Debunking Demographia House Price Survey

It's about time NZ Herald and Auckland Council refrained from giving the Demographia Housing Affordability survey such an easy ride - especially given there are more useful and more credible surveys available internationally. And even more reason is that the matter of housing affordability requires reasoned discussion in Auckland.

In this posting I will quote criticism of the Demographia survey that has been published in Australia where stories similar to what we see in New Zealand about "unaffordability" are pedalled by Demographia. I will also refer readers to other surveys which are held in higher regard by the Economist - for example.

And at the end of this post I summarise the more useful findings and research of Numbeo - a very interesting and emerging crowd-sourced database including cost of living comparisons.

DEBUNKING DEMOGRAPHIA

But first, here's what the Australian Property Forum had to say a couple of years ago about the Demographia work:

The infamous Demographia survey is updated and released every year, and every year the property bears of Australia use the survey to claim that Australian houses are the most expensive in the world, the most unaffordable on the planet, the greatest real estate bubble in history.

But almost half a million families and individuals bought homes in Australia last year. So while housing may be unaffordable to some (has it ever been otherwise?) plenty of people do seem to be able to afford to buy houses. So how come so many people are buying houses in a country that Demographia claims to be completely unaffordable?

Obviously there must be many flaws in the Demographia survey, some of which I will outline here.....

For a start, the Demographia survey uses a very simplistic measure of affordability - the median house price to median gross household income ratio. Using gross household income is an inappropriate way to determine household spending power, because the spending power of a household is based on the amount of gross income remaining after costs are deducted for essentials such as taxes, food, transport, clothing etc. Differences in tax rates and cost of living pressures across various countries make a comparison of spending power based on gross income meaningless. Furthermore, there is no reason why a family on median wage income should feel entitled to be able to afford a median house, because houses are not purchased using wage income alone. Houses are purchased using wealth. A better measure of a household's ability to afford property would be to consider household discretionary income and total wealth. This would include non-wage income (such as income from interest, shares or other investments), and wealth stored in other assets (such as shares or equity in existing property) that may be liquidated or borrowed against in order to fund a new property purchase. A family with median wealth should feel entitled to a median dwelling, but an FHB on median wages (with no other wealth) should not....

The survey also fails to consider dwelling size. Houses in Australia are, on average, the largest in the world, so when comparing median houses it is important to note that a median dwelling in Australia is much larger than a median dwelling in the other countries. Why would Australians build the largest houses in the world if our houses are supposedly unaffordable? Wouldn't we build smaller less expensive ones if that was the case? The truth is that Australians have high incomes, Australia is a prosperous country, and as a nation we choose to spend a large portion of our disposable income on nice large well appointed houses. Clearly we can afford to do that.

Another major failing with the Demographia survey is its measure of median house price. The official median house price figures that Demographia use for Australia are sourced from the Australian Bureau of Statistics. However these ABS figures only include freestanding houses. They don't include units or townhouses, meaning that Demographia are overstating median house prices in Australia compared to the other countries assessed in their survey (countries where units and townhouses are included when calculating the median house price).

So, the Demographia survey compares median house price to income ratios across various countries, but clearly there is no reason why those house price to income ratios should be consistent across each country, because there are substantially different factors impacting the housing markets in each country. The Demographia survey fails to consider the following important factors:

- Disposable/discretionary income
- Wealth (including wage income, non-wage income, and assets)
- Employment rate
- General cost of living (affects spending power)
- Interest rates
- Credit availability
- Rental yield
- Availability of public housing
- Marginal tax rates
- Mortgage default rates
- Tax incentives such as negative gearing, FHOG, CGT reductions
- Land/block size
- Dwelling size and quality
- Proximity to transport and infrastructure
- Currency exchange rates
- Economic and political stability
- Average persons per dwelling
- Home ownership rates
- Urbanisation
- Population growth rate
- Demographics (it is ironic that a survey called Demographia ignores basic demographics!)

Of course, no survey is perfect and no survey can possibly hope to account for all these factors. The best we can do is try to look at as many different surveys as possible, each of which address a few of these factors, and this will give an better general impression of comparative affordability in each country, rather than looking at just one survey (I have linked to twelve alternative surveys below).....

In my view, the best way to determine whether homes in Australia are affordable or not is to employ a little common sense.

1 - Would we choose to build the largest homes in the world if homes were unaffordable?
2 - Would half a million families and individuals (approximately) be buying homes every year if they couldn't afford those homes?
3 - Would we have one of the lowest mortgage default rates in the western world if people couldn't afford their homes?

