For many Australians, the dream of owning a home is fading. Rising interest rates and property prices act as gatekeepers to both the hopeful and the aspirational. Affordability has deteriorated in most capital cities and regional areas to within a doorbell of its lowest level ever, according to the latest Housing Industry Association (HIA) – Commonwealth Bank of Australia Affordability Report.
Measured as an index combining interest rates, household incomes and home prices, Sydney remains the most unaffordable city followed by Melbourne, Brisbane, Perth and Canberra. The HIA says mortgage repayments now account for 27.2% of total income, which is only marginally below the historical high of 28% seen at the beginning of 2008. To put it another way, the average house price is now 9.3 times the average national wage compared to 5.8 times 40 years ago.
Graham Wolfe, HIA chief executive, says home ownership remains a fundamental tenet of our society that's worth fighting for. While access to social housing provides a solution for some, Australians should not sit idly as the dream of owning their own home slips away. "There's a collective responsibility to ensure that the Australian dream comes true for as many people as possible," insists Wolfe.
A large part of the problem is that the supply of new housing stock is insufficient to meet growing demand in capital cities and regional centres. The shortage of supply pushes up prices. The National Housing Supply Council in its 2nd State of Supply Report 2010 estimated the gap between total underlying demand and total supply to have increased by about 78,800 dwellings in the year to June 2009, to a cumulative shortfall of 178,400. While there has been some dispute over the National Housing Supply Council's data, the Council is not alone in projecting a housing shortage.
The Reserve Bank of Australia has estimated a 40,000 annual shortage. The ANZ Banking Group estimates there was a shortage of more than 200,000 homes in 2009 and 250,000 properties in 2010, with a shortfall per annum of 30,000 dwellings. Another of Australia's big four banks, Westpac, estimated there was a shortage of 190,000 dwellings during 2009. Research house BIS Shrapnel estimates there are 160,000 too few dwellings.
Waiting on Approval
Wolfe acknowledges the positive impact of recent government stimulus, such as the increase in the first home buyers grant and state stamp duty concessions, particularly for new dwellings. "Increases to the first home buyer grant helped to put some confidence in the pipeline," Wolfe says. "It boosted activity at a time when it was much needed, as many first home buyers who had been waiting on the sidelines for some years returned to their dream, their aspirations." However, Wolfe notes that infrastructure levies and planning approval times have a much greater impact on affordability. Planning delays, for example, inflict holding charges, adding significantly to final costs. And someone has to pay for these.
Inevitably, governments have a significant role to play in keeping the dream of home ownership alive, Wolfe says. Through positive intervention, such as facilitating land supply, funding opportunities to deliver key infrastructure, and removing the components that drive costs upwards – infrastructure levies, planning delays and tax overlays – the federal, state and local governments can contribute to lifting new housing supply and reverse the fall in housing affordability. The HIA says federal policy priorities need to include a program that focuses on reducing new housing costs such as inequitable taxes and charges, better planning approvals systems, and a dedicated federal housing and development ministry to co-ordinate policy across all sectors and levels of government.
Michael Russell, the chief executive of Australia's largest independently owned mortgage broker, Mortgage Choice, also wants improvements to the planning approval and development assessment process. The processes result in far too much time wastage, frustration and costs for developers and builders, he says. State and federal governments must also review property-related taxes and charges with the aim of reducing them, Russell insists. "Australia has serious blockages in its land and dwellings supply pipeline. This must be cleared if we are to start to get on top of the undersupply problem that continues to stress housing affordability."
While part of the solution to the supply shortage is to build more dwellings, it is not as simple as it looks, warns Glenn Otto, an economics professor at the Australian School of Business. "At one level increasing supply is the answer, but on another level there are potential political and geographic constraints on a big increase in supply," he says.
Otto recalls what happened only a few years ago in the US when attempts were made to try to solve its own housing affordability problems by building new homes. Unfortunately, most of the homes and the associated loans to buy them went to people who could least afford them. When they began to default on their mortgages and prices began to fall, there was a surplus of houses that formed the start of the sub-prime mortgage crisis and, ultimately, the global financial crisis. "Nobody wants to go to that extreme – but it can happen," notes Otto. He points out that supply as a solution to housing affordability is not very responsive due to government regulations, including the release of land. And there is the potential for resentment from existing landholders to potential urban infill – that is, using land in built-up areas for development.
Another issue with increasing supply is the impact it has on existing house prices. "If you have a house and it is a major part of your wealth, then you may not be keen to see its value fall by a long way," says Otto. Besides, if state and federal governments were to fast-track the supply of new "affordable" dwellings on land that's considered suitable, there can be no assumption that people will want to live there.
Social researcher Mark McCrindle of McCrindle Research says rising house expectations, as well as rising housing costs, are why Generation Y – born between 1979 and 1990 – are shaping up to become Australia's first "houseless generation". Even if they could afford to buy something small on the outskirts of a capital city that may not be what they aspire to, he believes.
"After their formative years being shaped by times of economic growth, the emerging generation has really only ever known expansion and prosperity and their expectations have risen as a result," indicates McCrindle. "Many of them are expecting to start their economic life in the manner in which they've seen their parents finish theirs. Having spent many years in their parents' well-established homes, Generation Y has grown accustomed to a high standard of accommodation and is now demanding well-located housing that is also spacious and affordable," he says.
For many young Australians the dream of home ownership is fading, confirmed a recent survey from the Mortgage and Finance Association of Australia and Bankwest. One in three Generation Y respondents anticipated they would be permanently locked out of the housing market, leaving them with expectations of being lifelong renters or staying in the comfort of their parents' homes.