I'm Jeremy Sheepard. >> And I'm Daniel. >> We use data to expose deceitful property experts and their marketing BS. >> This is the expert busting series. >> Welcome to episode six of the expert busting series. Why higher salary doesn't mean higher capital growth.
Jeremy, let's jump in. >> Yeah. So you've probably heard a lot of professionals in the industry say that you should uh follow the money, buy in affluent areas uh where people can easily afford to pay more for property. Uh so what I've done in this episode of had a look at historical data and as you're about to see uh this theory uh is blown away uh can't really be used in practice and in fact towards the end you might be wondering whether it might be better to actually uh buy at the other end of the spectrum. You've had arguments with a lot of people about this higher wages commentary before, haven't you? We won't name names, but >> uh yeah.
Well, as soon as you uh tread toes on someone else who's written a book or they've hosted a podcast, uh yeah, they don't like the truth. >> We need a book, Jez. So, if you want to if you want us to write a book, uh leave a comment in the comment section. So, moving forward. >> Yeah. So, one of the big problems with this theory is that buyers can come from anywhere.
Oh, by the way, if you are just on audio, we're going to show a fair few charts and some visuals. So, it's probably best watched on YouTube. >> Well, it can be YouTube, it can be Apple podcast, and also Spotify is a very popular avenue for watching this also. So, three platforms, but we'll do our best to talk about it as much as we can. So, whatever we're seeing, we'll mention what we're actually looking at. >> Yeah.
All right. So, uh imagine an auction for a property. It's in a particular suburb. uh we can easily look up the wages of residents for that suburb uh and see if they can afford to buy the property. >> Before that, where do the wages come from? >> This is Australian Bureau of Statistics census data.
So, they conduct a census once every 5 years. >> And how reliable is that? Is that the form that you fill in and you can fill in whatever you want or not fill in at all? >> That's right. You can you can fill it in. Uh in order to measure reliability, we would know what the true figure is.
We don't know that. It's just a measurement of what people fill in. So I would actually say even the statistical reliability would be very low for wages within a certain suburb because how accurate is it actually? >> Yeah. There's a theory that people underquote because they don't want the ABS sharing this information. Oh sorry overquote under quote.
Yeah. They don't want the ABS. They think the ABS might share this data with the ATO and the ATO will come knocking. Uh there isn't anything that that that is that granular. So the ABS makes sure that your personal information is not known to the rest of the country. So you can feel free to be as honest as you like.
But here's the issue that I mentioned. Buyers can come from anywhere. So uh that could be the the suburb next door. It could be across the other side of the city. We don't care what the residents of this suburb earn. We want to know how much money the buyers have got.
Are they in a position to purchase property in this suburb? >> An example would be let's say you live in Sydney, okay, and I want to buy any investment property borderless. So it could be you might be buying in Melbourne where there's a lot of auctions there, for example, or you might be buying in Darwin. Auctions are becoming a bit more apparent there, too. So it's like you might be earning the big dollars in um the state that you live in, but then investing in other locations. And a lot of investors will look to diversify their portfolios.
So that's not getting taken into account, is it? >> No, that's that's a good one. For investors, they can they can buy anywhere. Why do you care what their their income is like? Um but even just for home buyers, investors excluded, home buyers, they don't you don't there's no law that says you must buy in the suburb in which you live in. That's Yeah, it's ridiculous.
So first of all, how do we know if they can afford to buy? And that leads to the second problem. Uh if they turned up, well, it's a pretty good indicator they can afford to buy there. They wouldn't even bother looking in this suburb if prices were beyond their budget. So the incomes of residents are just not relevant. We need to know the income of buyers.
But buyers can come from anywhere. And that brings us to another problem. The income data that you can examine comes from the ABS. Uh that census is conducted once every five years. As you pointed out, it might be unreliable, but it doesn't get published until about a year after the census is conducted. So this time next year, we would have conducted the 2026.
Uh it's usually in August, the 2026 census. Uh but the data you won't get until 2027. So, we could be in early 2027 wondering what are the uh median incomes of the people that live in uh this suburb and uh that could be that data could be out of date by up to six years. The only way to tr truly really do it is if you had access to the atto, every address, every >> tax like everyone's income. That's the only way you could really assess it. And income for every single dwelling.
>> Yeah. Well, the ATO are not going to information, but even if they did, even if you knew that there's a buyer walking down the driveway, they're going to bid at auction. >> Uh, and you know where they live, they've turned up. So obviously they can afford to buy. So it's yeah it's irrelevant >> and they can do it from anywhere. Like I said you could live in Sydney and go buy a property in Melbourne or Darwin or Perth or all these markets and have a significant salary or a successful business.
