Well, it’s nice to see that the mainstream media have started to wake up about the lies surrounding the housing shortage.

Eagle-eyed Money Morning reader Gary sent us this link to The Australian:

“Homeless figures are ‘distorting housing shortage’”

Nice work. It’s just a shame we revealed that fact back on August 24th last year when we wrote, “Revealed: The Housing Shortage Lie.”

In the article we quoted from the ‘National Housing Supply Council State of Supply Report 2008.’ It contained the following passage which simply blew us away:

“The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008. This is based on the incidence of homelessness and the low level of vacancy rates in the private rental market.”

That’s right, as we pointed out in August, and as The Australian newspaper pointed out last week, the housing shortage crisis is based purely and simply on the number of homeless people.

But we won’t get too excited about the possibility of the mainstream media mending their ways. Because right on cue, last Thursday the same newspaper gave you, “House prices soar 12pc amid recovery.”

Ah, the good old days are back. Amusingly the article finishes with the line, “RP Data said the figures released on Friday were likely to provide a far more conservative view of market conditions.”

Ha, ha, the arch spruikers trying to keep a lid on things. Love it.

And indeed RP Data did produce a “more conservative” number. It claims national dwelling values were down 0.3% during December.

But not surprisingly, the report is another hodge-podge of confusion. Take a look at their latest press release to see if you can make head or tail of it.

But perhaps the best bit of spruiking was in a little noticed article on Business Spectator, titled “Housing affordability steady over 6 years: Rismark.”

The article by a “staff reporter” states:

“The perception that housing is becoming less affordable is untrue, according to a new housing index which indicates affordability has remained steady or even fallen over the last six years. Investment strategy firm Rismark Australia has released a new index that shows median house prices remained between 3.7 and 4.3 times disposable income over the last six years. Currently, the index has median house prices at 4.1 times household disposable income, while it was 4.2 times disposable income at the end of last year.”

If only the guys at Demographia knew this they wouldn’t have bothered releasing a report that claims Australia’s houses are the most unaffordable in the world ever.

And it flies in the face of the latest research from Fujitsu Consulting which claims that by the end of 2010 “747,000 households [will be] in some degree of discomfort and those in severe stress perhaps as high as 307,000; with around 40,000 defaults annually.”

We don’t know the guys at Demographia and Fujitsu Consulting from a bar of soap, but we’re happy to give their research some airplay. If it achieves nothing else it will help to balance out the pap you’re constantly bombarded with by the mainstream press.

But back to the Business Spectator article. We do love Rismark for their balls. If they don’t like the numbers given by someone else then they go away and make up their own numbers. And voila! House prices are cheap.

Anyway, we’d love to know how Rismark came by their figures, because as usual none of it makes any sense.

The article states: “In the meantime, the rise in median house prices has been lower, at 41 per cent, from $270,000, to $380,000.”

Oh yeah? Here’s a screenshot from the RP Data homepage early last week:

And here’s the screenshot following the release of their December numbers:

In neither case is the national median house price anywhere near $380,000. Although we’re not quite sure why Rismark even references the median price anyway, seeing as they’re so scornful of it.

So, we’ll ignore the $380,000 number and instead look at RP Data’s median price of $451,000.

Anyway, Christopher Joye repeats the claim about the income to house price ratio in the RP Data press release:

“It pays to remember that the price of Australian homes is only around 4.1 times disposable household incomes, which has been unchanged since September 2003. This tells us that over the last six years Australian house price have very closely tracked changes in household incomes. Contrary to popular myth, Australia’s house price-to-income ratio is not unusually high, nor has it risen in recent times.”

Really? Well let’s take a look at that shall we.

Based on the number from Joye that “Australian homes is only around 4.1 times disposable household income”, if we use the number from RP Data’s own website that would mean the household disposable income is $110,000.

Remember, that’s after tax and after the Medicare Levy. It would suggest a monthly cash income of $9,166, or $2,115 per week.

So, the first question we can ask is whether we think that’s believable?

For a start it isn’t clear whether they’re referring to median or mean income. So we’ll let’s look at the median first. Using Rismark’s 4.1 times numer, that would mean if you line up the individual disposable household incomes for every household in Australia, the number in the middle would be $110,000.

Half the households would have a lower income and half would be higher.

But here’s where it gets problematic. Because if we refer to the Australian Bureau of Statistics (ABS) Household Income and Income Distribution report for 2007-08, the median gross – not disposable mind you – household weekly income would be somewhere in the range of $1,200 to $1,399.

