For years we’ve been told that the answer to solving Australia’s housing affordability crisis is to increase supply of dwellings, rather than tinker with the tax treatment of housing or limit immigration levels.
In recent years Australia has been doing just that, building an unprecedented 780,000 dwellings since 2011. Much of that supply has been apartment stock, largely concentrated in Australia’s largest cities, Sydney, Melbourne and Brisbane.
Everywhere you look there seems to be cranes littering the skylines of Australia’s largest cities, providing a visual indicator to back up those figures.
However, despite Australia’s residential building boom, affordability concerns have not gone away. Indeed, if anything, they’ve become more acute, driven by strong population growth, lower interest rates, an increase in investor activity – at least up until recently – and tepid levels of wage growth.
It’s got many wondering what, if anything, will be able to solve the problem for those looking to enter the housing market.
According to Daniel Gradwell, senior economist at ANZ, the outlook, even with the latest building boom, is not encouraging. He points out that strong population growth and pent up demand for housing from prospective first-home buyers is likely to provide support to prices in the period ahead.
On population growth, Gradwell notes that it remains at elevated levels even with a slight moderation in recent years, ensuring that demand for housing remains strong.
“Over the 20 years to 2005, Australia’s population growth was relatively stable around 218,000 people each year,” he says.
“Since then, it has accelerated rapidly, reaching a peak increase of 460,000 people in the year to December 2008.
“While that rate of growth has not been sustained, an increase of 360,000 people in 2016 is still well above historical levels.”
And, as this excellent chart from ANZ reveals, while dwelling supply has responded to population increase, it followed a strong period of population growth well above historic norms.
While Gradwell admits that an increase in construction since 2013 has helped prevent an even worse shortage of housing in Australia, as the chart reveals, it was a laggard response, coming years after population growth started to accelerate.
That underpinned demand for new housing supply which, along with lower borrowing costs, meant that rather than stabilising prices, it only ensured that prices grew less quickly than what would have been the case.
At a time of tepid wage growth, that ensured that housing affordability, or perhaps more accurately housing market accessibility, didn’t improve but worsen for many prospective buyers, especially in Australia’s southeastern capitals.
“Clearly the strong house price growth in recent years does not help. But that has been compounded by a fall in wages growth to the slowest rate on record, and lower returns on savings due to falling interest rates,” says Gradwell.
“As a result, the time taken to save a deposit for an average dwelling in Australia has been increasing for the past five years.”
Gradwell says that for an average income earner in Sydney, the time to save a 20% deposit for an average dwelling in Australia’s largest and most expensive city is now over 10 years, with Melbourne not much better at 9 years.
With house prices increasing faster than many could save or maintain a sufficient deposit required to obtain housing finance, it’s meant that many potential first-time buyers have involuntarily put off home purchases, adding to pent-up demand if and when prices start to weaken, says Gradwell.
“This strong latent demand is likely to provide support to prices,” he says.
“Any dip in prices may well activate the pool of potential entrants, resulting in additional demand and thereby sustaining prices.”
Combined with strong population growth and a likely moderation in new housing supply based off recent building approvals data, Gradwell says that demand for housing looks set to remain “extremely competitive” for those looking to enter the market.
“The outlook for first-home buyers is not encouraging,” he says.
“The probability of strong population growth and the presence of many potential FHBs mean the market is likely to remain extremely competitive.”
As such, he says that “it is difficult to envisage Australia’s supply-side response suddenly boosting the availability of affordable housing, so it looks like home ownership will remain a challenge for 20–34 year olds”.
Gradwell also notes that while some state governments such as those in New South Wales and Victoria have introduced stamp duty concessions to help improve housing affordability for new entrants, he says that those measures do little to address the underlying issues underpinning demand for housing.