You could be living overseas with a successful business and buying. That's right. >> Being an Australian resident and buying here. So yeah very interesting. >> And another thing uh around 40% of the residents of a typical Australian suburb change where they live every six years. M >> so whatever the incomes were at last census uh there's a very good chance that they could be inapplicable for the time you're you're doing your research.
>> I'd love to know how accurate that census data is or how many people fill in that accurately. >> Yeah. Yeah. I do. But it's more of a guess. I'm not trying to be dishonest.
I just don't know. >> I can't even remember. It was 5 years ago. So I can't remember what I did with it. >> Yeah. Well, we got one coming up.
All right. And there's another problem with the theory. Uh so the theory assumes this is a small issue but it assumes that income determines your financial capacity to buy but there are more factors uh determining buying potential than merely income. So a high wage earner may be terrible at saving. Uh a low wage earner may impress the banks with their more than diligent savings. So uh it's not a direct one for one correlation.
It's pretty close. And what about a buyer who has no income? Like a retiree, and they're going to pay in cash. They've got a nest egg there. They're going to they're going to pay in cash. So incomes uh have got lots of problems.
They're not a good indicator. Uh but it all comes down to the data, doesn't it? Especially when you've got like for example healthy superanuation balances and you're buying within you super for example like that's a very popular strategy as we saw in episode 51 52 and 53 of our expert our um suburb data podcast but where we talked about things like super like where's the income there you're buying a property somewhere within your super fund what income's getting taken into account then >> yeah it's contributions isn't it >> very interesting >> yeah so it's there's not a onetoone correlation but all of this is just suggesting thing that the theory might not work. >> The proof is in the pudding. So let's have a look at some data and this is what the historical data has to say. So it's a busy chart.
I'll go through and explain all the bits and pieces. So this chart shows the capital growth of suburbs from around Australia split into 10 evenlysized groups uh called deciles. So each desile contains onetenth of Australia's suburbs. Now to know which group a suburb belongs in, I've used the suburbs median family household income. So if the suburb has the lowest income earners in the country, that suburb will be placed in desile one on the far left of the chart. >> Mh.
>> Uh along with all the other low-income earner suburbs and yeah, so this income data comes from Australian Bureau of Statistics. It's that census data and it covers censuses conducted from 1991 to 2021. Uh the first income desol contains the lowest 10% of income earners. The second desile contains the second lowest 10%. The 10th income desile is on the far right of the chart that contains the highest 10% of income earner suburbs. Now each decile is represented on this sharp column and the height of that column reflects the capital growth of that group of suburbs over the 30-year period from 1991 to 2021.
As you can see straight away, higher income suburbs that are to the right have not outperformed lower income suburbs to the left. >> Very interesting. This refutes the claim that higher income suburbs have better capital growth. But what's more important is that there is not a huge difference in the height of each column. It's not that there sorry it's not that there isn't a, you know, a huge difference, but it's there's no clear trend. Perhaps a slight decreased growth rate as you go from, you know, low income earners to high income earners, but there's there's practically nothing in it.
They're all pretty much the same height. So, don't try and read too much into this and and and plot a a line of best fit across the top of those bars there and assume, oh, you've you've got to buy in uh lower income areas. There's the line, the trend line there would be too flat, too shallow uh to draw any conclusion. Now, you'll also notice that each column is a stack of blocks, one on top of another. Each block represents the growth for a five-year period between any two censuses. So, uh, the blocks at the bottom represent the growth of their group from 1991 to 1996.
That's the oldest 5-year period in the data set. And each block has a shade that corresponds with the legend at the top. Probably not so easy to see now that I'm looking at it. Um, >> it's easy to see. You can sort of you can see just the lower part is the earlier years and then the further up you go it's the later years. >> Right.
Yeah. So there are seven censuses. So seven blocks sorry six blocks. >> Is that right? 1 2 3 4 5 six. Yeah.
>> So yeah the the period between each census that growth is has been measured. So if you look at the bottom row of blocks they're in the darkest shade of turquoise. uh you'll see that the best growth from 1991 to 1996 was found in the seventh income desile and you'll also notice there was not much difference in growth between decol one and desol 10 but the next five-year period uh is very different that's the next set of blocks so the second from the bottom in each column now uh the best growth was found in the highest income earning suburbs that's the 10th decel on the far right and This was the period from 1996 to 2001. But then if we look at the next 5-year period, that's the third row of blocks from the bottom, that trend reversed. So the tallest block in that row was the lowest income earning suburb on the far left. And the lowest growth was in the highest income earning suburbs on the far right.
>> So 2001 to 2006, you had the best capital growth um in the suburbs with the lowest income. Uh, sorry. It's the 1996 to 2001 and then 2001. Yes. Yes, you're right. >> Yeah.
