Dual incomes – capitalized or decapitated

Westpac Chief Economist Ted Evans nailed his colors to the mast with his optimistic report ‘Australian housing: the bubble myth’. Evans forecasts steady prices for the next two years while household incomes rise 7 per cent pa, “setting a basis for higher house prices in the medium term”.

If Westpac Bank follows his advice and lends freely to qualified property buyers – funded from overseas wholesale markets – their already overweight mortgage position can be expected to grow significantly. I wonder how WBC shareholders will view that risk.

A key Evans theme is housing is still affordable for two income families. Vendors pretend this small group are setting new (higher) price benchmarks, displacing all other buyers, and thereby capitalizing the sacrifices two income families make into land prices. Thank you very much!

Why should these economic benefits accrue to existing landholders? A two income couple committed to building home equity ought be able to pay down a mortgage in record time. Instead, current prices set them up for a lifetime of drudgery.

And he perpetuates the stock shortage myth. Tell the builders trying to sell new houses on Melbourne’s outskirts there is a housing shortage. They will throw bricks at you. This sad story is repeated in many markets – think Proserpine QLD or the Sunshine Coast.

In trying to explain away the painful price to earnings ratios Australian buyers are confronted by, Evans takes a fresh departure and creates a novel comparison – a dual income median earning family can buy themselves a flat. But even his preferred measure of unit prices over median incomes comes out at 4.5 x.

Demographia ranks a media multiple of 4.1 to 5.0 as ‘Seriously Unaffordable’

And does a working couple regard the opportunity to buy a flat sufficient compensation for denied leisure and disrupted child-rearing? I think not.

Prosper Australia has an institutional disgust for the endless thievery by the landed from the landless. It is one thing for current income to be capitalized into land values and quite another for all projected and foreseeable rises in income to also be optimistically capitalized into current prices.

Ted Evans has not shaken my bearish opinion that current house price declines will go on for years, halving land prices in real (after inflation) terms. Prosper and the Land Values Research Group say prices will return to trend, and may well overshoot downward.

There may be economic pain in the transition, but this path is less painful than maintaining these excruciating prices. Landowners say high prices merely reflect limited supply and high demand. The suddenly revealed oversupply changes all that.

“Things always become obvious after the fact” ― Nassim Nicholas Taleb

Sorry, I didn’t make it clear the Ted Evans paper was 26 Oct 2010. My crit was and is that a leading economist – schooled in the equiibrium theory – could not envisage the disorder, financial damage and private harm being imposed by The Great Australian Land Bubble. I assume he also advised Westpac accordingly and they acted on his advice. At the time, the entire housing economic indicator board was lit up with flashing lights and sirens: house price to rent, household debt to assets, median house price to income multiple, mortgage debt to GDP and household debt to disposable income.

Hyman Minsky’s financial instability hypothesis shows apparent stability with debt accumulation has within it the seeds of collapse – leading to a ‘Minsky Moment’. We ignore such insight at our cost.


  1. james squire21-09-2011

    well put. I think we need to realise there are 2 issues re house prices
    1) a sustainability issue – ie can sky high prices be maintained and what will be damage to economy if it is not
    2) a moral issue – do we want high prices to be maintained? and can we bring house prices down.

    I have no confidence in our policy makers to address number 2), so the best we can hope for is the market collapses under its own weight despite govt efforts to inflate it. To my mind, this is the only way social equity will be delivered. Fingers crossed this pans out. Either way, I am happy to sit tight and rent for a quarter of what it would cost me to buy the place I live in.

  2. Cameron Murray21-09-2011

    I thought his name was Bill Evans…

    And he has become a lot more bearish in the past few months.

  3. davinci722-09-2011

    “The pyramid must be kept strong! Find more slaves”
    Have we really evolved?

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