High property prices, escalating construction costs, and rapidly rising interest rates have pushed Australia’s housing affordability to the worst level in over 30 years, according to a new PropTrack report.
The PropTrack Housing Affordability Index shows that in 2023 households across the income distribution could afford the smallest share of homes since 1995, when records began.
The decline represents a significant drop over the past 2-3 years.
Data shows that affordability slowly improved in the decade following the Global Financial Crisis and was markedly higher in 2020 and 2021 as interest rates fell to record lows.
And those low rates kept mortgage burdens low and meant that by mid-2020, and even as late as mid-2021, households could afford a higher share of homes nationally than at any time since 2001, the report explains.
PropTrack’s report shows the worst-hit states for housing affordability are New South Wales, Victoria, and Tasmania.
Unsurprisingly, and with a median house price of over $1 million in Sydney, New South Wales continues to rank as the least affordable state across the country.
Further south, Victoria’s housing affordability also continues to sit below the national average, having recorded a significant drop over the past 12-18 months in line with rapidly rising interest rates.
Tasmania has also been hit by housing affordability thanks to surging property prices - by up to 50% in Hobart and as much as 70% in regional Tasmania.
Meanwhile, on the other end of the scale, data suggests that housing affordability in Western Australia has rebounded.
Just over a decade ago, in 2007-2010, Western Australia was the least affordable as the mining investment boom pushed prices across the state, but now it comes out far ahead of all other states as having the best affordability rates.
A state-by-state breakdown reveals how each Aussie state and its residents are coping amid the current property market.
New South Wales
As I mentioned above, NSW has the worst housing affordability of any Aussie state, having worsened significantly since 2020 and sitting well below the previous low in 2008.
It’s true that buying property in NSW has always been most challenging, particularly for low to middle-income earning households, but the rapid increase in interest rates since May last year has pushed even more would-be-homebuyers out of the market.
PropTrack’s data shows that a household with a median income in NSW can afford just 7% of houses available on the market, while that number drops to near zero for households with an income around the 20th percentile.
Again, housing affordability in Victoria has worsened significantly over the past 12-18 months off the back of surging interest rates, which has also dragged the state’s affordability index rating to its lowest-ever point since records began.
PropTrack’s data shows that a household with a median income in Victoria can afford around 10% of houses while those with a household income in the 20th percentile can afford none.
Further north in Queensland, housing affordability has also worsened, but it still sits slightly higher than the previous low in 2008.
While house prices have surged across many parts of Queensland in the past few years thanks to a sea-change shift driving homebuyers north to more affordable property markets in lifestyle suburbs, it still remains more affordable than all other states (except Western Australia).
PropTrack expects that it will be this relative affordability, compared to other capitals, which will continue to be an attractive feature for interstate movers.
Housing affordability in South Australia is lower than ever on all of PropTrack’s recorded metrics.
Strong growth in property prices, coupled with the mortgage rate surge and lower average incomes compared to other states means households in South Australia can afford the smallest share of homes at any time since 1995, when records began.
As mentioned above, affordability in Western Australia tells a different story than elsewhere.
Slow-growing property prices - prices have risen 24% in Perth and 8% in regional Western Australia since 2012, versus 93% nationwide - have meant owners and buyers have been able to keep up with rising interest rates, making it Australia’s most affordable state.
Affordability levels are far higher than the state’s all-time low in 2008, with median-income households able to afford just under 25% of the properties on the market - this significantly higher than elsewhere.
Surging property prices have caused Tasmania to slip from one of Australia's most affordable states to the second-least affordable in just over a decade.
In 2016-17, a median-income household could afford almost half of all homes sold across Tasmania, while today they can afford just 5%.
The difficulty of affordability is compounded by the fact that Tasmania has the lowest average income across states.
In August the National Cabinet agreed to build 1.2 million new homes over the next 5 years to help tackle Australia’s affordability crisis, but while this is a step in the right direction, much more needs to be done.
“1.2 million homes will barely cover Australia’s growing population over that period; we need to do more,” Owen Wilson, chief executive officer of REA said in the report.
He points out that residential building approvals have hit their lowest level in a decade, while new low-rise apartment blocks are nearly non-existent, and medium-density development has not kept pace with Australia’s growth.
“Further reforms are necessary to encourage investment and support fast and effective development.
At a minimum, we need to streamline planning to fast-track more medium-density housing.
Other levers such as taxation are also important. Stamp duty in particular is an inefficient and unreliable tax and together with many others in the community, we have been calling for its removal for some time.
It further worsens affordability by discouraging people from moving to homes that better suit their needs, and makes it even harder for first-time buyers to save a deposit,” he said.
I agree that there isn’t enough being done to tackle Australia’s housing crisis, and in some cases, some government intervention to control the market, especially the rental markets, is only making matters worse.
While the government has committed to easing our housing shortage over the next 5-10 years, the report shows that the promise falls short of a real solution to our worsening property supply crisis.
The number of construction companies able to do the work is both in short supply and overwhelmed by a backlog of work and soaring demand for their services.
Even the volume of additional properties in the pipeline won’t be enough to meet demand.
The looming housing shortfall highlights the importance of collaboration among government agencies, private developers, and community organisations to find sustainable solutions to Australia's housing challenges.
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Policy-makers must focus on addressing key issues like land availability, construction costs, and interest rates, and fostering community support for new developments.
To increase land availability, urban planning strategies should be developed to facilitate the efficient use of available land and encourage urban regeneration.
Infill development and land reclamation projects can help optimise land use in high-demand areas.
Additionally, the government should consider reviewing and revising zoning regulations to promote higher-density developments in strategic locations, enabling more efficient land use and the creation of diverse housing types that cater to different income levels and household sizes.
Interest rates, though largely determined by market forces, can be influenced by monetary policy decisions.
The Reserve Bank of Australia, in collaboration with the government, can work towards striking a balance between maintaining economic stability and ensuring affordable borrowing rates for homebuyers and developers.
Note: High interest rates and low wage growth are pushing affordability down across the country and it needs to be addressed.
Without a comprehensive and holistic approach to tackling these housing pressures, Australians will continue to face difficulties in securing safe and affordable homes.
However, I do still see a window of opportunity for property investors with a long-term focus.
Because consumer confidence is low, with many prospective homebuyers and investors sitting on the sidelines.
Sooner rather than later many prospective buyers will realise that interest rates are probably at their peak and that inflation has peaked as the RBA's efforts have brought it under control.
And at that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
Don’t try to time the market - this is just too difficult - and don’t hunt down a bargain.
Investors should focus all their efforts on buying an investment-grade property in an A-grade location because these types of properties are in short supply but are still selling for reasonably good prices and will hold their value better in the long term.
While it might feel counterintuitive to buy in a correcting market, you can also benefit from less competition, low consumer sentiment, more time, and minimal risk of oversupply.