So, from 2001 to 2006, you had the best capital growth in the lower income markets and suburbs compared to the higher income >> suburbs. So, you can see that it's not consistent for each 5-year period. Uh, it shows that there are eras in which certain cohorts outperform and then eras when they underperform. uh the conclusion you draw is heavily dependent on when you set the start and finish times. But overall uh the chart shows it didn't matter what income a suburb had uh over the long term the growth had been pretty much the same for all income deciles. Now if higher incomes do have a noticeable influence on capital growth then the column on the right should have been the tallest and the shortest column should have been the one on the left.
instead after 30 years all columns are pretty much the same height. So this chart debunks the theory that higher wages result in higher capital growth. But I want to point out this is current wages. It's a static value. It's read off the census for a suburb. Now there are some experts out there for one of a better word.
They're all about wage growth. not where wages are currently, but >> how wages have grown to get to where they are. Now, there are some professionals in the industry who don't look at high or low income suburbs. Instead, they look at high or low income growth suburbs. In other words, it's not how high the income is, it's how much income has grown recently. So, here's a chart showing the relationship between 5-year income growth and capital growth.
So, it's the same concept as the last chart, but the chart title is a bit of a mouthful now. And you'll also notice there is one set of blocks fewer than in the previous chart. And this is because I need to calculate income growth between two censuses and then calculate capital growth for the next 5year period. So I need a 10-year period that's of historical data to calculate the height of each block's 5-year growth. Now that uh leftmost column, it's not the 10% of lowest income suburbs in Australia. It is the lowest income growth suburbs.
Uh so they could be affluent suburbs with uh no income. Uh there sorry there could be affluent suburbs with no income growth. Uh or there could be uh really cheap suburbs with very high income growth. Uh so similarly with the column on the far right, it may not consist of expensive suburbs, but it consists of suburbs with very low income growth. So, we're measuring income growth across the horizontal x-axis and comparing that with capital growth up the left vertical y-axis. And again, you can see there's nothing convincing in this chart to suggest that higher income growth might lead to higher capital growth.
Uh, and again, there are eras when high income growth suburbs outperformed low-inccome growth suburbs, but there are eras when that trend reversed. Uh, for example, if you run your eye across the bottom set of blocks, that's the darkest shade, >> uh, you'll notice that higher income growth suburbs marginally outperformed lower income growth suburbs. Now, that's the capital growth from 1996 to 2001. But you look at the next set of blocks above those and they show the trend reversing. So in that 5-year period, it was the low income growth suburbs that outperformed. And overall, looking at the total height of each column, you can see there's no clear pattern we can use.
If anything, higher income growth produced fractionally less capital growth, but there's nothing sturdy enough to even hang your hat on the uh here. So this was after I chose a a five-year period uh to measure the growth in incomes. But someone might argue that 5 years is not enough. So if you look at the next chart, this chart shows the relationship between 10year income growth and capital growth. And now we can see a pattern. But it looks like an argument in favor of low income growing suburbs uh given the gradually declining rates of capital growth from from left to right.
So remember the fastest income growth is is on the right. So, this might be explained by let's say you've got an established suburb um and there are just stable incomes or perhaps you've got newer suburbs which have fast income growth but they also contain a lot of new property which is um which has been proven to have slower capital growth. Uh and for more on that topic, check out expert busting topic number three, new versus old. Uh anyway, it looks like we have a pattern here, but this is more than likely just another case of a of a trend of one era reversing in the next era. Uh so I did 15 years, which is the next chart. >> It's interesting seeing that lowest income household income growth had the best capital growth over the other the higher incomes.
Very interesting. Yeah, I mean I I wouldn't uh read too much into it, but even when there's the slightest indication of a pattern, it is going against what uh you know the experts have have told us. >> Now, this is over 15 year. >> Yeah. So, this is now over a 15-year period of income growth. Uh again, back to no pattern in the data that we can practically use.
And the blocks in each column show the same trend. There are eras of outperformance followed by eras of underperformance. Um that's for each co cohort each decol. Uh and just quickly for completeness one more chart. Actually I don't think it's the last chart. It's not the last chart but this is for 20 years of income growth.
And uh again I don't know if you can see a pattern there. I can't there's nothing in that that's useful. >> How far back does the ABS data go? uh 19 1991 okay >> was the first yeah so >> is it hard to get this data like is it readily >> no it's freely available from the OBS it might be difficult to analyze it um I mean I put this in a database and run queries against it so you yeah you might not be able to do this very easily in a spreadsheet but it's not impossible >> yeah it takes time anyway um the next slide is 25 year growth Yep. So, this is the last one. Um, and once again, yeah, nothing in it.
There's no uh trend there. Uh, there's just a range of different values. So, so we've debunked the theory that high income suburbs have better capital growth. And then we looked at high income growth and debunked that as well. There's another theory that I've heard and it is income relative to the state average. All right.
