Australia’s crisis in housing affordability is being exacerbated by long-term structural factors, a leading economist says.

(above image source: Freepik)

Speaking at the launch of the More Houses Sooner: Australian Housing Demand & Timber Use Scenarios to 2034 report published by Forest & Wood Products Australia, Nerida Conisbee, Chief Economist at Ray White, talked about current housing market conditions across the country.

Conisbee also explored structural factors which are contributing to housing supply and affordability challenges.

According to Conisbee, there is a growing recognition about the importance of supply.

This, she says, is encouraging as the role of supply has not been given appropriate recognition in the past.

“Prior to the pandemic, when I spoke about housing supply and building enough houses where people want to live being the ultimate solution to housing affordability, I was often shouted down at that not being the way to do it,” Conisbee said.

“The way to do it (some commentators believed) was through incentives. The way to do it was trying to manipulate government spending. There were so many other ways that people put forward (to address affordability) that housing supply really wasn’t seen as the main way – which we have completely seen that it is.”

Conisbee’s comments come as Australia is suffering from a lack of affordable housing.

A PropTrack Housing Affordability Report released last September showed that nationwide, only 14 percent of all homes were affordable to median income households (refer article).

The comments also come as the aforementioned FWPA report suggests that Australia will need to deliver an annual average of 225,000 new dwellings over the eleven-years between 2024 and 2034 in order to address existing housing shortages and meet new demand.

Speaking about current market conditions, Conisbee noted that house prices have held up despite the rapid rise in interest rates which took place between the middle of 2022 and early 2023.

In markets such as Perth, South-East Queensland and Adelaide, dwelling values have performed strongly.

Even in Sydney and Melbourne, where overall conditions are subdued, price growth remains evident at the affordable end of the market.

This means that already unaffordable house prices have not come down despite a massive increase in interest rates.

(Nerida Conisbee presenting at report launch)

Structural barriers

More fundamentally, Conisbee says that long-term factors are impacting Australia’s ability to address housing shortages.

1. Strong Population Growth

First, the nation’s rate of population growth has continuously outstripped most other wealthy countries over recent decades.

Over the past twenty years, Australia’s population has grown by more than one third (36.5 percent) to go from 19.9 million in June 2004 to 27.2 million in June 2024.

Whilst this reflects our success as a nation and attractiveness as a place in which to live, the greater number of people who need homes is adding to housing supply and affordability challenges.

According to Conisbee, this presents a circular conundrum. Skilled migrant workers add to Australia’s economy and capacity to deliver new housing, infrastructure and communities. Yet these people need to be accommodated – something which adds to existing housing demand.

These challenges are particularly interesting in Brisbane and the Gold Coast. In these places, large numbers of workers are needed for infrastructure projects (especially with the upcoming Olympics) as well as rebuilding from natural disasters. However, there is a shortage of housing in which to accommodate these people.

In places such as Queensland and Western Australia, challenges associated with overseas migration have been compounded over the past five years by interstate migration. This has occurred as people have moved to these locations on account of employment or lifestyle opportunities.

In particular, Conisbee talks of challenges on the eastern coast from Byron Bay in Northern New South Wales right up past the Gold Coast, Brisbane and the Sunshine Coast.

She says that the Gold Coast – which now has the second highest median house price in Australia after Sydney – is a standout in terms of affordability challenges.

2. Bigger Houses, Shrinking House Sizes, More Spare Bedrooms

Beyond population, Conisbee says that Australia is building larger homes even as household size is shrinking.

In terms of homes, the latest Census data from the ABS in 2021 suggests that around one-third (33.1 percent) of all Australian homes now have four or more bedrooms. This is up from less than a quarter (24.3 percent) twenty years earlier in 2001.

Meanwhile, average household sizes have shrunk from 3.6 people per household in 1961 to 2.6 and 2.5 per household in 2001 and 2021 respectively. As many as one in four households (26 percent) are now occupied by a single person (see report).

