Last week I heard a financial discussion on ABC radio about house prices in Australia. 

Now housing affordability has been a hot topic for quite a few years, and it seems everyone has an opinion about it, and most offer solutions to the ‘perceived’ or ‘real’ (take your pick) problems in relation to the current price levels of housing in Australia.

Whilst most people feel that the average price in the city they live in is way “too high” to be realistic and sustainable; I feel we also secretly enjoy each report of price rises as it feeds into our own self worth equation. Most of us are genuinely sympathetic for the average first homebuyer trying to struggle into their first property purchase, but we also take heart from the fact that our “castle” is quietly increasing in value.

The radio program was a discussion between the radio announcer and the ‘resident financial expert’ and went along the lines of -

Then the so-called expert came out with a statement along the lines of -

“25 years ago, the median house price in the capital cities was 3 to 4 times the average wage. Today, this figure is more like 7 to 8 times the average wage. This just shows you how far out of reach property has become”

Now, at first hearing this, it sounded like a profound statement that encapsulated the crux of the issue.  However on deeper reflection, it all sounded way too simplistic.  In effect, it was a superficial way of looking at a deep-seated multi-faceted issue. 

It also got me thinking about other things I have read and heard from the media on this issue over recent years.  The media loves a simplistic solution to multi faceted problems. 

If someone, (usually a politician, but more recently self appointed experts), can come up with a ‘sound bite’ to cover a complex situation, and at face value it “sounds good”, they will get media attention every time.  But, it does little to address the real problems, and consequently, doesn’t offer up any solutions.

Back to the ABC ‘financial expert’s’ statement, I contend that there are at least five things wrong with this superficial analysis that ‘median house prices have risen well above average wages over the past 25 years and so house prices are unsustainably high and out of reach of the average first home buyer’ 

1. 25 years ago, a 1 income family made up a higher proportion of the average household than they do today.  Presently a ‘normal’ household is more likely to have 1.5 to 2 incomes than the traditional 1 income household.  This means there is more overall income in the average household to support household expenditure, including housing costs.
2. Average tax rates are a lot lower today than 25 years ago as marginal tax rates have risen up the income scale.  This has meant more take home pay for the average wage earner, and hence, more household disposable income.
3. The interaction between the welfare and taxation system has grown massively in the past two decades, and this has meant more Australian households now receive at least part of their income, from the government (family tax benefits, child care rebate, etc). This means more disposable income for many households as well (whether this tax churn is a good or bad thing is a topic for another day!).  
4. Lower ‘real’ interest rates (i.e. inflation adjusted) over the past 8 years when compared to the late 1980’s and early 1990’s, has meant the capacity of households to borrow more for housing has ballooned.
5. Increased competition in the finance sector over the past 2 decades has made access to housing finance that much easier to achieve.  The ‘margin’ extracted by the banks on housing lending 2 decades ago has been greatly reduced leading to easier access to housing credit, and lower comparative costs for borrowers.

So, the ‘expert’s’ (simplistic) comment on the interaction between wages on one hand, and house prices on the other, can be shown to be naïve at best, and superficial at worst, as overall, there is a massive interaction between many factors at play in the housing sector.

As I mentioned earlier, there have been many other (similar) instances I have come across over the past year or so, where generally held views on housing affordability can be shown to have a similar one dimensional flavour to them. For example:

GENERALISED VIEWPOINT 1

What is it? - A pegged exchange rate (or a fixed exchange rate) is when a currency is maintained at a certain exchange rate (or tight band) with another currency or basket of currencies.

Countries often do this to contain inflation in their own economy by maintaining a close peg to another low inflation currency; and also to ensure that the exchange rate on offer is predictable in the belief that this encourages and fosters easy trade between the two countries (or group of countries).  

Many smaller countries have in recent decades, pegged their currency to the US Dollar to foster trade between the US and itself, and to foster trade elsewhere as most world trade is conducted in US dollars.

How a country keeps this currency peg is to be either actively trading in the foreign exchange market to maintain the desired fixed exchange rate, or more simply by controlling all official exchanges of the countries currency, and ensuring all exchanges are conducted at the desired level.