So, this chart is like the others, but instead of income, I've used the ratio of income relative to the state average. And again, as you can see, no help to investors. There's no general pattern we can take advantage of. Now there were some eras that ended up working in favor of higher income ratios if you look at those blocks but there are also eras where that trend reversed just like we've seen in in the other charts. So uh that's the last oh there is one last income theory to do about >> so that household income relative to state or what's that looking at? >> So what's the state average or median income?
>> Mhm. uh compare the income uh relative to the state >> okay and the capital growth of the state >> uh sorry versus the capital growth of those so I've calculated the capital growth of the suburbs that have a high income relative to the state average >> okay perfect >> yeah um >> 5year household income growth >> right yeah and this one is the ratio of suburb income income growth to state income growth. I mean again you can see no pattern there and it's getting quite complicated now. So it's very difficult to find anything that actually works. Uh so this one is not the ratio of a suburb's income compared to the state average. It is the ratio of income growth to state income growth.
>> It's tricky. There's a lot in that. trying everything I can to try to see if anything works and nothing does. Um, yeah, you can see again there's no pattern here. So, and I won't bore you with more of the uh the income growth periods and different combinations. Um, there is one last thing I just want to show.
>> So, before we move over to that, so that's like the the five year household income growth. So, like let's pick an example of a suburb. Let's just say um household income in Maricville compared to New South Wales. >> Yes. >> Is that what that's comparing versus >> it's well yeah income growth versus New South Wales income growth. >> Okay.
Versus the capital growth >> and Yeah. Sorry. Uh so it's like the ratio of income growth of a suburb versus the state. >> Okay. and then split all those suburbs up according to their ratio into 10 groups. >> Okay, so desile one, two, three, four.
>> And then how did they perform over the next um five years? >> I think was it five years? >> To keep it super simple, there's not much change with it. Like you look at it overall, higher suburbs um higher income suburbs versus lower income suburbs, there's pretty much no difference. So if you hear anyone say buy in an area with high wages, high growth, like income growth, >> send them this presentation [laughter] >> delicately. >> Better confuse them even more most probably.
>> Yeah. So uh one last nail in the uh coffin of this wages nonsense. Uh imagine this. Prices rise in a suburb. >> Pick an example. Pick a suburb.
um reservoir >> reservoir >> in in Melbourne. Okay. So, prices rise in that suburb for some reason other than wage growth. Perhaps there's some gentrification. Uh maybe there's an infrastructure project, something, who knows? But let's just say uh property prices increase.
Now because of higher prices, the only people that can afford to buy there are people with incomes sufficient to buy there with higher incomes. So >> or someone with a superanuation, they've retired and they got a large sum of cash. >> Yeah. Yeah. All those other issues we we said at the start, but in order to buy there, you've got to be in a pretty good position compared to before it had all this price growth. So the only people that going to buy there are the people that can afford those properties.
Then a census is conducted and it records higher incomes. Why? Because the people there's more people that have moved in there who have higher incomes. So all I've been doing here is measuring correlation. I don't know cause. But is it possible that higher property prices draw in wealthier people?
And it is actually price growth that leads to wage growth, not the other way around. >> Which would explain why none of these charts show any meaningful pattern. >> And certain suburbs have a lot of investor activity, too. It could be like 50% investors, 60% investors. >> Yeah. Yeah.
I mean, imagine you've got a suburb with 50% uh of investors. Then really are the wages of half the population uh relevant? I mean I would say no. >> I never look at wage growth. >> Yeah. >> At all as a part of my analysis.
>> So if someone finds something else, send it through to us. >> Yeah. Yeah. Happy to look at some uh uh different type of analysis. Happy for people to say, "Oh, Jeremy, you didn't do this or perhaps you could try that." Um but yeah, it looks like from this analysis there is nothing nothing in it. >> Uh it's just a bunch of um marketing fluff from uh some fake experts.
>> Conclusion incomes do not influence growth. >> Yeah. Um it is it is a bit difficult. I can understand why investors would struggle with this with this concept. um it seems so obvious but the proof is in the pudding. Uh the data just does not confirm this.
So uh it is hard to do this kind of analysis. I mean um it's time consuming for starters. You've got to get your hands on the data and you need some analysis skills. Uh it is 100 times faster to make something up that sounds right than it is to figure out if it's actually true. Uh which explains why there is so much marketing misinformation out there. Uh but yeah, if you found this helpful, give us a thumbs up and if you uh know someone who has a belief in this, just delicately pass on this link.
>> That wraps up episode 6 of the expert busting series. Join us next time for episode 7, how depreciation hurts capital growth. Thanks for watching and take care.