As a result, Australia now has as many as 13 million spare bedrooms  despite having a housing supply crisis.

In addition to lower birth rates and an aging population, Conisbee says that the contraction in household size reflects that many people if given the choice, ‘don’t really want to live together that much.’ This was evident during the pandemic as shared households broke up, more people moved out and a spike in single households occurred.

A further challenge involves barriers to downsizing for older Australians.

With mortgages typically paid off, many retirees feel little pressure to downsize nor any financial benefit in doing so. Many also feel a personal attachment to the home in which they live.

Even those who wish to downsize may find that suitable options may be limited within their existing community. In such cases, downsizing may involve relocating away from social connections and neighbours.

On this score, Conisbee highlights the case of her own mother, who lives alone in a large four-bedroom house in Research in Melbourne’s outer northeast. Even if she wanted to downsize, her mother would face limited options in either Research and Eltham as houses in these areas are typified by large, detached homes on generous sized blocks.

In addition to downsizing barriers, a related challenge is a lack of quality one or two bedroom units or apartments (outside of student accommodation) which are suitable for single-person households.

3. Construction costs and industry capacity

A third challenge involves higher construction costs and industry capacity to deliver the quantity of new homes which are needed.

These challenges have been exacerbated over recent years as supply disruptions and labour shortages have led to delays, cost blowouts and construction insolvencies.

All up, Producer Price Index data from the Australian Bureau of Statistics indicates that output prices for building construction increased by 32 percent over the four years to 2024.

What’s more, costs and prices continue to rise across most parts of the industry notwithstanding that the rate of output price escalation has eased since its peak in the September quarter of 2022.

Furthermore, Conisbee notes that the rate of cost and price inflation is picking up again in places such as Western Australia. In addition to the relative strength of the state’s building market, Conisbee notes that WA is heavily reliant upon bricks for its construction which are heavily dependent upon gas for their manufacture.

All this is leading to challenges in delivering either the 1.2 million new homes over five years from 1 July 2024 as envisioned under the National Housing Accord or the 225,000 homes per year which the aforementioned report suggests are needed over the eleven years to 2034.

In fact, the nation has only come close to this level once before during the apartment building boom that occurred on the back of Chinese investment in the mid-2010s.

Such challenges are being further exacerbated as it is cheaper to purchase existing homes than build new ones in some locations.

In Baldivis on Perth’s outer southern fringe, Conisbee says that existing homes constructed prior to the pandemic (three bedroom/two bathroom) go for around $600,000. However, developers are unlikely to be able to deliver new housing at any price point below $700,000 or $800,000.

In the inner Melbourne suburb of Collingwood, meanwhile, two-bedroom apartments go for $600,000-$700,000 but developers have difficulty in getting these out of the ground less than $800,000 or $900,000.

4. Where will money come from?

Whilst construction during the aforementioned apartment boom was bankrolled by Chinese investors, Conisbee says that there are questions around who will finance the number of homes need to be constructed.

Whilst superannuation is one possibility, there will be challenges in encouraging funds to invest in housing as these funds need to maximise investment returns for their members.

5. Resistance to density

Finally, Conisbee talks of resistance to greater housing density.

Whereas countries such as the US have density across every city, multi-unit dwellings in Australia are generally seen as a viable starting option but not a long-term living solution.

Conisbee says that Australia needs to move building on the urban fringe and building inner high-rise apartments to also develop medium density housing in middle suburbs.

Solutions

In terms of solutions, Conisbee acknowledges that her suggestions are nothing new.

These include:

• more efficient construction practices such as prefabrication
• more standardisation of home designs
• accommodating more people in regional areas
• changing consumer preferences
• examining potential models to fund construction of the 1.2 million homes
• examining opportunities to accommodate multiple generations within families within single dwellings; and
• examining opportunities to repurpose vacant commercial premises for residential use.

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