houses. This would all be fine, except that we’re encouraging people to live roughly 40kms out of town.

Apartments, instead, can already be built cheaply within a 15km radius of the CBD.

 

6. Mango or papaya?

Comparison is a cruel mistress. Australians feel hard done by when comparing certain aspects of their lives to a place which no longer exists in time and space (1960s Melbourne), but they fail to recognise their relative comfort in comparison to pretty much everyone else in the world today.

Apartment living is not for those who can’t afford a house. It’s for those who have different preferences, like valuing commute time over backyards. And when our tastes and preferences become out of reach, it might be worth opening our minds to other possibilities, consulting foreign cookbooks and considering other fruits.

 

7. #notallfruits

The term “housing affordability crisis” in this post refers to the current focus on “young Australians’ inability to break into the market“, or that “housing is out of reach of the average Australian“.

It does not discuss the issue of un-affordable rental markets and people struggling to secure a safe roof on an everyday basis.

Rental affordability is a completely different issue and using the same term to discuss both problems is somewhat problematic.

I discuss the rental aspect of housing affordability in these previous posts: Those who can’t afford, rent; and Rental struggles

_____________________________

Sources

  1. All Melbourne house and apartment price info from: http://www.dtpli.vic.gov.au/property-and-land-titles/property-information/property-prices (Statistics (XLS 1.2 MB))
  2. Population distribution by dwelling structure: European countries, America, Canada, NZ, and Australia
  3. Cyclone information – https://www1.ncdc.noaa.gov/pub/data/cmb/bams-sotc/climate-assessment-2006.pdf
  4. Front graphic by LioPutra

UK auto disqualified after poor lifting

UK auto disqualified after poor lifting

by | 10 Aug, 2016 | Europe, income, Inflation, politics, social issues, social security, tax

In the aftermath of Brexit, the pointy finger of blame has fallen squarely on the rise of conservative patriotism, racism and the stench of economic stagnation among the working poor.

But when analysing the economic situation of UK’s households over the last few decades, it’s hard to see what Brexiters are complaining about.

While American working class wages got stuck in the 1970s, the UK’s have been rising steadily, especially since 1990. In fact since Thatcher lost office, the poorest 40% of households have seen their disposable income increase at twice the rate of the rest of the country.

PoorPoms1

(I use disposable income as it’s a more complete measure of a household’s situation than wages.  It includes all income (private and government cash benefits) and removes direct taxes (income tax).  It’s the money which lands in people’s pockets.)

After adjusting for inflation, household disposable income grew by 71% for the poorest 20% of households, and 59% for the 2nd poorest since 1990.  The rest of the UK only grew by 34%.

The poor are not only getting richer in absolute terms, but also in relative terms.

PoorPoms2

Firstly, absolute growth

The poorest quintile has seen their disposable income increase from £7,200 in 1990 to £12,300 in 2014/15 (after inflation). The second poorest quintile increased from £12,400 to £19,800. No matter how hard life is today for poor households, it would be a lot worse with £6,000 less a year.

To put this growth in perspective, we can compare today’s poor households to that of people in the past.  Today’s 2nd poorest quintile earns the same as the middle quintile earned in 1990. And going back a bit further, they earn the same that the 2nd richest quintile did in 1977, just before Thatcher took office. So, the economic situation of the working class today is similar to that of the upper middle classes when the (Royal variety) Queen celebrated her Silver Jubilee, and Queen (of the Freddy Mercury variety) released “We are the champions”.

 

Secondly, relative growth

As the poor households’ earnings grew faster than the rich ones, the relative gap has decreases considerably. The disposable income ratio of richest to poorest was 7 at the end of the Iron Lady’s regime. Today that figure is 5.4. Likewise, the ratio between the 2nd richest and 2nd poorest quintiles dropped from 2.4 times to 2.0. Of course, the ratio is still too large, but a 23% drop is worth noting.