I believe the answer to each of those questions is 'no'.

Can every first home-buyer in Australia afford the home they desire right away? Of course not... they never could. But any family willing to work hard can afford a home of some description, and as they progress through life, increasing their income and wealth, over time they will be able to afford comparatively better houses. Once they have achieved median wealth then the average family can afford a median dwelling, and later in life an average family who continues to build their wealth can afford increasingly higher quality dwellings. This is the way it has always been.

Here are some alternative studies...

World's Top 10 Priciest Cities To Own A Home
Sydney - not in the top 10

Numbeo: House Price to Household Disposable Income Ratio
London 15x, Singapore 14x, Tokyo 12x, New York 8x, Dublin 8x, Sydney 7x

GlobalProperty Most Expensive Cities 2009 (apartment price per sqm):
Sydney - Number 28: US$4,994 per sqm

CityMayors Expensive Cities
Sydney - Number 38

Knight Frank Survey (prime residential property)
Sydney - Number 8: EU$13,100 per sqm

Overseas Property Mall Survey
Average home values for select 2,200 square foot single-family dwellings with four bedrooms...
Tokyo $786K, Sydney $683K

The Economist: Worldwide Cost of Living Survey
Australia - Not shown in the top 10

Mercer Most Expensive Cities (cost of living, including housing)
Sydney - Number 24

Xpatulator Global Cost of Living Ranks
Sydney - Number 22

Aneki (most expensive countries to live in)
Australia - Not shown in the top 20

Most expensive countries in the world
Australia - Not in the list

Most expensive rental markets
Australia - Not in the list

NUMBEO

The study that I have looked at closely and which seems to me far more useful when looking at what is happening in Auckland is the NUMBEO study, which is now one the largest and most data rich sources of cost of living and housing price data in the world.

The survey data quoted by NUMBEO is described on its website like this. I have highlighted in bold aspects of the approach of note:

.... there is no standard formula to calculate property price indices. Our formulas differs from Case-Shiller Index, UK Housing Price Index, etc.

Price to Income Ratio is the basic measure for apartment purchase affordability. It is the ratio of median apartment prices to median familial disposable income, expressed as years of income.

Our formula assumes and uses:

• net disposable family income, as defined as 1.5 * the average net salary
• that the average apartment has 90 square meters
• its price per square meter is the average price of square meter in city center and outside of city center

The statistics that are reported, by country, include:

• Mortgage as Percentage of Income is a the ratio of the actual monthly cost of the mortgage to take-home family income.
• Average monthly salary is used to estimate family income.
• It assumes 100% mortgage is taken on 20 years for the house (or apartment) of 90 square meters where the price per square meter is the average of price in city center and outside of city center.
• Loan Affordability Index is an inverse of mortgage as percentage of income. Used formula is : (100 / mortgage as percentage of income).

So there you go. In some ways this survey is like Demographia's - ie that it calculates a ratio of median prices to median family incomes. However when analysing affordable homes (as opposed to all homes), then it is more useful to survey the types of homes that are generally purchased by young families and couples starting out on the housing ladder. And for most cities in the world, the starting point is NOT a freehold 200 square metre floor area, three bedroom house on 400 square metres of land. The starting point is an apartment. The NUMBEO survey reports affordability of 90 square metre apartments.

You can see the NUMBEO survey for 2013 here for 103 countries. Note you can list the data in any ascending or descending order - by clicking the arrow keys.

In 2013, New Zealand ranked 21 (Price to Income Ratio of 6.40), while the USA was 1 (Price to Income Ratio of 2.16), Germany, Canada and Ireland ranked 8, 9 and 10 respectively. Australia ranked 32. And so on.

Then you can also look at the affordability index which considers the cost of a loan (assuming it is taken on for a 20 year period) and which uses interest data from each country and such like. New Zealand ranks 24th in affordability (with 1 - the USA - being most affordable), and places like Belarus and Ghana being least affordable and ranking 100 or more. It should be noted that in this survey countries like Sweden, Australia, Italy, Egypt rank as less affordable than New Zealand.

In Auckland we need to be measuring and comparing data that helps us focus on change and on policies that will make a difference, rather than using discredited surveys that only exist to reinforce a particular party line that is all about removing development costs and improving conditions for developers so they can be effectively subsidised to build relatively expensive and large homes.

We know that the average NZ home has been increasing in floor area for the past 20 years or more, and that the number of occupants/home has been decreasing on average. This is inconsistent with the policy objective of increasing the supply of affordable homes, because internationally, affordable homes in urban environments are apartments.