Housing affordability has again become a policy issue of national focus and debate.
Declining rates of home ownership, especially amongst younger age cohorts is one example of the need for strong policy action to reverse low levels of housing affordability. Much of the recent elevation in housing affordability as a national topic of debate stems from the persistent tendency of house prices to significantly outgrow both earnings and general inflation over the past few years, especially in Sydney and Melbourne.
Housing affordability woes in Australia (as most notably exemplified by Sydney and Melbourne) are the product of both demand and supply conditions and influences. The excessive cost of new housing supply is the most substantial contributor to the nation’s housing affordability challenge and is therefore where the policy focus of all levels of government needs to be.
Let’s take a step back and digest some facts. The most reliable figures indicate that dwelling prices bottomed out back in May 2012. Nationally, the typical home price has since increased by about 50 per cent. However, price movements have been even more pronounced in some of the bigger markets – established house prices in Sydney have risen by 83 per cent over this period and the established house market in Melbourne has seen price growth of 62 per cent.
It is worth pointing out that Sydney trailed behind all seven of the other capital cities for house price growth over the 10 years between 2002 and 2012 – some of the rapid growth in recent years can therefore be regarded as catch up for this lost decade.
The experience of Sydney and Melbourne house prices in recent years stands in stark contrast to many other parts of Australia. For example, dwelling prices in both Perth and Darwin have been falling since 2014 as the natural resources downturn takes its toll. In markets like Brisbane and Adelaide, meanwhile, dwelling prices have continued to grow but at a fairly modest pace.
There has been some silver lining to the affordability cloud. The actual cost of servicing a mortgage has been made significantly easier by the fact that interest rates have fallen substantially over the past six years or so. Back in October 2011, the RBA’s Official Cash Rate (OCR) stood at 4.75 per cent. A succession of cuts over the intervening years brought the OCR down to a record low of just 1.50 per cent in August of last year – where it has since remained.
Financial institutions haven’t exactly been generous in sharing all of these reductions with their mortgage customers. In fact, some interest rates have even been increased over recent months. However, the overwhelming impact of rate reductions over recent times has been to counterbalance some of the detrimental effects on affordability resulting from dwelling price increases.
Affordability can generally be labelled as ‘manageable’ in a situation when mortgage repayments absorb less than 30 per cent of individual gross average earnings and on this criterion the picture is still a pretty stressed one. Only two of the eight capital cities (Hobart and Perth) can be described as ‘manageable’ in terms of affordability.
In the country’s two largest cities, the mortgage repayment burden is heavy. Sydneysiders can look forward to seeing 52 per cent of gross earnings being eaten up by mortgage repayments on the purchase of a home in current market conditions; the repayment burden is less heavy in Melbourne (42 per cent) but still far too big to tick the manageability box. The hard truth is that for ordinary single-earner households in both cities, dreams of home ownership are probably not realisable right now.
So what can be done? In fairness, the Federal government has been hot off the blocks on this one in recent times. They have correctly spelt out their intention to retain negative gearing and capital gains tax arrangements in their current forms.
This is a good start – meddling with these levers would only result in fewer new homes being built, not a smart thing to do in a situation where supply is struggling to match demand. When it comes to housing affordability, the reality is that there are no quick policy fixes. Additional units of dwelling supply need to be delivered more quickly, at lower cost and for a prolonged period of time. This can only be done through painstaking and politically courageous interventions – speeding up the planning system, smashing land supply bottlenecks and taking the burden off private developers with respect to housing infrastructure provision.
At the same time as supporting these reforms, governments must also avoid the temptation to react with quick fixes that in isolation will simply create the opposite outcome to that intended. Housing affordability has always been a complex issue and supporting today’s first home buyers cannot come at the expense of future first home buyers.