Currently, the Chinese government has pegged its currency (the Renminbi or Yuan) to the US dollar in a very tight band.  As the US dollar has depreciated over the last 18 months against almost all the worlds leading currencies, the pegged rate with the Yuan has caused the Chinese currency to trade at levels many feel is way below where it should. 

This has caused trade tensions with the US as (in normal unpegged circumstances), a falling US dollar would make Chinese goods more expensive for US consumers to buy, thus decreasing demand, whilst US goods would be relatively cheaper for Chinese consumers. Therefore, this would (likely) lead to an improvement in the trade imbalance between the two countries, which runs heavily in China’s favour.

The Chinese government appears to be reluctant to allow its currency to float freely, as it would appreciate considerably (as demand is strong for Chinese goods), and this would cause Chinese goods to be more expensive all over the world causing potentially lower exports, and lead to higher unemployment at home just as the economy has surged again.

from the floor...

The GFC (Global Financial Crisis), has been bad for the economy and bad for companies who operate in the economy, and most of all bad, bad for banks, right? 

Well, yes and no. A bank operates in the heart of the credit system that provides the lifeblood of a modern economy. Overseas banks were devastated by the GFC, and many failed, or were taken over by their national governments in an attempt to protect the whole economic edifice from collapsing on itself. 

However in Australia, we ran a better show. Regulation of our financial institutions should be the envy of the developed world, as none of our banks failed or looked likely to fail, and now rank in the top 20 banks in the world by market capitalisation.  

And for that, our banks have rewarded their CEO’s handsomely to say "thanks". Fortune’s Annual reports out this week, shows that the top four banks in Australia – ANZ, CBA, NAB and Westpac, paid their CEO’s a total of over $35.97 million (including cash and equity) in 2009. Gail Kelly of Westpac on $10.62 million was edged out Mike Smith of ANZ, on $10.94 million. 

Nice work if you can get it! But hey, they did save us from oblivion... so well done guys and gals, you deserve the kudos and the millions! (a little bit of sarcasm goes a long way) 

SOURCE | Phil McGann :: The Australian

Share market update for the week ending Wednesday 18/11/2009

The local market has recovered well from its late October / early November correction and is on track to break new ground in coming weeks – if the momentum continues.

The All Ordinaries was marginally lower this week dropping 6 points to close at 4759 points.  The big corporate play at the moment is AMP’s unsolicited play for AXA Asia Pacific. 

AXA has rejected the bid as underdone, but has indicated it is prepared to continue discussions (i.e. ‘increase the price’ and we will deal). The share market thinks AMP will eventually get its mark and will simply have to pay more, or put more cash options into the bid for shareholders to accept.

The offer at present is a mixture of cash and shares, and is valued at about 5.34 per share. AXA finished the week at $5.84 or up 15 cents for the week, so the market thinks a higher bid is coming. A month ago, AXA was trading just over $4, AMP finished 10 cents weaker at $6.30.

World indexes were mostly upbeat continuing the recent upward momentum as follows:

SOURCE | The Australian Financial Review | www.reuters.com| Graph data: Finance.yahoo.com.au

Westfield Group (WDC.AX)

Westfield is a share I own, and one I have recommended a number of times as a good long term Whisper stock.

Westfield needs little introduction, but in brief it is the largest listed shopping centre manager in the world.  It is a multifaceted property investor  – owning, designing, building, leasing and managing its own shopping centre assets around the globe.  It has operations in Australia, New Zealand, the USA and Great Britain.

The current GFC has caused problems for its biggest asset holdings in the US market with much concern over the last 18 months about the resilience of the US consumer.  The deep recession in the US, has caused increased vacancies in Westfield’s malls and lower than forecast turnover.
 
However recent reports from Westfield show it is confident that its Australian operation will report a significantly higher turnover in 2010, and this will help alleviate softer figures in the US and UK markets, which will take longer to recover.

The Westfield share price has under performed in the general market over recent times, but the weaker share price is somewhat compensated by a stronger yield of over 7% on a forecast reduced payout next year. 

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