27 Oct 2023

The Housing Affordability Crisis – Introduction

Buying a home has become unattainable for a lot of everyday Australians, and many have given up.

In fact, the Census data spells it out. In 1971, 68% of those aged 30-34 owned their home. By 2021, that figure fell to just under 50%. And for 35-39-year-olds, rates have dropped from over 70% to 59% in the same period.

But for people who do have their foot in the door already, they are sitting pretty.

Since the 1990s, house prices have nearly quadrupled, defying downturns and political shifts. Compare that to the more gradual post-war rise from the 1960s onward.

So, how did we get here? Why are so many Australians “locked out” of the property market while others thrive?

What does the “housing crisis” mean?

What does the “housing crisis” actually mean? And where does that leave aspiring homeowners today?

Well, the best way to explain is by looking at economic tools and, in particular, the underlying drivers of “demand and supply.”.

Now, there are several common themes that create a mismatch between demand and supply in the property market. 

And this mismatch is ultimately keeping prices elevated and making it difficult for prospective buyers, especially first home buyers, to get into the market.

It’s so severe that Housing Australia estimated a shortage of 106,300 homes between 2023 and 2027.

And after analysing the latest migration figures, the Institute of Public Affairs expects the shortfall to be even worse at 252,800 dwellings over the same period, which would cost on average $24 Billion per year to construct.

But the question still begs: Why are we in this position today?

The Demand-Supply Mismatch Causing High Property Prices

After sifting through literally hundreds of pages of data and economic opinions on this supply and demand issue, I have developed an essential 8-part framework to help you get the answers you need.

There are four factors driving the demand for housing, as well as four factors impacting the supply on the other side of the equation. Let me explain these one by one.

On the Demand Side..

  • Low interest rates – firstly, while low interest rates are not the only demand driver, the Australian property market has experienced a boom phase over 2008 and 2022 which has been a period of loose monetary policy leading up to the historically low interest rates until May 2022.
  • Immigration – net overseas migration levels are far exceeding the Australian government’s forecast. By allowing excess migrants to arrive in Australia, including international students, the demand especially on housing units surges. The pressure on rental accommodation spills over to the demand for buying, as migrants are also competing with students for a place to live.
  • Living preferences – Australians’ preferences for land and lifestyle means that they tend to resist vertical living within the city centre. The result is that the cities are much more spread out compared to overseas counterparts. When there is limit on liveable land, scarcity impacts demand and hence property prices.
  • Taxes – there are elements in our tax system that are arguably factors that influence housing affordability. Stamp duty is one example because it adds to the transaction costs of a purchase. An economic study by the Grattan Institute also found that limiting the types of losses allowable under our negative gearing rules (and reducing the CGT discounts) would lower property prices by 2%.

On the Supply Side..

  • Shortage of well-located Land – 50% of Australia’s population live in the 3 major capital cities. This is very concentrated when we compare it to our international counterparts like UK and US. The shortage of well-located land when combined with Australians’ aversion towards high density living drives up the value of property that has a land component (i.e. houses).
  • Planning Regulations – new land releases are also arguably too slow in keeping up with the demand for housing. Developers who get released land on which to build new apartments have to fight the resistance from NIMBYS (“not in my backyard”) to get the green light on council planning approvals. Again, this is another driver restricting the supply of housing.
  • High Interest Rates – new developments of apartment buildings and houses have also suffered a slowdown due to the steep rise in interest rates post pandemic. Higher costs of finance has reached a point where in many instance it is no longer profitable to start a new build project.
  • Construction Cost Rises – the construction industry has experienced unprecedented supply chain shocks ever since the pandemic which was followed by the inclement weather in 2022. The supply of completed housing suffered a bit due to these delays in these projects. Property prices have inevitably been driven up by the significant increase in the cost of materials and labour as well.

In two upcoming posts, I will be elaborating on each of these 8 parts with supporting data. So please stay tuned!