With a growing population, projected to top 36 million by 2050, and one of the most expensive property markets in the world, is Australia in the midst of a housing affordability crisis?
According to the senate committee report, A good house is hard to find: Housing affordability in Australia, the cost of an average home is now equivalent to seven years of average earnings, up from three years in the early 1980s. With prices rising, many would-be first time buyers are priced out of the market, stimulating growth in the rental market, and fuelling concerns about international investment, tax concessions, urban sprawl and household stress.
As gross income took a nosedive in 2009, house prices spiralled to unprecedented highs in all Australian capital cities. House prices have continued to rise faster than income since 2013, and according to data from the Melbourne Institute, the difference is expected to increase further in the short term.
The number of households with a mortgage has increased substantially over the last 20 years and this is mirrored by significant growth in the rental market with one in four households now renting. Increased supply of quality housing is required to accommodate Australia's growing population but this must be paralleled by growth in infrastructure and amenitie to service these developments.
While more affordable housing may alleviate pressure for some, a sudden drop in house prices could put some existing homeowners in negative equity, leading to rising bad debt and undermining bank share prices.
With house prices continuing to surpass income, housing demand showing no signs of abating and Australians as eager as ever to own their own homes, we asked the experts their thoughts on the future of housing in Australia.
The Economist—supply and demand
According to economist and tax expert, John Freebairn, the current property market situation is a case of basic supply and demand, where demand outruns supply so prices rise. Demand for housing is price sensitive and shifts out with population and income growth. For households the cost of housing reflects the purchase price, as well as the availability and cost of finance, and other expenses such as repairs, maintenance and rates. Much of the increase in demand for housing in Australia in recent years can be attributed to population growth (both natural increase and net migration) and to the lower cost of finance.
The supply of housing takes time to respond to an increase in demand. Often there are lags of several years to gain approval for new housing, to obtain finance, for the associated provision of infrastructure, and construction time. If there is an unanticipated jump in housing demand, with new housing supply restricted, most of the demand increase flows into higher prices. Only after some years to allow for supply to respond will the rate of price increase slow or fall.
The current tax system favours savings invested in owner occupied homes and, to a lesser extent, rental property, as well as the exemption of owner occupied homes from th age pension means test. Such tax incentives also increase the demand for housing.
The Planner—liveable cities
Not only will we need more than a million new homes in both Sydney and Melbourne in the next 35 years, says urban planner, Professor Carolyn Whitzman, but we will also need infrastructure to support them. Professor Whitzman, who has been instrumental in guiding liveability policy globally, argues that we can't talk about the property market without considering public transport, childcare centres and schools, and health services and aged care, which are also key drivers of demand.
Australian cities need long term metropolitan strategies that link public infrastructure investment to the growth of new homes, and provide sufficient certainty to both private developers and local residents. Internationally many cities face similar housing affordability issues and Whitzman says that Australia could learn a lot from Vancouver, Canada, and Portland, US. Significantly, metropolitan planning in these cities is based on local governments working together on a common vision and outlasts both state and local government election cycles.
Whitzman is leading a collaborative research project, Transforming Housing: Affordable Housing for All, to address social justice, economic resilience, and environmental sustainability challenges facing Melbourne and Australia. Forging strategic industry partnerships and drawing on international best practice, the research project is piloting and evaluating innovative policies and programs to expand the amount and quality of affordable housing in Australia.
The Designer—the future of prefabrication
Associate Professor in Environmental Design, Assoc Prof Masa Noguchi agrees that Australia needs to look overseas for guidance in dealing with the current market situation. Noguchi says Australia is way behind Europe, North America and Asia in sustainable, cost efficient prefabricated building delivery. If we look at the property bubble as innovators, we can view it as an opportunity for the exponential growth of housing performance that embraces the needs of individuals and society.
The Australian construction industry is a $150 billion sector, beset with rising costs and inefficient productivity associated with many traditional building methods, yet only 3% contributes to prefab production today. In contrast, 15% of housing starts are considered to be prefabs in Japan and in Sweden prefabrication exceeds industrialised housing delivery with about 70% of the market share. Japanese housing manufacturers mass-produce net zero-energy-cost, yet customisable, homes, designed to accommodate diverse market needs and demands, and in Canada we have seen sustainable housing delivery through the EQuilibrium Initiative that leveraged the successful commercialisation of prefabricated net zero-energy houses in the local contexts.
This is a golden opportunity for Australian prefabrication. The recently established training centre for Advanced Manufacturing of Prefabricated Housing at the University of Melbourne will support research and development to propel the prefabricated housing sector well beyond the current 3% share of the construction market, says Assoc Prof Prakash Singh. Assoc Prof Singh will lead a research team on supply chain and financing innovation at the centre and Assoc Prof Noguchi will contribute to the zero-energy mass custom home design and construction research and development.
The Finance Expert—complex incentives
Professor Garry Twite says that foreign investment and negative gearing have become the big issues in property market discussions but we don't fully understand the nuances surrounding these concepts and their implications. Foreign investment in the Australian property market may be high but we need to determine the breakdown between foreign investment and investment fuelled by immigration. Referencing research from the University of Oxford, Professor Twite says that it is likely that some foreign investment, particularly in more suburban areas, actually takes the form of people moving to Australia to live and while they are taxed as foreign investors their goal is to become Australian citizens. The Oxford study investigated foreign capital flight into residential real estate in London and found that changes in the domestic political environment of the origin country led to a spike in house prices in the corresponding London suburb.
The question of negative gearing is even more complex and the real implications of any policy change are highly dependent on multiple factors, such as demand, availability, income, etc. Australia removed negative gearing in the mid-1980s and real rents and house prices didn't change to any large degree. In the US there is a long history of gentrification, where investors create a large property portfolio in a particular area and act as real estate agents. This model became particularly pertinent with the advent of the Global Financial Crisis. We saw a large stock of foreclosed property. Financial institutions became big buyers and many set up a management model that will have a large presence in the market for some time to come. This model could easily be replicated in Australia.
To move forward we need to be very clear on what we are trying to achieve and what the widespread implications of our actions will be for all the players in the housing market.
The Property Expert—buyer behaviour
Senior Property and Finance Advisor, Jason Kuan, of Provincial Home Loans and Provincial Property Advocacy, says the consumer needs to take back the power. Emotions can run hot when buying a property to live in. Buyers will spend more for the characteristics they see as most desirable, such as location, proximity to amenities, commute time to work, family or space, as well as presentation and style. Such sentiment can fuel bidding wars as buyers commonly seek the same thing.
Although buying power is primarily determined by our capacity to pay more than our competitors, understanding why we should or should not is a skill. As the heated market continues, lenders are under increased pressure from the Australian Prudential Regulatory Authority, with changes in lending criteria starting to filter through to the buyer, in the form of lower LVR (loan-value ratio), and lower rate discounts for investment property lending, as well a greater income capacity requirements to borrow.
However, Kuan argues that an educated and realistic property buyer is a powerful investor even in current markets. Potential buyers can take control of the current situation if they are prepared to prioritise certain housing characteristics to meet their needs without causing undue financial or emotional stress. Property investment is still one of the best ways to achieve long term capital growth.
The property market is complex and Australia faces both challenges and opportunities. The future of housing in Australia requires expert collaboration that crosses academic and industry boundaries to find long term, sustainable solutions.