Striking a balance in the Australian property market

Government policy in a market downturn needs to balance housing affordability and long-term economic stability.

The cost of housing in Australia is a hot button issue and according to Dr Sam Tsiaplias, Senior Research Fellow at the Melbourne Institute: Applied Economic & Social Research, should be firmly on the federal budget agenda next week.

A harsh divide pits homeowners against renters, investors against those eager to purchase property for the first time. Home ownership is an important part of that great Australian dream and much of the discourse in recent years has been around increasing affordability and creating access to the market for first home buyers.

Now, with house prices dropping in major cities like Sydney and Melbourne, the discussion is changing. According to Dr Tsiaplias, there are two competing priorities that need to be addressed to create a more stable housing market – improving access for first time buyers in an environment where there is a significant amount of negative housing sentiment.

“We’ve always had people trying to get on the housing ladder but now the housing market is in decline we have existing owners watching the value of their property fall,” says Dr Tsiaplias.

“Enacting policies that may assist access to home ownership may – in the short to medium term – curb household spending, particularly for those with lower incomes. That taken together with low wages growth, may slow down overall economic growth. So, by helping one part of the economy, you may be slowing down the rest.”

At present, data from the Melbourne Institute’s House Price Expectation Index suggests that the proportion of consumers that expect house prices to fall by more than 10% is the highest on record. At the same time, consumers are reluctant to enter the market because they don’t believe it’s a good time. Negative sentiment feeds into low prices going forward which may slow down housing markets even more.

Then there’s the ripple effect of how this attitude extends to household spending.

“There’s evidence suggesting that for every 10% decline in house prices, households can reduce their household spending by half-a-percent,” says Dr Tsiaplias.

“Now, whilst that may not be particularly large, that’s an average of all households, Households on the low end of the spectrum may reduce their spending by over one percent.

“Household spending is responsible for the bulk of GDP in Australia. Even a small decline in household spending can have significant ramifications for the rest of the economy. It may lead to job losses, lower investment, and overall slower economic growth.”

So, the government needs to be careful about enacting policies that exacerbate this negative sentiment and curb household spending, but how do they balance affordability and the great Australian dream with sustaining economic growth? Dr Tsiaplias says the answer might be changes to rental policy.

“The problem is that rental agreements tend to be skewed in the favour of landlords, including short-term rental agreements. So, the government could consider policies related to long-term rental agreements that provide a safe and stable housing alternative to purchasing.”

There’s also the option of postponing any changes to existing housing market schemes until it’s clear that Australia’s economic growth is strong enough and additional monetary easing is off the table.

With the release of the budget, balancing these two issues is going to be a major consideration.