Household disposable income is near 20-year highs – and it’s helping house prices: Joye

In a speech a number of years ago, the head of economic analysis at the RBA looked at the amount of income the representative Australian household had left over after buying a home – at the median price at that time – and servicing all their interest and principal repayments on a home loan (at prevailing rates).

The conclusion was counter-intuitive. The RBA analysis showed that Australian households actually had more income left over after all housing costs – that is, buying a home and meeting their mortgage repayments – than at any other time in recorded history. (The RBA’s research went back to the early 1980s.) Since this work stopped in June 2007, we recently decided to update it with a few tweaks.

The RBA looked at first time buyers acquiring a home in the 30th price percentile (i.e., a cheaper-than-average home). We simply examined the “average household” –calculated by dividing the ABS’s quarterly disposable national income estimate by the number of households each quarter – buying the “average dwelling” in Australia, which is defined as the average sales price in a quarter. The income estimates from the ABS are the only regular (or quarterly) income data that are made available by government. The dwelling price data is sourced from RP Data, which captures 100% of all home sales in Australia.

We then assume that the borrower has a 10% deposit and a 30-year standard variable rate home loan, which requires him or her to repay both interest and principal. Finally, we “inflation-adjust” all the data to make households’ positions comparable over time. The results of this work are enclosed in the chart below (click to enlarge).


The key question we are trying to address is this: do households in 2011 have more or less disposable income after buying a home and paying down the mortgage than their predecessors? 

Like the RBA, we find that – contrary to popular myth – today’s households actually have more disposable income than at any other point since we began our analysis in 1993. 

Of course, there are some good explanations for this. Per capita disposable income has been growing very strongly, and has outpaced house price appreciation over the past seven to eight years. Over the longer term, we have had a structural decline in the unemployment rate from the double-digit peaks in early 1990s to just 5.1% today. And then we have had the rise of multi-income households care of a secular increase in the female participation rate. 

A final crucial difference is the decline in inflation – aka “price stability” – which has permitted lower nominal mortgage rates. As I have argued many times before, the cost of price stability is occasional spikes in interest rates, assuming that the RBA is prepared to do its inflation-targeting job. 

Unfortunately, the RBA’s inflation-fighting resolve is becoming an open question with a board majority-controlled by conflicted business executives. The bank has thus far ignored the last six months of core inflation data that was 40% above its target, and has yet to respond to its own forecasts for above-target price pressures out to 2013. 

The healthy incomes and balance sheets of Australian households are one reason why house prices are unlikely to fall much, especially if the RBA begins cutting rates in order to appease community demands that it prioritises the maintenance of growth and employment over its once-dominant price stability objective.

Christopher Joye is a leading financial economist and works with Rismark International. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.

This article first appeared on Property Investor, Australia’s top site for property investment news and advice


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