## Friday, September 17, 2010

### A closer look at Australian incomes and predictions from Google Trends

Income distribution fascinates economists.  The release of the new ABS personal income estimates for small areas gives a complete picture of the geographical spread of incomes in this country for the first time.  Given the amount of media attention to Australia’s recent economic success, these figures surprised me.  They are extremely low. Australia’s average gross personal income for 2007/08 was $44,402 or about$853 per week.

Let’s take a closer look.

The calculation of this income figure is an average of individuals with any of the following sources of income in the 2007/08 financial year -wage and salary income, investment income, unincorporated business income, superannuation and annuity income. It does not include individuals whose sole income comprised government benefits.  It therefore includes all casual, part-time and full-time workers, self-funded retirees and business owners. What it doesn’t include are the government benefits many of these groups may also receive.

If government benefits received by this group were included the average would be higher.  After tax incomes would, however, be much lower.

It is important to be clear that these are gross incomes after deducting losses, remembering that there are 1.7million residential property investors with net losses in 2007/08 of $8.6billion. Averaging across the population does not clearly show the diversity of investment income and the severity of many negative investment incomes. We must also note that these are all average numbers, and as is typical for these types of (assumed) distributions, the median income would be much lower. Why is this important? Much of the mainstream economic establishment has latched on to the idea that incomes have been rapidly rising in Australia, yet the data does not to support this optimistic view. If we examine, for example, total earnings of full time employees, we can see that in the period 1995-2010, annual growth in before tax total earnings was a mere 3.9%. In real terms, a 1.3% annual increase in full time wages since 1995. Total earnings of fulltime employees in 2007/08 were$67,860 (wage plus other income), and from recent data, it looks like private sector earnings are pretty flat since then. That’s about $52,000 after tax. The ABS capital city house price index on the other hand, rose by an annual rate of 9.4% since 2002. RPData-Rismark currently has Australia’s median dwelling price (detached and attached) at$405,000 and the ‘trimmed mean’ home price at \$435,000.

Anyone who claims home prices are rising in line with incomes either has not seen the data, or is being intentionally deceptive.  The RBA can be counted amongst this group.

Australia’s current housing situation is truly unsustainable.  It would take two above average fulltime workers to buy one median priced dwelling.  If they want to live in or near a capital city, the situation is more severe.

With an income picture less rosy than many make out, it is quite clear that current elevated house prices are not due to owner occupier demand - there is simply not enough income for that to be true.  They have risen strongly through speculative investment decisions backed by government support (including negative gearing). Anyone who claims that home prices are stable due to incomes fails to realise that prices are determined by investors who can abandon the market in droves as soon as returns start looking bleak.

Moving on.

Google has an uncanny ability to predict the future.  Google Trends allows users to plot search popularity over time for any search term you like.  I have borrowed this idea from various other sites, but what prompted me to post it was a line I read that went something like - ‘once the mainstream media is talking about a housing bubble it is ready to crash.’  As you can see below, this was definitely true in the US.  The recent attention to Australia’s precarious housing situation is a worrying sign for those recently leveraged into the market.

#### 5 comments:

1. Fantastic post Cameron. Thanks for sharing. I'm sure this is information that the property spruikers would hate to get out.

2. so are you suggesting that the rba is deliberately deceiving the market cam?

I take this from the line "Anyone who claims home prices are rising in line with incomes either has not seen the data, or is being intentionally deceptive. The RBA can be counted amongst this group."

If so, I wouldn't mind proof of motive - seems tome like they'd be stepping pretty far outside their charter to lie to the markets about what they thought housing markets were about to do

3. My suggestion is that the RBA has no choice but to say the housing market is not in a bubble. They must intentionally try and deceive the market into thinking prices are reasonable. To do otherwise is to breach their obligation to provide financial stability. If they RBA says prices are in a bubble (which they have tried to do indirectly with Glenn Stevens going on daytime tv), that could easily be enough to prick the bubble and completely disrupt the real economy.

4. I'm not so sure - if they put it about that nothing's wrong when in fact something is, then they're also breaching that rule.

5. We should always be careful about predictions as going with that can never be benefit to anyone. At the moment I am working in Forex trading where going with predictions can be seriously risky affair. At the moment I am trading with OctaFX broker where they have incredible facilities, but best of all is their daily market updates, I can easily use it and this mostly brings profits to me and allows me to be successful easily without much trouble at all.