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Who’s to blame for Australia’s exploding property prices and housing affordability crisis?

Australia’s housing affordability crisis worsened significantly over 2021 as the property market boomed and prices reached new record highs.

Mar 10, 2022

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Source: Who's To Blame For Australia's Exploding House Prices? (realestate.com.au)

Author: Vanessa De Groot - 02/03/2022

But the difficulty many people face in buying their own home isn’t a modern challenge, but one that experts say began back in the late 1990s.

House prices rose by a fairly modest 16% in the decade from 1990 to 2000, then surged by 88% in the noughties, before jumping by another 23% between 2010 and 2020, according to PropTrack data and adjusting for inflation.

And over the past two years, values have absolutely skyrocketed despite the world being in the grips of the COVID-19 pandemic.

In 2020, house prices defied forecasts of a coronavirus-induced crash and went up by 7.5% and then last year, median values grew by a staggering 22.7%.

In Sydney, Australia’s most expensive city, house values rose by 99% – effectively doubling – over the decade to January 2022, to reach a median price of $1.015 million, while Melbourne house prices rose 66% in that 10-year period to reach $780,000.

AMP Capital Chief Economist Shane Oliver said the price-to-income ratio in Australia has more than doubled over the past two decades.

The 2021 Demographia International Housing Affordability report found the house price-to-income median multiple is 7.7 times in Australia, compared to 4.8 times in the United Kingdom and 4.2 times in the United States.

Melbourne is sitting at 9.7 times and Sydney at 11.8, with both classified as ‘severely unaffordable’.

Price hikes have also seen the household debt-to-income ratio nearly triple over the past 30 years, Mr Oliver added.

So how did we get here – and who or what is to blame for the country’s housing affordability woes?

The fundamental issue driving price hikes

The housing market is very complex, and a multitude of factors play into affordability, including land releases, tax policy, government incentives, banking regulation, overseas investor rules, immigration, employment, wages growth, and inflation.

The blame game is regularly played, with fingers pointed at so-called wealthy landlords, money hungry developers, selfish baby boomers, invisible foreign investors, lazy governments, greedy banks, and out-of-touch figures at the Reserve Bank or Australian Prudential Regulation Authority.

Ask just about anyone their views on one or all those groups and the response is likely to be pretty fiery.

Ultimately, however, the consensus among experts about the driver of housing affordability comes back to basic economics.

There has been much more demand than supply for a long time, and until the two reach more of an equilibrium, property values will continue to grow, and affordability will worsen.

Mr Oliver said while the demand and supply imbalance is mostly to blame for the deterioration in housing affordability, low interest rates are also a major factor alongside it.

He said low rates play a significant role in prices rises over the past few years and are also one of the catalysts for the decline in housing affordability that started in the late 1990s.

“It meant people could borrow more and therefore pay more for houses, and as we went into the 2000s housing started to become more and more expensive and less and less affordable,” Mr Oliver said.

“But we also saw a lack of supply relative to demand at that time. It wasn’t that we were building less houses, but we were building less houses than we needed for the surge in immigration that occurred through the mining boom in the 2000s.

“Something got out of whack in the 2000s when we massively increased the immigration intake but didn’t increase the supply of housing to match."

While interest rates have also played a big role in housing affordability, the RBA isn’t to blame for rising house prices either, PropTrack Economist Angus Moore said.

“While it’s unequivocally true that lower interest rates have raised house prices and made it harder for first-home buyers, it’s not the RBA’s role to make housing affordable,” Mr Moore said.

“Its job is to make sure inflation is in the target band and keeping unemployment low, which is an important part of getting into the housing market. It’s very hard to get a mortgage without a job.”

Mr Oliver pointed out that many countries around the world have low interest rates, but not all have had housing as expensive as Australia, demonstrating that the biggest issue is a lack of supply relative to demand.

“In the US and Europe, the price-to-income ratio has gone up, but while it might be three or four times, it’s not like Australia at seven,” he said.

“Ultimately it comes down to supply and demand, and unless you calibrate those two in a better way, we’ll have a going problem with housing affordability.”

Real Estate Institute of Australia president Hayden Groves added that there is a social impetus behind the more rapid affordability decline over the past few years during the pandemic.

