Affordability bug bites as supply constraints continue

The affordability debate that continues to plague Australia’s housing market has caused quite a stir among industry experts and recently, the head honcho of ANZ Bank decided to weigh in with his thoughts on the issue.

Phil Chronican raised a few eyebrows (mine included), with his suggestion that property is a weakening commodity, and the past two decades of significant capital growth have created a false perception of housing as an investment vehicle for wealth creation.

In a Sydney Morning Herald article, Chronican put real estate under the microscope, suggesting there’s an innate imbalance in the market due to the ongoing supply shortage we are experiencing that’s placing upward pressure on prices.

“The housing market has a $4.2 trillion capital value and has a unique influence over our lives, but is proving an increasing source of controversy,” he says.

“As a market or industry, rarely do we stop to ask what does the ideal housing market look like. For me, it would be a market that delivers sustainable outcomes and a balance between access and affordability, financial security, returns for investors, business opportunities and employment for industry participants.”

But Chronican says with house prices having increased well in excess of inflation and average incomes over the past 30 years, affordability constraints are keeping many would be home owners locked out of the market.

He says the average house price doubled in the 13 years to 1998 and did the same again from 1998 to 2007, before starting on the slight downward trajectory we are seeing today. According to the Australian Bureau of Statistics the weighted average home price across all capital cities fell by 2.1 per cent for the March quarter.

Chronican says, “This has been the result of many things, including removal of the first home owners grant, rising interest rates, a retightening of foreign investment rules and slowing population growth.”

“But prices, which are still very high in a historical sense, are also having an impact, particularly on affordability for new buyers. We’re seeing this play out in reduced demand such as lower auction clearance rates. This decline is affecting the banks, too, with credit growth for housing at rates lower than they have been for 30 years.”

He cites survey results published by The Economist magazine that controversially suggested our housing market is the least affordable in the world, estimating it to be overvalued by 56 per cent.

However the bank executive acknowledges that while prices have increased from an average of $100,000 to $500,000 over the past 25 years and as such are “high”, the question of affordability is not quite so cut and dried.

“The question of affordability is a little more complex as you need to take into account not just prices, but interest rates and incomes,” he says. “If you look at the past 20 years, incomes have risen and interest rates have fallen. This means the average person’s effective purchasing power is much greater than it was.”

Chronican believes the real issue with affordability lies in the continuing imbalance between supply and demand.

He says with prices for inner city apartments in Australia almost on par with those of heavily populated Hong Kong and Singapore, the issue is obvious: “constraints on the supply side have artificially steepened the supply curve for residential housing. Under the status quo, the Australian housing market is clearly losing the battle to keep demand and supply in check.”

ANZ estimates the current housing shortage to be in the vicinity of 230,000 dwellings, with the gap between availability and demand widening significantly since 2006.

“This year there will be demand for about 20,000 more new dwellings than will be completed,” says Chronican.

“The supply of housing will become even more critical in the coming years as Australia lifts its intake of skilled migrants to help fill shortages in the labour market.”

He points a finger at all levels of government as being largely responsible for land supply constraints and says the first home owner’s grant did more harm than good, with sellers enjoying the benefits (due to the grants being capitalised against house prices), rather than those it was intended to help.

Then of course there’s the revenue governments enjoy from property, like stamp duties, taxes and rates, which Chronican says creates a “financial disincentive” for them to make major changes.

“If we’re going to continue to be a stable, growing country and we don’t want housing to become more unaffordable, supply side needs to be addressed. We need reform back on the agenda to address supply issues,” he says.

“Affordability problems have got to a point where we no longer can let market forces attend to them. What we need is a real, ideally shared, political commitment for reform and the discipline to see a long-term plan through to completion.”

Interestingly, one of Chronican’s ideas is to encourage medium and high density development in areas where demand has traditionally been higher than elsewhere – namely the inner areas of our major capital cities.

If you’ve been reading my blogs you’ll know that for some time I have been suggesting that inner city apartment and townhouse stock will become increasingly popular in the future as we realise that we simply cannot keep carving up land on the outer urban fringes where infrastructure constraints are an ongoing issue.

These types of dwelling provides more affordable housing alternatives not only for for first time buyers but also downgrading baby boomers and are also popular with tenants. That’s why they make great investments.

As for affordability – while I can’t deny that some are struggling to break into the housing market, I’m sure the houses our parents bought in their day, on their wages at the time seemed pretty pricey too. I know I took out a 30 year loan to pay off my first mortagge which was around $16,000.

In reality – it’s all about perception.


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