Can property prices outpace wage growth?

Wow, this thread has spiraled.

Some quick thoughts on the topic, and on ZeroHedge.

Firstly, I'm a big fan of ZeroHedge and the Austrian School of Economics. I slogged my way through Ludwig von Mises' magnum opus "Human Action" and it certainly changed the way I view everything.

The Austrian school perfectly explains why wages don't grow during periods of artificially low interest rates. Essentially, capitalism relies on savings (under consumption) as its lifeblood - these savings are then deployed through a banking system to create capital which is then lent on to entrepreneurs.

The under consumption in the present provides the capital which makes wages more valuable.

So to summarise the Austrian position: savings lead to capital equipment, which leads to productivity, which leads to increased wages.

Central banks which have suppressed interest rates have essentially interfered with our ability to accumulate capital. In fact, capital accumulation (savings) has been actively discouraged.

Mises talks about central banking and essentially says that "capital is a process": ie money off a printing press can not replace the process of saving (under consumption).

So, it is artificially low interest rates which have discouraged the process of savings, which has lead to a lack of capital, and a lack of productivity growth. This is what is stifling wages growth.

Phew!

Thoughts?

 

Australians have managed to squirrel away $1.3 trillion in savings last time I checked. Is thar not much? Because it seems like a lot to me.

 

I agree. Perth is maybe emerging from essentially a lost decade in terms of price increases. Sydney 2003 to 2013 was unspectacular in terms of growth. Melbourne 2007 to about 2013 didn't seem to move much. People claim the past 40 years have just been one massive boom. It hasn't been. It's a constant cycle of boom/correction/boom/correction.

 

But spectacular in terms of opportunities ripe for the taking Especially those who bought say 2011 onwards. People who are waiting for the boom years, it's often too late then.

 

Is that compulsory super or voluntary under-consumption?

 

Are you confusing $1.3 trillion in Australian deposit accounts and assuming they belong to Australian households.
A insane amount disappeared last month , and as it turned out it was super funds moving their money into higher performing areas.
If for example you had a few spare billion $$$ lying around and the USD dollar was strengthening (and a weaker AUD) where would you move your money too .
Its one of the unintended consequences of allowing the US to have higher interest rates than Australia, lots of money flows out of Australia.
There was also a story a few months back that Apple and Google were moving billions of dollars back to the US after Trump introduced a new tax on US companies that hid money offshore, and our banks were using this money at a nice cheap rate.

 

Some people make excuses, others make opportunities. Just sayin'

 

Voluntary underconsumption

 

Citation needed.

 

A quick Google search brought up some statistics for living costs in 1901 compared to 2001.

1301.0 - Year Book Australia, 2001

It doesn't mention property prices, but the average weekly rent on a three bedroom house was (equivalent to) $1.30. The article gives the inflation adjusted figure for 2001 as $65, whereas it was $250 then, and I'd guess it'd be $350 to $400 now. (The median in Melbourne was $380 a year or two back.)

So rents have risen around about 5% per annum since 1901.

The average weekly income in 1901 was about $4.35. Depending which measure you use, it's somewhere between $1200 and $1500, so it's risen by about 5% per year again over the last 117 years.

I don't know what the average house cost in 1901, but assuming a 10% yield, it'd be around $700. Had values risen at 7%, which is the "double every ten years" rule of thumb, they'd now be about $2 million. Clearly that hasn't happened.

If you want to get really silly, I've just looked up the value of a farm in the Domesday Book, and it was recorded as £6 in 1066. Had it grown by 7% per year for the last 952 years, it'd now be worth nearly £60 octillion (a 6 followed by 28 zeros). Given that world GDP is around £60 trillion (a six followed by a mere thirteen zeros), that's also not happened by a very, very long shot.

This is borne out in the research done by economists. Yeah, I know that profession isn't well regarded by investors, but Robert Shiller (won a Nobel Prize, predicted the GFC) found that over the long term property prices rose slightly (1% or so) above the rate of inflation.

Incidentally, the chart that Guest posted showed the price of a new apartment in Tokyo peaked at around eighteen times the median wage.

In Sydney the median house price hit $1.2 million against a median wage of around $60K, which is a ratio of twenty. OK, if you want to compare apartments, they peaked at around $760K, which pushing a ratio of thirteen times.

If you want to take a punt that Sydney property will increase to a higher level than the 1989 Tokyo bubble, and maintain it, be my guest. But I don't think that it'll have a good outcome.

 

Indeed, there is currently no incentive to save in the current enviorment. I personally only hold a cash buffer of 3 months wage equivelent. And at my wage level this is not alot!

 

I do take your point which applies well to European cities but at the same time, I question whether or not a 3 bedroom house from 1901 would be worth 2 million now.
Actually, I think it might be. The imaginary house may or may not still be standing. Let's say it was simple but well built by Joe Blow and his brothers. Where was it located? Inner city and close to everything. I say it's worth at least 2 million now, in almost any capital city in Australia.

 

Can we please stop glossing over the first home buyer boom of 2009-10? Units came under strong demand during that time. Gave me enough equity to buy a house in outer Melbourne. It happened.

 

I really hope Sydney doesn't rival Tokyo's heights!
Good to know about that 18 times thing. BUT
Tokyo vs Sydney: the main difference here is that even reduced migration far outweighs no immigration and no internal population growth.

 

Tokyo has been no Sydney as far as population growth goes, but it has seen a slight trajectory higher over past decades...

11.86m when apartment prices peaked at 18x income.
12.58m when apartment prices bottomed at around 8x income.

 

Yes. I made money in the mini boom too. If you take the "Perth median house price" in 2007 and "Perth median house price" in 2017, no one made any money. That is not correct because the mini boom saw a lot of properties increase significantly in price.

My only point was that house prices can't keep rising faster than wage increases. They can't and they don't.

 

Only time I would save a substantial amount of money in the bank would be if interest rates were 17% again. Other than that, I'm not happy if I have too much cash in the bank.

 

One way it could continue to increase is when people start co-buying property with others. It will no longer be one family per household. First home owners will probably have to start buying with their parents, siblings etc. Multigeneration households are the norm in Asia. I'm guessing that's how prices in Hong Kong keeps going up when their income to price ratio is 20x.

Household size | City of Sydney | profile.id

Over 50% of Sydney households have less than 3 occupants.

"In 2016, 37% of households in the City of Sydney contained only one person, compared with 21.6% in Greater Sydney, with the most dominant household size being 2 persons per household."

 

You are right that this could happen. It does not seem to be happening in this cycle but can't be ruled out for future cycles for sure.