So even if we take the top of the range of $1,399 that still only puts the before tax annual household disposable income at $72,748, a full $37,252 below Rismark’s supposed after tax number of $110,000.

But let’s look at it this way. If we take Rismark’s $2,062 household disposable income figure, then according to the ABS data even if we assumed the household paid no tax they would still be in the top 20% of household incomes.

So that clearly can’t be the median.

If we then use the same ABS gross numbers to see where it pinpoints the median, well, it’s a whole different story…

Based on a split of households, the median gross household income per week falls somewhere between $1,200 and $1,399. So, to be fair, let’s split the difference and say the median gross household income in 2008 was $1,300.

Now remember, this is gross. So you’d think the Rismark net number should be less than that. But it’s not. In fact, using Rismark’s assumptions, the disposable income would be about 50% higher than the ABS’s recorded gross household income.

That just doesn’t make sense.

But let’s be kind to Rismark and say that perhaps due to a bunch of tax breaks and some – hehem – creative accounting, the ABS’s median household managed to get away without paying any tax so their disposable income was the same as the gross: $1,300.

Annualise that and you’ve got a “disposable” income of $67,600.

Compare that to RP Data’s national median house price of $451,000 and you can draw your own conclusion.

But to help you out, that works out as 6.67 times household income, not 4.1 times.

Somewhere there’s a problem with the numbers.

Even if we remove all the incomes that receive government benefits then the median still only comes in at $1,634 per week or $84,968. And remember, that’s gross income, not household disposable income.

That gives you a median house price of 5.3 times median gross incomes.

Now, Mr. Joye does claim that their income numbers include all sources of income, not just wages. He claims it includes investment income as well.

But the ABS numbers also do that. And still it doesn’t come close to his 4.1 times.

Even if we use the higher mean average of $2,007 per week that would still only give a gross – not a disposable – income of $104,364 per year. That still puts housing at 4.33 times gross income.

So even if we’re being kind, the disposable income figure is going to be around $85,000 per year, making house prices 5.3 times income.

Whichever way you slice and dice this, you can’t seriously come up with a disposable income of $110,000.

But what about this research from Demographia. It paints an even worse picture. According to their housing affordability numbers, they’ve got Sydney house prices at 9.1 times median gross household income, and Melbourne at 8 times median gross household income.

That makes both cities “Severely Unaffordable.”

However, we will point out one tiny fly in the Demographia ointment. Naturally enough, they use the median household gross income for the entire country, yet they’ve used median house prices for specific cities.

Clearly that’s not going to provide a completely accurate picture as we can assume the median income in Sydney will be higher than the median income in Dubbo or Newcastle. Although of course it’s always dangerous to assume.

So in that respect we’ll probably argue that the 9.1 times figure for Sydney overstates the true picture. But by the same token, there’s no way it’s anywhere near the 4.1 the spruikers at Rismark claim.

Our figure of somewhere between 5 times and 7 times is probably as close as you’ll get to an accurate figure.

But even so. Even if we forget about what the 9.1 times figure refers to, just the comparison to other cities is enough to tell you that Australian house prices are heading for a monumental crash.

And how about the Fujitsu Consulting research [Ed note: click on the link and enter your details. Fujitsu will email the report to you]. That report indicates 200,000 households in Australia are experiencing ’severe’ mortgage stress.

And remember, it forecasts that number to increase by 50% by the end of this year.

But let me draw your attention to the image below. The blue line indicates the ’severe’ stress levels and the yellow line is the RBA cash rate:

The interesting point to note is that the number of households forecast to be in severe stress by the end of this year will be roughly the same as those that were in stress when the RBA had interest rates above 7%.

Yet forecasts are that the RBA will only increase rates to around 6% by the end of this year.

It’s a perfect example of how the ‘normal’ interest rate levels have been distorted by artificially low interest rates. So that all the first home buyers who were suckered in with bribes and low interest rates will start to face ’severe’ mortgage stress at a much lower interest rate level than previously.

However you look at it, trying to claim that house prices are only 4.1 times the median household disposable income is just pushing things that little too far.

Doubtless Rismark are using a hedonic incomes index with a fancy formula which will ‘prove’ they’re right. But what it probably means is that your income is recorded as higher if your neighbour happens to get a pay rise!

We wouldn’t put it past them.

Cheers.
Kris.