 

Since GFC

The figures above look at the UK since the departure of Lady Thatcher in 1990, but what about a more recent focus?

Well, the picture is even rosier (relatively speaking) for the lowest quintile over the past 7 years.  While the richest 2 quintiles dipped between 5-10% around 2011-12, and have only just returned to pre-crisis levels, the poorest quintile now earns 11% more than they did in 2007/08, and never went behind pre-crisis levels over the period.  The 2nd lowest earners hovered steadily, but over the past 2 years increased to a small increase over pre-crisis levels.

PoorPoms3

A historical lens

A longer search shows that this was not always the case. The last dark age for the lower classes was clearly under Thatcher.  During Margaret’s 11 year regime, the disparity between rich and poor climbed steeply.  While the richest households in the UK experienced a 46% increase in real disposable income, the poorest 2 quintiles only increased by 11 and 13%. This resulted in the income ratio of richest to poorest to rise from 4.9 to 7 in an 11 year period.

PoorPoms4

It’s taken the following 25 years to bring this disparity back to pre-Thatcher levels for 2nd richest to 2nd poorest, but the Richest to poorest ratio is still much higher than it was in the late 70s.

PoorPoms5

Show me the money

Here’s where it gets super interesting. It would be easy to assume that seeing as the end of Thatcherism marked the turning point for income distribution; government handouts would be somewhat responsible for the change. But that is far from the truth. The income growth for the poorest has been largely driven by increases in private income. Since 1990, private income for the poorest has increased by 168%, while Government support only increased 22%! The opposite was surprisingly true under Thatcher, when the bulk of the poor’s income increases came from government benefits.

PoorPoms6

Since 1990, Government support has increased the least for the poorest quintile, in relative AND absolute terms.  While the government now gives the poorest quintile £1,400 more than they did in 1990 (after inflation), they also give middle income earners an extra £3,400, and the richest quintile an extra £1,700 per year, after inflation.

PoorPoms7

Brexit due to a lack of jobs available

Yeah, nah. Unemployment has not been lower than current rates since the mid-70s. Sure there was a momentary blip from the 2008 crisis, but not only did that not reach the unemployment levels seen in the 80s and 90s, it also finished a year ago. People should be high on finding employment at the moment.
PoorPoms8

It’s not you, it’s tax

Even income tax hasn’t been lower in the last 40 years. The poorest households now pay 5 percentage points less in tax than they did 25 years ago, and the middle and upper middle classes have dropped around 3 percentage points. The only section of the community paying more tax (per household) are the richest 20%, and even they only pay less than 1 percentage point more than they used to.

PoorPoms9

So, what the heck are Brexiters complaining about?

Overall the economic situation in the UK has been favourable across the community, and in particular the poorest sections.

  • Income is considerably up
  • Inequality is slightly down
  • Unemployment is at its lowest point in the last 40 years, and
  • Brits have not paid less in taxes in at least 40 years.

Furthermore, the government is increasingly supporting the middle and upper classes through direct cash benefits, so they can hardly complain about the support being handed out to those (arguably) more deserving.

What’s that leave us with

If Brexit was a vote of discontent at the current economic situation, it was a result of perception more than reality. More likely, it was a vote from fear. A xenophobic reaction to the constant hysteria bombarded at the populous, misleading on the current situation. The world is not getting worse. Neither from within, economically, nor from outside evils.

Time for more reasoned responses, from a better informed community.

 

 

Sources

All data is sourced from the Office of National Statistics (ONS) UK.

http://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2015

http://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms

They may take away our lives, but they’ll never take our freedom to drive!

They may take away our lives, but they’ll never take our freedom to drive!

by | 2 Jun, 2016 | Australia, consumption, Inflation, politics, social issues

Petrol today costs around 40% more than it did 12 years ago, after adjusting for inflation, but Australians still drive like it’s going out of fashion.  Australians have defied the petrol bowser again and again since the 90s, bringing into question what impact some government policies may have in curving our enthusiasm for the wheel. Seems there is no pricing Australians out of their cars.

