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The systemic issue impeding housing affordability - featured image
By Doron Peleg
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The systemic issue impeding housing affordability

An imbalance in supply of family homes to population growth is a major contributing factor to housing affordability challenges in Sydney and Melbourne.

A 30 per cent reduction in dwelling commencements and dwelling approvals was predicted by RiskWise Property Research one year ago, with significant impact on both the broader economy and, particularly, GDP growth.  Royal Commission Into Misconduct In The Banking

Lending restrictions, the findings of the Banking Royal Commission, increased scrutiny of residential property loan applications and restrictions on foreign investors had led to a significant reduction in investor activity and changed the market landscape and consumer sentiment.

This had a direct flow-on effect on investor demand and, consequently, on developers who were also reeling from the effects of the construction defect crisis.

Melbourne had the highest population growth in Australia and Sydney was not far behind thanks to their strong economies, good job markets and high immigration.

This had created a structural problem of undersupply of family-suitable properties and led to housing unaffordability, and was unlikely to be resolved in the foreseeable future.

The burning problem we have is housing supply imbalances as there are not enough family-suitable properties but there is an outstanding number of units in high rises that are unsuitable.

There is a systemic issue of undersupply of family-suitable properties in the high-demand areas of Sydney and Melbourne where there is access to jobs, infrastructure and schools.

With high population growth in both these capital cities, undersupply of family-suitable dwellings, mainly houses and, to a lesser extent, townhouses will drive property values and is likely to create strong long-term growth in prices.

What it means is supply has been unable to keep pace with strong demand.

While there is a large supply of units in high-rise buildings, with many areas affected by oversupply, these are generally unsuitable for owner-occupiers and are largely rental properties.

This imbalance in dwelling construction has been a major contributing factor to housing affordability challenges, remembering that rental properties and owner-occupied ones are not fully substitute products. Future Sydney Scenarios

High-rise units carried a higher level of risk driven by Danger Zones areas with oversupply and also the newly emerging threat of construction defects and combustible cladding which had added an addition layer of risk for investors.

For the same amount of money, investors can usually buy a house in the middle or outer rings which will present much less risk and more likely to enjoy solid capital gains down the track due to the long-term appreciation of land values.

However, to avoid housing unaffordability proper planning must be undertaken for medium density in the middle rings.

This is the long-term strategic solution.

Lack of planning, regulation and a co-ordinated approach between the federal, state and local governments would lead to further imbalances.

Overall, investors were more likely to benefit from buying houses in the middle rings and the outlying areas of Sydney and Melbourne, provided there were adequate transport solutions and access to employment hubs. Sydney+suburbs

With the bulk (around 40 per cent) of the population concentrated in the major cities, particularly Sydney and Melbourne, this only served to drive house prices skyward.

Unemployment in Sydney and Melbourne sits at 4.3 per cent and 4.8​ per cent respectively, but in Queensland it is 6.5​ per cent and in Western Australia, 5.7​ per cent.

Sydney and Melbourne both have strong labour markets and high population concentration and, therefore, house prices will only rise, driving unaffordability.

Currently, there are a lack of strategic economic solutions for the other states eg the mining states and, therefore, it is obviously the two capital cities will continue to attract higher population concentrations.

About Doron Peleg is the CEO/Founder of RiseWise Property Review. He has more than 20 years’ experience in risk management including, Co-Founder of Peleg, Kessel & Co, an assurance and advisory accounting firm & Executive Manager at Westpac Banking Corporation in Sydney. www.riskwiseproperty.com.au/
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