There’s a prevalent assumption that Australia is far more urbanised (or should I say suburbanised) than the rest of the world. It’s is being spread by, among others, high-ranking staff of the Reserve Bank of Australia. Those staff have suggested urbanisation is a partial explanation for the gaping difference in dwelling price-to-income ratios between Australia and the US.
According to the RBA’s numbers, the average Australian dwelling sells for almost 5-times average household disposable income versus less than 2-times in the US.
But there’s a slight problem with the assumption about Australian urbanisation being far greater than in the US. While it’s both plausible and widely-believed, it’s also wrong. Last year, I attempted to prove as much—see Statistical Buggery: RBA Urbanisation.
The misunderstanding, I suspect, stems from the quite different way that some nations measure city size. This particularly applies to the USA. Americans focus on the single, central inner city municipality whereas Australians chiefly look at greater metropolitan area.
An apples-with-apples comparison of urbanisation requires us to use the Combined Statistical Area population numbers. This measure recognises Chicago, for example, as the 10 million inhabitant super-city than it is, rather than counting only the 2.7 million people that live in the downtown and immediate surrounds.
I thought my debunking last year was comprehensive. Nobody argued the contrary. One of our readers emailed a copy of the blog post to the then RBA Governor, Glenn Stevens, and Head of Financial Stability Department, Luci Ellis. The latter had been a staff member perpetuating the myth in the first place. That reader received a response from an RBA Communications Officer. My post had been forwarded to both Stevens and Ellis.
It’s to be expected that nobody called to discuss it with me, these people are busy. But it’s disappointing to see Luci Ellis back out on the circuit spouting the same rubbish, most recently last week at the Australasian Housing Researchers Conference. Here’s the most relevant portion of her opening remarks:
“What we can do is get some sense of the relativities between countries that you might expect, given those institutional and other differences. For example, we can reasonably expect that countries where much of the population lives in smaller, cheaper cities will have lower national aggregate ratios of housing prices to incomes than other countries. That might partly explain why the price-to-income ratio for the United States is relatively low.”
I don’t know if any of the ‘Housing Researchers’ in the crowd called her on it. But, once again Luci, I’d like to call ‘bullshit’.
Counting Urbanisation Properly
The table below lists the 8 largest cities in Australia by greater metro area population. In the next column is the cumulative percentage of Australians living in cities that size or larger. To clarify, 21% of Australians live in Sydney, 41% in Sydney or Melbourne and so on. It’s true that we are quite urbanised. But we’re not alone.
In the next column is the percentage of Americans living in cities that size or larger. This measure is done using combined statistical area. So 37% of Americans live in cities as big or bigger than Sydney, and 51% in cities as big or bigger than Brisbane. You can get data for both Australia and America from Wikipedia.
In contrast with what Ellis is claiming, here are some facts:
- 29% of Americans live in cities larger than 7 million people, versus 0% in Australia
- 37% of Americans live in cities as big or bigger than Sydney vs 21% in Australia
- 51% of the population in both nations live in cities as big or bigger than Brisbane
- 72% of the population in both nations live in cities as big or bigger than Canberra
- 76% of Americans live in cities larger than 100,000 people, slightly lower than the 79% in Australia.
Start spreading the news
The differences between the two nations in this regard are surprisingly mild. The clearest one is the percentage of the population living in megacities. That’s because there are none Down Under.
Australia does have somewhat more people living in cities larger than 100,000 people but smaller than Canberra. In mirror contrast, the US has a slightly larger percentage of its population living in towns and villages with less than 100,000 people—24% versus 21% in Australia.
But these don’t look like statistically significant differences to me. It’s not enough to even hint at it as an explanation for the vast difference in dwelling price-to-income ratios between the two nations.
It’s time for RBA staff members to stop spreading this nonsense and perhaps book into a Demographics 101 course.
12 thoughts on “Demographics for Dummies (and the RBA)”
Houses are essentially a bundling of land, and a dwelling.
Part of the difference in the dwelling component of house prices can be explained by the fact that whilst Australians in general have lousy build quality in their homes, Americans have truly mastered the art of creating z-grade housing at an appropriately low price.
Similarly part of the difference in the land component can be explained by the fact that Australian bureaucrats love to use zoning laws to create islands of residential land between oceans of agricultural/industrial land, whereas in America it is more of a free for all.
However the bulk of the difference is that the US housing bubble burst in 2006 whereas the Australian bubble kept inflating for a further eleven years (and counting).
