‘Sorry, Gen Y, housing costs haven’t gone through the roof’

Renters aren't smiling these days as the cost of keeping a roof over your head soars across Australia.

Renters aren't smiling these days as the cost of keeping a roof over your head soars across Australia. Photo: Getty

This won’t go down well with the housing crisis brigade, but housing affordability has not gone through the roof. It’s actually been fairly stable for the past quarter century

And to the extent that housing affordability has worsened recently, it’s renters rather than owners who have felt the pain.

Further heresy? That darling of the housing shock chorus, “housing stress” (the go-to for scary headline clickbait) has also been relatively stable for buyers, but increasingly bad for renters.

The trick in the above is that it considers housing costs as a percentage of disposable income, not just housing prices in isolation. Yes, prices have jumped, but over the quarter century interest rates have plunged and incomes have risen.

housing affordability disposable income
They are the key findings in a report by Ben Phillips, associate professor at the Australian National University’s Centre for Social Research and Methods.

Dr Phillips’ methodology exposes the flaky nature of most housing affordability stories that consider price movements only as a ratio of average wages. And, like plenty of serious but often under-reported studies over the years, it highlights the plight of lower-income renters as the people with the real housing crisis.

As Dr Phillips’s report in The Conversation acknowledges, the median Australian house price has soared from $140,000 in December 1997 to $540,000 last December, a compounding annual increase of 7 per cent and a 68 per cent increase compared with disposable income.

But those two decades of rising housing prices haven’t done much to housing affordability. The real problem period was the decade to 1993.

“This was a combination of weak income growth and strong increases in housing costs, particularly mortgages with interest rates increasing sharply over this period,” Dr Phillips writes.

“Since peaking in 1993 costs remained relatively stable with rents increasing modestly over the past 10 years, while mortgage costs declined.

“Overall, actual housing costs relative to income have remained stable since 1993 at around 16 per cent of disposable income.”

Sorry, Gen Y and Z, we Boomers haven’t been fibbing when we told you we had it harder.

Before the youngsters seek to tar and feather me, listen to Dr Phillips: “There is no agreed measure for defining housing affordability, but just looking at house prices can be deceptive.”

Averages can be deceptive as well. The overall average housing cost as a share of disposable income is currently running around 17 per cent, but that average is held down by those who already own their home.

For those in the process of paying off a home, it’s more like 21 per cent. For renters, it’s nearly two percentage points more. That’s a reversal of the story for much of the last decade when costs for purchasers were higher than those of renters.

As a share of disposable income, purchasers’ costs peaked at 26 per cent in 1993, fell to 20 per cent in 2000, rose again to 23 per cent in 2003. Renters’ costs started rising from 20 per cent in 2007.

Where housing costs can really be seen hurting is in breaking them down by disposable income quintiles. For the bottom 20 per cent of incomes, housing costs average 29 per cent. For the middle quintile, it’s 19 per cent and just 13 per cent for the top 20 per cent.

housing affordability disposable income quintile
For the “good old days” of housing affordability, you have to gave back more than three decades.

“Housing was much more affordable in 1984 with average housing costs at just 11.3 per cent of disposable income,” Dr Phillips says.

“A number of important changes have occurred over the past 25 years. Interest rates are much lower, living standards have increased substantially for low, middle and high income families and savings rates have also increased – implying that housing costs are increasingly a larger share of expenditure.”

Just as there is no agreed definition of housing affordability, “housing stress” is also open to interpretation. Martin North, who seems to have replaced Steve Keen as the media’s most-quoted housing bear, uses his own methodology to come up with a claim of 30 per cent of people paying off a home being in “mortgage stress” with income not covering outgoings.

Dr Phillips uses the “30/40” stress rule – a household paying more than 30 per cent of their disposable income on housing costs and also in the bottom 40 per cent of the income distribution.

“Using this housing stress measure, we see a significant increase in renter stress, firstly between 1984 and 1993 and then from 2007. Mortgage stress is largely unchanged since 1988 following an increase between 1984 and 1988.”

housing affordability 30/40
On that basis, mortgage stress stood at just under 12 per cent in 2015. Renter’s housing stress was at nearly 25 per cent.

Dr Phillip’s graphs run up to the end of 2015. Housing costs obviously rose over the next two years with housing prices in our two biggest cities while disposable incomes have risen slowly and interest rates have eased a little. Now prices are coming off, which should mean housing affordability will remain relatively stable.

Sorry, this does not make a scary headline – they’re the ones that attract the most clicks, which is why scary housing stories are so common.

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