Australian Property News

Disposable incomes increase in Australia

Posted on Wednesday, December 08 2010 at 11:10 AM

Australians are becoming richer, but more cautious after the global financial crisis. Riskmark says the nation’s home price-to-disposable income ratio has fallen from 4.6 times to 4.4 times, between the June and September quarters. Rismark says this trend is likely to continue next year, with disposable incomes on a per household basis growing by 6.8 per cent over the past 12 months.

Rismark joint managing director Christopher Joye believes there will be substantial improvement in residential real estate valuations, as Australia’s business investment and export boom drives strong household income growth. Australian disposable household incomes have also out-run median dwelling prices over the preceding three years, with compound annual growth rates of five per cent and 4.2 per cent, respectively.

Australia’s dwelling price-to-income ratio in the September quarter is exactly in line with its average of 4.4 times since the end of the last cycle seven years ago. Rismark says on that basis, there is little evidence that housing market valuations have become more stretched in recent years, as is commonly claimed. Rismark says unlike other estimates, its national dwelling price-to-disposable household income ratio includes:

• Dwellings across all Australian regions

• All property types

• The Australian Bureau of Statistics’ quarterly national accounts measure of average disposable household incomes.

Rismark says it has documented the relationship between Australian housing costs and disposable household incomes since 1993. It says there has only been a brief period between 2000 and 2003, when Australian dwelling prices outpaced disposable incomes. Rismark and the Reserve Bank of Australia (RBA) believe this reflects the once-off valuation impact of the structural downward shift in inflation and nominal interest rate expectations, after the RBA established an inflation-targeting regime in the late 1990s.

Because of the boom in the prices of Australia’s key commodity exports, such as iron ore and coal, the nation is benefiting from a large income shock. Rismark says this is reflected in the striking differential in the real gross national income (GNI) and real gross domestic product (GDP) growth rates over the past year. In the 12 months to September 2010, real GNI rose by 7.2 per cent compared with just 2.7 per cent growth in real GDP. The RBA believes that this positive income shock is more likely than not to persist for a number of years, as China and India continue to undergo their steel-intensive urbanisation processes.