So are Australians better or worse off than Americans? We went digging for the data this morning over a $6.50 cup of fresh squeezed orange juice from Babble on Babylon, the café at the front of the Old Hat Factory. And what did we find?
Driven by the tight labour market and the resource boom, Australian wages are rising. But they are not rising much faster than inflation. The Chinese may be able to make textiles cheaper in China than in North Carolina. But low labour costs don't do you any good when the iron ore is in the Pilbara. Aussie wages enjoy a level of protection for that reason: the stuff is in the ground here and must be mined here by Australians.
But while wages are just ahead of the inflation rate, the cost of housing has risen much faster than incomes. You can find all the statistics we published below at Research Paper No. 14 in the Parliamentary Library of the Parliament of Australia. http://www.aph.gov.au/LIBRARY/Pubs/RP/2007-08/08RP14.htm#intro
Our first discovery is that the big nominal gains in wages generated by the resource boom are not as big when you adjust for the CPI.
That is, when you adjust for the growth in prices of the things you buy, your real wages gains are smaller than they first appear.
On a state-by-state basis, you can see on the table below that real average weekly earnings have grown at just above the rate of inflation in each state. Wages in New South Wales have grown by $63, or 6%, from 2002-2007. Victorian wages grew by $52 per week, or 5.2%. Wages in Queensland grew $75 per week over the last five years, or 8% total. In South Australia, wages grew by $70, or 7.5%. WA wages grew the fastest, by $122 per week or 11.9%. In the Northern Territories wages grew by $63 per week, or 6.4%. And if you're lucky enough to work in the ACT, your wages grew by $117 per week, or 10.1% in the last five years. Government men.
While wages have laboured to keep just ahead of consumer prices, the Parliament report shows the other side of the housing boom. Home loan repayments make up more than 30% of median family income everywhere in Australia except the ACT and the NT. Thank you debt boom.
The average monthly repayment on new home loans is growing at a much faster rate than real weekly earnings. And you wonder why there's an affordability crisis? Home prices are simply too high based on Australian wage growth. But maybe an affordability crisis is not the right name for what's going on. Maybe it's an expectations crisis.
Some reader mail suggesting that expectations are too high from first-time home buyers.
Dear DR,
This was my scenario in 1975: new house $36,000; salary $14,000; married 1 child no second income; interest rates 12.75%; deposit on house required by bank 15%. House was 14.7 squares; no garage or car port only two drive strips; no carpets; no curtains - newspapers on the windows until WE made the curtains ourselves; very little furniture - bed, cot, dining table and chairs and a couple of bean bags; no garden just dirt and left over builder's rubble; no new car in the driveway - it was sold for the deposit and an 8 yr old banger replaced it.
I'm sorry but I have no sympathy for today's home buyers - they want a 25 sq Macmansion, 3 garages, new car or two in the driveway, fully furnished with plasma TV AND interest rates are only just over 8%. Within 2 yrs of moving in, our interest rates had gone to 16% in 1977.
The real problem is builders don't want to build smaller houses for first home owners because there is no enough profit - they want to fill a ridiculously small block of land with the biggest house that will fit. First home buyers should find a block of land, build a smaller house, leave room for extension at a later date and then you won't have mortgage stress.
Dave R.
More mail.
Dear DR
I like your daily reckoning, interesting commentary you make, but I wonder whether all your bearishness is because you are by disposition bearish, or is it that you are by disposition contrarian and so happen to appear constantly bearish in (what was) the mother of all bull markets?
Also, onto your constant refrain that "property is not our beat" and your reader's question as to why the value/income multiple of Australian residential property has now jumped up to 8x from about 3x in the 1970s.
The short answer is that in a rapidly globalizing, open market like Australia, it makes less sense every year that passes to use average Australian incomes, rather than global income, in calculating the value/income multiple.
