By Lindsay David, cross-posted from the Australia: Boom to Bust blog
I found it interesting going through Demographia’s annual housing affordability survey. Which I must say is always well worth the read and does provide great insight on house price to income ratio’s in cities and towns across primarily the English speaking world.
And once again it showed how insanely ridiculous house prices in Australia are– not only in the sum paid for a house, but also relative to what we earn.
One thing that struck me year after year was how the median house price across each country is measured. Demographia suggests that Australia’s median (market) house price is 5.6x household income. Yet over at LF Economics we have calculated the house price to income ratio to be 8.4x (& 6.6x for units).
Then I realised that the methodology for Demographia to measure the median house price to income ratio nationally was to use the median house price to income ratio without weighting each city relative to the sample size. So if there were hypothetically three cities in a national sample, the house price to income ratio in the middle city (median market) would be the national house price to income ratio (which is the number the media jumps on) regardless of population variables.
As an example, City A which has a population of 10 million and a median house price to income ratio of 12x. City B (population just 1,000) has a house price to income ratio of 2.1x, and City C (population just 2,000) with a house price to income ratio of 1.1x. Under Demographia’s methodology, the national median house price to income ratio would be just 2.1x. But in reality the median house price to income ratio, when the three cities are weighted against their population would be just a fraction under 12x.
I wonder how many other research houses (private and public) use a similar methodology to Demographia giving equal weighting between Sydney and Bathurst..
Nevertheless,Demographia’s annual housing affordability survey is definitely an insightful read and always recommend anyone with an interest in housing affordability to check it out…
Lindsay David is the author of Australia: Boom to Bust and Print: The Central Bankers Bubble. Lindsay is a co-Founder of LF Economics.
