People can deal with their basic needs using a smaller and smaller proportion of their income. This leaves more and more to spend on your mortage.
Here’s a little model to demonstrate what I mean: Let’s pick a point in the past (1995) where someone is making an amount of money (50 grand). Imagine that person spends $17,949 on consumer goods and services and the rest goes on their mortgage.
The ABS tells me that wage inflation means the same wage is now $95,828. CPI means that the same basket of consumer goods now costs $26,414. Doing the same job, buying the same stuff and obeying the tax laws, a person now has 2.5 times as much to spend on housing!
The big assumption here is that housing budgets expand to take up the left over money. This is not perfectly realistic. Consumption expenditure will also increase. But the people do scrimp to pay their mortgage. Because they expect growth, they want to make this investment as big as they possibly can.
We can see support for the assumption, here:
Housing expenditure has grown fastest of all categories of household expenditure. People rush to expand their housing budget before their other consumption
There may be other factors distending the old ratio of household income to housing price.
Multiple income earners. What proportion of housebuyers are now a two income team? How has this changed?
People also may be willing to take on bigger longer mortgages now. Maybe due to
- Macroeconomic stability – recessions less often and less deep
- More predictable and stable interest rates (the RBA controlling monetary policy)
- Longer lives
- More flexible labour markets mean a more stable income stream.
I want to conclude, like an economist, by hedging my bets. I’m not saying ‘housing markets won’t crash’. I’m just saying that a changed price to income ratio doesn’t make it axiomatic that they will.