Solutions to housing affordability require cooperation

| April 26, 2017

There is no straight forward solution to solving the housing affordability issue. Tim Lawless, Head of Research with CoreLogic Asia Pacific, says a holistic approach must be taken to include areas like increased infrastructure.

A solution to housing affordability is extraordinarily complex, requiring a multifaceted response from a variety of public sector and private sector stakeholders. The goal of affordable housing can also be at odds with the aims of maintaining capital inflows from foreign investment and sustaining the value of domestic assets.  A coordinated and cooperative approach is likely to be one of the largest challenges to improving housing affordability – can we get all the stakeholders to agree on the best strategy and then execute the plan?

The three layers of government have separate and sometimes conflicting agendas, limiting a coordinated response to housing affordability. One of the prime examples of the imbalance between federal, state and local polices is population growth, which is a primary driver of housing demand.

It’s not a coincidence that the two states with the highest population growth (Victoria and New South Wales) have the highest growth in dwelling values.  Both states are seeing a solid upward trend in net overseas migration rates, while interstate migration is also remarkably higher than average in both states (despite remaining negative in New South Wales).  Strong population growth stimulates the economy, providing a larger taxation and consumption base. It also puts upward demand pressure on existing dwellings and transport and requires an adequate investment in new infrastructure.

The federal government sets migration policy, state governments need to supply more infrastructure and local governments need to ensure land is appropriately zoned for appropriate population densities and additional housing. While the federal government sometimes contributes funding for these initiatives, state governments are generally faced with the funding challenge for these new projects.

An underinvestment in efficient transport infrastructure projects relative to population growth can be one of the primary contributors to high dwelling values in certain areas because housing demand becomes focussed within those areas that are in a convenient location relative to work and essential amenities. This is one of the reasons why growth rates are so disparate between Australian capital cities and regional areas.

A shortage of strategically located, appropriately zoned land is another key contributor to higher housing prices and, consequently, the affordability challenges many cities are facing.  Take Sydney as the worst case example, where the dwelling price to income ratio for detached housing is approaching ten times the median gross annual household income.  Buying a house within 20 km of the Sydney CBD generally involves a purchase price of at least one million dollars.  Demand for housing is substantially higher across the inner city suburbs, along the coastline and along the transport spines, while demand for housing located in the city outskirts is often undesirable for many aspiring home owners due to the long commuting times and lack of essential amenities.

Of course, focusing on transport infrastructure in isolation is unlikely to push house prices down. Indeed, new infrastructure projects often increase demand from investors looking for new growth areas. The complexity of a solution to housing affordability is therefore about adjusting the interplay of many demand factors in addition to housing supply considerations.

Investors are contributing substantially higher than average levels of demand to the housing market.  Investors have historically comprised around 33% to 40% of housing demand, however the latest data from the Australian Bureau of Statistics shows that investors comprised closer to 50% of new mortgage demand nationally (excluding refinances) and closer to 60% in New South Wales.  The high participation rate of investors has contributed to housing market activity and added to the upwards pressure on housing prices.

Recently, APRA and ASIC have cracked down on mortgages originating on interest-only terms and lenders are implementing stricter servicing standards and writing fewer mortgages on small deposits.  These measures should help to slow investment in housing, however investors are still incentivised to participate in the housing market via taxation policies like negative gearing and the 50% capital gains tax concession that applies after twelve months.

However, considering the unprecedented number of high-rise apartments currently under construction, it is important that investor demand is not dramatically reduced. The large majority of apartment stock under construction is reliant on investors being able to settle their off-the-plan purchases.   Regulators and policy makers are likely to be mindful of this risk when adjusting their policy settings and dampening investment demand.  The 2011 Census showed that apartments were more than two and a half times more likely to be owned by investors than owner occupiers highlighting that ultimately a large proportion of new unit stock is being purchased by investors.

Housing Affordability Online Consultation:

Q: What can be done to improve housing affordability?