You say that households choosing to gather two incomes is driving price increases in the housing market, stating that the increased income is allowing said households to bid against one another to buy/rent homes in better locations. If this is true, then increases in house prices should follow increases in wage growth. Over the decade ending March 2022, wages grew 26% while average house prices in New South Wales grew 123% over the same period.
A 97% difference in the increases in wages and house prices comprehensively pokes a hole in the theory that housing price increases are merely driven by more households receiving two incomes. I think you will find that many people (particularly those buying their first property) are being driven into cheaper areas, rather than, as you suggest, bidding "against each other to rent or buy homes in better locations" due to the 97% drop in purchasing power from 2012.
Personally, I am struggling to see how the calculations to support your theory stack up, when there has been a 26% increase in wages, and a 123% increase in house prices. There are certainly other factors at play here; diminished supply through various means comes to mind. Whether it be investment by those with the existing capital base to do so, a physical shortage of the number of domiciles available, or some other factor. These housing price increases are far beyond the capability of wage growth and two-income households to support.
Thanks Sam. I think the issue here is that the asset price can change dramatically without changing the annual cost of homebuying. E.g. a $1m home for a household with a $125k income is 8x price-to-income ratio. If interest rates are 2.5% and property taxes are 0.5%, then the annual cost of owning is $30k, or 24% of HH income. However, if interest rates are 6% and property taxes are 1.5%, the annual cost is $75k, or 60% of HH income. With these different interest and tax settings, the price would have to be $400k, or only 3.2x income, to be the same $30k/yr cost of owning.
There are also considerations about the incomes of actual homebuyers. It is a mistake to take a regional average household income (which includes pensioner households, etc) or a single full-time wage. First home buyers are usually households entering into some of their highest income-earning years.
The chart 'Dual income families in Australia' is really surprising. Why would it be less likely for couples without children to have a second person working? Not only the levels, but also the gradient and point of inflection around 2013. Recently, increasingly, it's couples with kinds that have second-incomes. I wonder it it would be possible to disaggregate this between home-owners and non-homeowners as well. I don't even know whether the households with children are more or less likely to be homeowners. I certainly think that the popular desire to buy a place before having children could, and the increasing purchase prices of homes, could provide a powerful 'lock-in' effect for dual-incomes parents who got a mortgage that required both incomes to service. (Speaking somewhat from experience.) If you're renting, you could move to a new location that eases financial pressure if it it turns out it's too hard to parent with both parents in full-time work. But if you've busted guts for the last 5-10yrs saving a deposit for the home you just bought, it's pretty hard to walk that decision back.
You say that households choosing to gather two incomes is driving price increases in the housing market, stating that the increased income is allowing said households to bid against one another to buy/rent homes in better locations. If this is true, then increases in house prices should follow increases in wage growth. Over the decade ending March 2022, wages grew 26% while average house prices in New South Wales grew 123% over the same period.
A 97% difference in the increases in wages and house prices comprehensively pokes a hole in the theory that housing price increases are merely driven by more households receiving two incomes. I think you will find that many people (particularly those buying their first property) are being driven into cheaper areas, rather than, as you suggest, bidding "against each other to rent or buy homes in better locations" due to the 97% drop in purchasing power from 2012.
Personally, I am struggling to see how the calculations to support your theory stack up, when there has been a 26% increase in wages, and a 123% increase in house prices. There are certainly other factors at play here; diminished supply through various means comes to mind. Whether it be investment by those with the existing capital base to do so, a physical shortage of the number of domiciles available, or some other factor. These housing price increases are far beyond the capability of wage growth and two-income households to support.
Thanks Sam. I think the issue here is that the asset price can change dramatically without changing the annual cost of homebuying. E.g. a $1m home for a household with a $125k income is 8x price-to-income ratio. If interest rates are 2.5% and property taxes are 0.5%, then the annual cost of owning is $30k, or 24% of HH income. However, if interest rates are 6% and property taxes are 1.5%, the annual cost is $75k, or 60% of HH income. With these different interest and tax settings, the price would have to be $400k, or only 3.2x income, to be the same $30k/yr cost of owning.
There are also considerations about the incomes of actual homebuyers. It is a mistake to take a regional average household income (which includes pensioner households, etc) or a single full-time wage. First home buyers are usually households entering into some of their highest income-earning years.
More here https://www.fresheconomicthinking.com/p/the-economic-price-of-housing-is-not.html
The chart 'Dual income families in Australia' is really surprising. Why would it be less likely for couples without children to have a second person working? Not only the levels, but also the gradient and point of inflection around 2013. Recently, increasingly, it's couples with kinds that have second-incomes. I wonder it it would be possible to disaggregate this between home-owners and non-homeowners as well. I don't even know whether the households with children are more or less likely to be homeowners. I certainly think that the popular desire to buy a place before having children could, and the increasing purchase prices of homes, could provide a powerful 'lock-in' effect for dual-incomes parents who got a mortgage that required both incomes to service. (Speaking somewhat from experience.) If you're renting, you could move to a new location that eases financial pressure if it it turns out it's too hard to parent with both parents in full-time work. But if you've busted guts for the last 5-10yrs saving a deposit for the home you just bought, it's pretty hard to walk that decision back.