As Australian globalizes and trades more with our increasingly wealthy Asian neighbours, it is their local buyers and incomes that can and do drive prices to the next price point - remember, prices are set by the marginal buyer, not the average buyer. Only if a massive flood of properties hit the market due to local factors (eg. very high interest rates) would we see the local market dynamics prevail over the international.
George, Avondale Heights, Melb
Interesting and valid point about the marginal buyer setting prices. As for our disposition, you are correct. We are skeptical by nature, but not bearish. In large groups, human psychology is somewhat predictable. People tend to be too optimistic and carefree on the upside and too negative and risk-averse on the downside.
As you point out, we are on the tail-end of one of the most reckless periods in financial markets in quite some. We think caution and preserving your capital make sense now. But that doesn't make us hereditary bears.
On the far side of this financial crisis-and there could be a long way to go-we are enthused about the prospects for alternative energy companies, biotechs (where medicine and technology are converging) and a wide variety of other small businesses. Tomorrow's new wealth will come from these businesses, and many of them could solve some of the critical problems we face today. That's exciting.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by John on 31 January 2008:
Dan-
I think you've absolutely hit the nail on the head.
I'm so sick of my aussie friends telling me that the growth in housing prices is a result of the aussie mining boom. While I agree that's part of the story, relaxation of credit lending tightness has certainly played its part in Australia- with both factors trumped by the magic of "expectation".
Is it evil of me to hope that interest rates go up 5% to prove the point?
J
Comment by Zaphod on 31 January 2008:
I'm not much of an economist, but can someone please tell me what's driving our economic boom other than resources? I certainly don't experience the benefit of all that digging, (maybe because i'm self employed).Most of our industries are moving or have moved to china, India etc.Our exports have dropped imports risen so what's going on?Further more, how many of these figures have been embelished ie.economic growth due to more credit spending?After all Australians have the highest amount of credit debt per capita in the world.
Comment by Topographic on 31 January 2008:
The first letter in the article from Dave. R shows a lack of knowledge of the property market at the moment. He's able to give some numbers from the 70s, but nothing current. He also refers to house area in "squares", thats old school. A medium to large (500m2 to 800m2) block these days is as much as a small house and block, $300-$500k. There's no money left over for a NEW building of any kind. Unless you dont mind extreme debt. Singles however are almost completely priced out. Im not whinging, we bought 6 months ago, (small old house and small block) and by our calculations will be finished with the mortgage in 10 years, without suffering too much. I agree that times change, and so must expectations. Expectation crisis? yes, I struggled with it myself.
Comment by Unpopular Truth on 31 January 2008:
The first letter proves their own point wrong in very simple terms. His house cost 2.5 times his yearly salary. One that I could get would cost 5 times mine. And no, it's not a Mc Mansion, it's a modest unit with 3 bedrooms with an extremely old kitchen (probably from the 80s). And no, I don't have a new car.. I have a 10 year old banger, recently upgraded from a 21 year old.
Unfair expectations? Hardly. Baby Boomers have no idea how good they have it. Free education, free handouts, no tax on super, and the best land in capital cities.
Don't cry too much when you're all too old to work and the Gen Y's like myself are asking twice what we get paid now in 5-6 years time because there's a skills shortage. I plan on taking every penny I can get because I know that it's the only way I'll ever get ahead and live in a place that's as good as the one you take for granted now.
Comment by Watcher on 1 February 2008:
Yes the babyboomer realestate permabulls should be aware that the iPod generation whom you outnumber vastly are going to exact their pound of flesh.
They may only be able to afford a caravan now but just wait till you are dependant on them in your old age, $500 to mow your lawn, no problem. Don.t take it personally though, they will need to do this so they can afford the same lifestyle you take forgranted and have children of their own.
Bring on 15pc Interest rates, we'll be hanging out on a Bali on a surfing safari while the dust settles.
Comment by Dom on 4 February 2008:
Is 49% interest rate too much to ask for? Looking at buying a small caravan....