One of the ways in which governments hope to influence people’s activities and consumption is by affecting prices. All things being equal, increasing costs is meant to decrease consumption.  And decreasing consumption should decrease environmental impact.

Cars petrol links

 

Yet, Australians are unwilling to let go of their car keys, despite the cost blow out.  Petrol prices increased 51% from 1998 to 2008, and while they’ve dropped slightly from the peak, they are still 35% higher than in the late 90s. Beyond the whinging and media focus on the topic, Australians’ driving habits appear unfazed. Passenger vehicles travel between 7,200km and 7,700km per person every year since the late 90s, with only minor variations each year.

But not only are Australians not driving less, they’re also moving towards less fuel efficient SUVs over sedans.

SUVs cars sales

So, are Australians too wealthy to be easily manipulated by monetary pressures?

An AC Nielsen survey in 2006[1] suggested 60% of Australians were decreasing their car use to deal with the price increases. But it seems people overestimate their willingness or ability to update their behaviours according to their environment.  Increased petrol prices definitely led to increased snarling at the local servo. But people kept find themselves sucking on the bowser’s tit, much like the electorate with the major parties: they don’t like it, but are too lazy to search for other options.

Unless there’s a party willing to go beyond a 50% tax increase to test how elastic the petrol guzzlers are, what chance do governments have to guide behaviour through tariffs.

 

Sources

http://www.aaa.asn.au/aaa-agenda/affordability/latest-fuel-prices/

http://atrf.info/papers/2010/2010_gargett.pdf

http://stat.abs.gov.au/OECDStat_Metadata/ShowMetadata.ashx?Dataset=ERP_QUARTERLY&ShowOnWeb=true&Lang=en

ABS : 6401.0 Consumer Price Index, Australia, TABLES 1 and 2. CPI: All Groups, Index Numbers and Percentage Changes

[1] http://www.smh.com.au/news/business/aussies-changing-driving-habits-to-cope-with-fuel-prices/2006/03/07/1141493652510.html

Affordability, it’s a matter of expectations

Affordability, it’s a matter of expectations

by | 15 May, 2016 | Australia, consumption, demography, housing, Inflation, politics, social issues

There is no doubt that Australian property prices are increasing at a rapid rate. Affordability, however, may depend on expectations.

There is a difference between something being unaffordable and it rapidly increasing in price. The topic of housing affordability has been on high rotation in Australian politics for the past few years.  It’s the pinnacle of two topics du jour: Capital Gains Tax and Negative gearing. Much has been written about the impact these two policies have had on house-prices since the 1980s.  However, most articles focus on the speed of the price increase, not on whether houses are relatively ‘affordable’?  What is affordable? Would we think houses affordable if prices dropped by a third?

Much was made of Turnbull’s interview with the one-year-old who negatively geared property (or at least her parents did), and how out of touch the sentiments of the interview were. But it is generally acceptable, on the other hand, for a couple with a 4-month-old to own a home with spare rooms¹.

“We don’t have unreasonable expectations, but those three-bedroom apartments and townhouses are cost prohibitive ….” said Ms Rule-Layton, Coburg.

Census figures show that when it comes to young families with one or two children, spare bedroom(s) are by far the norm, not the exception.

Of the 207,000 couples with one child owning (or paying off) a home in 2011, 91% had at least one spare room. Almost half of these had 2 spare bedrooms or more.

The situation is surprisingly similar for single parents with one kid.  More than 4 out of 5 had at least one spare bedroom, and 27% at least 2.

When it comes to 2 children families, the question of spare bedrooms is slightly more complicated as the issue of sharing bedrooms arises.  Statistics usually show you how many people and rooms there are per home, but not whether kids share rooms making others spare, etc.  However, only 3 in 100 home-owning couples with 2 kids had insufficient rooms for their kids not to have one each.  This figure only rises to 5 in 100 for single parents with 2 kids.