In my opinion, one of the best indicators of a housing bubble is looking at the change in the proportion of house prices that is attributable to the land component. In theory , there is no good reason why this ratio should change significantly in any one year, in practice however, it tends to whipsaw about depending on whether a given housing market is in booming or going bust, although admittedly in places where land is extremely scarce (e.g, London, Kowloon, Manhattan etc.), it should steadily rise over time.
Excluding mining towns, Australian residential real estate market value is getting more and more dominated by land, which can only be explained by speculative price inflation.
Point taken – capital city density is not an excuse for high property prices in Australia. Question is does the domestic price/disposable income ratio compare to that of the US if we were to use the correct measure. I.e. Use the entire population rather than just metropolitan area?
Perhaps one of the big differences is that the US has had a massive recession preceded by crazy housing construction.
Australia on the other hand has cut interest rates, most likely in order to follow the US. Australia did not need the resulting stimulus nearly as much as the US. Australia didn’t have confidence battered as much, so there are far more people prepared to bid up the price of housing that they can service (based on repayments) at these very low interest rates.
Now the US might have the same thing going on regarding ability to repay, but confidence or the lack of it means people generally become highly risk averse, speculators are not so prevalent, and banks are perhaps a bit more prudent in their lending.
Would any of these things have some factor in what has happened? Even just a tiny bit?
When considering this statistic of “disposable” income V housing prices there needs to be a wider analysis of a large range of different inputs and comparable factors. Some different costs in America to consider might be:
1. disposable income V housing prices within 10km of cbd of New York Vs Sydney.
2. Much lower building costs in US
3. disposable income V cost of pair of Levis
4. disposable income V cost of car
5. Land component cost, as mentioned by someone else earlier.
6. Much lower rates of home ownership in US – therefore less demand.
7. Avg net wealth of population excluding say top and bottom 5%.
8. Surely some economists out there could go on…..
If you look hard enough you can find a myriad of justifications for high house prices. Its tax treatment, its urbanization, its immigration etc .
What none of these account for is the staggering rate of growth in house prices over the last few years.
-Has Australia been urbanizing at such a rate to justify Sydney house prices growing at 20% p.a. for the last 3 years? I don’t think so.
-Have tax treatments changed recently? Nope, been the same for years, though the original pickup in growth rates aligns with Howard’s CGT discount.
-Has immigration shot up? Its a little above trend on the long view, but at 1.5-2.0% its nothing particularly mind-blowing.
So why then could the market have revalued Australia’s housing stock to such extreme levels in such a short period? It couldn’t be the RBAs own doing via the continual drop into negative real interest rates in an economy that is still ticking along pretty strongly? Could it?
Seems to me that another factor in the Aust house price imbroglio, never spoken about publicly with any conviction, is the clusterf..k that is the intersection of interest rates, capital gains tax, state stamp duty (especially in NSW) and negative gearing.
This is a political hot potato, full of self interest, distorted statistics, and lack of political backbone, but must be addressed if my grandchildren are ever to be able to afford a house in a city bigger than West Catgut, where there are no jobs.
The RBA statistical myopia is a surprise to me, and a disturbing one. I had thought that they, at least, were able to understand and articulate stats, it was just that those who make policy were ignoring them.
Central banks have been complicit in creating asset price inflation with low and ZIRP, and of course QE etc.
Now Glen Stevens is a highly paid advisor to the NSW Govt. on housing affordability.
Hmmm funny old world isn’t it.
‘Gareth Brown Bullshit Party’, has a ring to it.
Come back to Australia. Run for the Senate.
My thoughts for some time on this ratio stretch between America and Australia is that it is basically down to a very low minimum wage setting in America versus Australia. This leaves those that make the difference in the figures (ie Mum & Dad Australians that will spend their last bit of disposable income on living in a better place than last time or investing in a renter) continuing to fuel the fire of prices. If you are struggling to feed your family on the American minimum wage then you are hardly in the market to get out there and start being a property tycoon or buy a more expensive house for yourself. Hence not the volume of fuel in America.
My thoughts on this crazy house price scenario, as I have been trying to buy a house in Sydney for the last 7 years,and got gazumped by u know what nationality. According to most of the Agents,they are illegally purchasing “used” houses by means of others with permanent visas in Australia. This is what the real problem is, not as the Government is saying that Immigrants are only 2% of the market. Its the criminal method of purchase by these illegal purchases that is the reason of the huge price rises in Sydney and Melbourne. Wake up you incompetent Australian Governments, and stop hiding behind false statistics.
I suspect another issue is that the government has been stalling, since 2003, to capture the real estate industry within anti-money laundering legislation.
If agents had to properly do checks on the sources of purchaser funds, their identities etc. I think a fair few people would be excluded from participating in the market.
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