People wanted a nicer dwelling as lockdowns forced them to be at home more, and they aspirationally invested in an environment where money was as cheap as it ever has been, Mr Groves said.

Most of the growth then occurred in houses as opposed to units, he said, with demand outstripping supply.

Who is to blame for the lack of supply?

With a chronic undersupply relative to a growing population being the biggest issue for housing affordability, a significant portion of the blame can be put on governments.

State governments need to release more land for development, and faster, while local governments need to speed up their development approval processes, Mr Oliver said.

Meanwhile, the federal government controls immigration levels and tax policy, so things can also be done on that front to ease demand.

Property Council of Australia chief Executive Ken Morrison said since the 1990s there has been a massive escalation in the complexity of planning, with the shifting of infrastructure charges onto developers.

“We’ve also seen a dire lack of forward planning in the zoning of land and renewal areas for denser housing,” Mr Morrison said.

“The picture is slightly different in every state and territory and local government area, but there is a clear need for Australia to get better at bringing new housing supply onto the market.”

Mr Morrison said there is a stark difference in affordability between Sydney and Melbourne, which is due to supply and how the planning system is run, rather than the geographical constraints of land availability.

“The New South Wales planning system is a long way from best practice,” he said.

“The Victorian planning system is certainly not perfect, but over a long period of time the state has done a better job of managing the planning system to be in line with growth.

“It’s about forward planning and ensuring plans on the ground match the housing targets that are set, having efficient processes, and ensuring you are not loading up too many costs onto new housing construction because at the end of the day the purchaser just pays for it.”

When it comes to supply, decentralisation is also key, the experts agree.

While people have moved to regional areas during the pandemic, governments historically haven’t done a great job to date of making sure these areas have enough supply or infrastructure.

A better focus on this would continue to draw people away from capital cities, where high demand for scarce supply is driving competition and pushing prices up.

Other factors contributing to the crisis

Factors influencing supply and demand should be be taken into consideration in determining who or what is to blame for affordability issues.

These include government incentives, particularly homebuyer grants and concessions, which are implemented to improve affordability but often do the exact opposite by inflating demand and prices.

City Median home price Annual change 5-year change
Sydney $1,015,000 19.4% 30.0%
Melbourne $780,000 12.2% 30.0%
Brisbane $570,000 11.4% 45.0%
Canberra $770,000 18.4% 58.0%
Adelaide $525,000 12.6% 41.0%
Hobart $630,000 26.0% 96.0%
Perth $500,000 7.5% 13.0%
Darwin $500,000 25.0% 23.0%

Government tax policy is also a consideration, with significant imposts placed on purchasing, such as hefty stamp duty charges, making housing more expensive.

Stamp duty costs also discourage empty nesters from downsizing and freeing up larger housing stock for struggling families.

Then there are tax breaks for investors, including negative gearing and capital gains discounts, which arguably increase demand and therefore buyer competition and prices, but also help with providing essential rental housing supply.

The same can be said for overseas investors, who are often for pushing up demand and prices, but who also add to rental stock.

Mr Oliver said tax concessions are a contributing factor, but pointed out that other countries also have them, but lack the affordability issues Australia has.

Negative gearing at least has long been a feature of Australia’s tax system, before housing affordability became a real issue, he said.

Foreign buyers also likely aren’t to blame given that Australian cities such as Adelaide and Perth don’t have a big proportion of overseas investors but have relatively unaffordable housing compared to other countries.

Mr Oliver also pointed out that there were few, if many foreign buyers active in the market last year, during which property prices ballooned.

Will housing affordability worsen this year?

Housing affordability will continue to be a challenge this year, but it will be more challenging for some than others.

Mr Moore said roughly one-third of Australians own their own home outright, which means housing is affordable for them no matter what.

But for existing mortgage holders, housing affordability will get worse over the next 12 to 18 months as repayments become more expensive with rising interest rates, he said.

“For first-home buyers, it is accessibility that matters – can you save the deposit you need to be able to get a mortgage?” Mr Moore said. “As prices have risen, it is accessibility that has worsened.”

On top of that, housing affordability will get worse this year for those at lower ends of the market, with interest rate rises in addition to expected price growth of 6% to 9% across the capital cities, as predicted by PropTrack.

However, Mr Groves said wages are starting to pick up now and unemployment continues to fall, so the house price-to-income ratio is starting to close a little.