Couples kids rooms

According to the Real Estate Institute of Victoria, 3bdr apartments and houses in inner Melbourne are on average 54% and 32% more expensive than the 2bdr variety.  That roughly equates to an extra $310k for the 3rd bedroom of an apartment, and $285k in a house.

This ratio may not be representative of the whole country but it does suggest that the 3rd bedroom contributes substantially to the price of the dwelling (approximately 30% across the greater Melbourne).

Would homes be deemed affordable today, if the price dropped by this amount?

If families were willing to live without the luxury of a spare bedroom, this saving becomes a real possibility. This relates to the 9 out of 10 couples with one child, and 55 out of 100 couples with 2 children.  Also, to the 42 in 100 families with two kids who have individual rooms.

However, it seems Australians fear room sharing more than they do debt.

 

The extra bedroom phenomenon is not limited to Australia’s elite. The ratio of houses with at least one spare room is remarkably similar across all socio-economic backgrounds for couples and single-parent families with one child. The difference becomes noticeable on households with 2 or more spare bedrooms.

Couples rooms deciles

Single parentsrooms deciles

And while the spare bedroom, beyond individual kids’ rooms becomes more difficult for the less well-off families, only 9% of the poorest single-parent families don’t have enough rooms for their kids to sleep separately.

Single parentsrooms deciles 2 kids

There is no doubt that Australian property prices are increasing at a rapid rate. Affordability, however, may depend on expectations.

Australia’s housing standards are amongst the highest in the world. The OECD ranks Australia’s housing at 4t4h highest out of the 36 compared in the Better Life Index². Furthermore, within this champagne crowd Australia’s housing costs come a timid 11th cheapest (of the 36) in terms of housing costs vs disposable household income.

Not only are Australian housing standards particularly high, but they are also improving fast. The average floor-space of new homes increased by almost 40% since 1985³, to 208 metres2 in 2013. To put this in context, the average new home in Germany is 109m2 and in the UK it is 76m2.

Average space home

Based on the best international comparisons I could find4, Australia leads the way in size of new dwellings, easily doubling the size of many European countries’.

Apples w watermellons

So, when we hear international house price comparisons, it’s worth remembering we’re not always comparing apples with apples, but rather their apples with our watermelons.

Does Australia have a housing affordability crisis? It’s hard to say. It depends on your definition of affordable. However, there is a lot of room to move if we want to decrease the cost of housing without lowering our standards beyond what is considered acceptable across the rest of the world’s richest countries.

After all, do we even want our in-laws to have a spare room at our place to crash in?  Save yourself the $300k, and shout them a five-star hotel for the few nights a year they do visit the grandkids.

 

 

 

 

[1] http://www.domain.com.au/news/melbourne-apartment-boom-is-it-working-for-buyers-and-residents-20160429-gogjvs/

[2] http://www.oecdbetterlifeindex.org/topics/housing/

[3] http://www.abs.gov.au/AUSSTATS/abs@.nsf/Previousproducts/8752.0Feature%20Article1Jun%202013

[4] http://www.demographia.com/db-intlhouse.htm

Smoking the poor

Smoking the poor

by | 4 May, 2016 | Australia, consumption, demography, health, Inflation, social issues, tax

Australia’s 2016-17 budget announcement included “four annual 12.5 per cent increases in tobacco excise and excise equivalent customs duties”, claiming it will raise “$4.7bn over the next four years”.¹

This is unlikely to face much opposition. After all, taxing smoking aims to discourage the leading cause of preventable deaths in Australia².

But it’s interesting to see who will be most impacted by this, as smoking is a poor person’s game.

Based on 2009-10 household expenditure data³, increasing the cost of smoking will have a much larger impact on the poorest sectors of the community than anyone else.  More specifically, it will impact households receiving unemployment, disability, and carers payments – those already under the most amount of financial strain.

Smoking poor

Back in 2010, the poorest 20% of households were already spending four times as much of their weekly expenditure as the richest 20%.  Households whose main source of income was unemployment benefits spent three and half times the national average on tobacco, in relation to their total income.  Those whose main income was disability and carer payments spent three times the national average.

This is likely to be much more accentuated today as the 25% annual increase in tobacco excise since 2010 has almost doubled the price of cigarettes since that data was produced[4].

So how will this picture look in 4 years’ time, after 8 years of tobacco increases, when a packet of winnie blues cost $50?

Smoking is addictive. I suspect it’s easier to sell a house than quit smoking. Yet, when governments change legislation, making previous decisions less financially desirable, there’s usually talk of ‘grandfathering’ policies. That is to say that if we ever change capital gains policies we’ll ensure those who got in on the action prior to the changes don’t lose out.  Should similar considerations be made with smokers? Or is this more like the drug dealer who gives away the first few hits until you’re hooked, and then jacks up the prices, marginalising the destitute to a life of crime, imprisonment and social isolation?

I suspect it’s not all bad. Many will quit, thus improving their lives, and those of their loved ones. But for those unable to let go of nicotine’s vice, I suspect health issues will be only part of their worries.

 

 

[1] http://www.budget.gov.au/2016-17/content/glossies/tax_super/html/tax_super-05.htm#health

[2] http://www.quit.org.au/resource-centre/facts-evidence/the-big-kill

[3] http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6530.0Main+Features12009-10?OpenDocument

[4] http://www.tobaccoinaustralia.org.au/13-3-the-price-of-tobacco-products-in-australia

Inflation Express

Inflation Express

by | 14 Dec, 2011 | data, Inflation, public transport

I’m not usually one to plan in advance nor buy in bulk, but with regards to Melbourne’s public transport, I might be convinced otherwise. Last week’s announcement of the upcoming 9% increase in train tickets (as well as bus and tram) has compelled me to buy my 2012 train tickets at what are still genuine 2011 prices.
Over the past two decades, Australia has kept inflation between 2 and 4% per annum. And yet, I find myself reminiscing the days when I could purchase a book of 10 bus tickets for $4.50. Being mindful of the concession price variable, and the fact that I was still wearing Brut (high school boys’ top selling deodorant!) the $4 per ticket I will be paying come January still appears a little inflated. To get a better idea of how this latest increase fares, I compared it to previous movements. With public transport data going as far back as 1972, the ABS’ CPI shows an interesting trend over the past few decades.
Throughout the 70s and 80s the increase in public transport prices mirrored that of the overall basket of goods. That is to say, the price of catching a train increased at similar rates to most other common goods. From 1990 onwards, however, the cost of buses, trams and trains has increased at a rate much higher than inflation (which includes housing costs, education, bananas, recreation and health, etc etc). While the cost of living in Melbourne increased 79% since 1990, by the time I sober up on New Year’s day, Melbourne’s public transport will have increased 190% in the same period.
Public transport’s elevated inflation is not only a Melbourne issue. Public transport has outgrown inflation by 97% across all of Australia’s capital cities. The graph below shows how Australian capital cities fare in terms of transport inflation compared to the overall Australian CPI.

(this google motion chart is not currently working… attempts will be made to reinstate it)

In the meantime… here is a temporary graph with similar data.

Public Transport Inflation

This phenomenon is made more remarkable when considering that the inflation for private motoring costs (including vehicle costs, fuel, parking, registration etc) has been lower than the total basket over the last few years. While the increase in cost of public transport is almost twice that of the overall basket, private motoring costs have increased 15% less than CPI since 1990.

I won’t speculate as to the reasons for this divergence.  Suffice to say that if we’re trying to encourage people to jump on the public transport bandwagon, a little economic incentive wouldn’t hurt.

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