There are few topics more likely to garner an opinion than the affordability of housing in Australia. Almost no one offers a view housing is affordable, but there are no end of people prepared to offer an opinion on a solution for this barbecue stopper. One thing is clear from the data: housing is becoming less affordable. Another thing is implied: the shape of the Australian economy is changing as a result.
In the past, softening dwelling approvals would see new and established dwelling prices moderate, improving the affordability of housing to improve. That makes good sense, but recent data presented by Jo Masters, Chief Economist at Barrenjoey suggests this is not the case. Based on an analysis of average mortgage repayments in relation to household disposable income, key affordability measures have increased for all capital cities, as the table here shows.
According to these findings, the average loan serviceability has increased from a 34% low during the pandemic to a current average of 49.4% across Australia’s capital cities, with Sydney now running at 61.5%. That means in Sydney, the average household puts more than 60% of their income into their mortgage!
Follow the line along and we can see it takes on average 17.5 years to save for a 20% deposit for the median house. It is better in other capital – a lot better in most cases – but still not easily accessible.
Making that more difficult, especially in our capital cities, rents are still rising and availability of rental properties is proving very challenging, even for established tenants. Hold onto that thought, because we’ll return to it at the end of this piece.
It is not clear this situation will improve any time soon.
According to CoreLogic, dwelling values peaked in April, with a pandemic gain of 28.6% prices are now moving back to nearer pre pandemic levels. Moderating house prices – the topic of so much discussion by the informed, the ill-informed and the rest of us normal folk – are one thing, but interest rate rises are pushing into the economy, lifting repayments and thus, playing their part in housing affordability.
In any event, Core Logic expects the deterioration of house prices to end in early 2023. Not much relief from an affordability perspective there!
This feeds into a broader discussion about housing affordability raised by Brendan Coates in a recent Henry George lecture on housing (The Great Australian Nightmare, Grattan Institute, 14 September 2022). Generally, housing has been seen as a discussion about social equity, but as economies become more services based, it is also an economic consideration.
Historically, in an agricultural society, land and its use were central to wealth creation. Following the industrial revolution and the rapid expansion of manufacturing, land became less important because the efficiency of labour and capital combinations drove living standards and wealth.
However, the modern economy is much more services based, meaning location and proximity to or of the service provider matters. It is perhaps a feature of the third industrial revolution. The ‘economics of agglomeration’, wherein the benefits from firms and people living and working close together are significant, results in productivity, innovation and wages being greatest in big cities.
This is a potent and powerful consideration in modern life. Who in a regional area has not said, ‘if only we lived closer to that large city, then we could also have access to…’.
Health services, in particular access to specialists, is the example that leaps to mind first and fastest.
This evolution towards cities can be seen in the following chart.
Coates makes the point:
“Economies powered by intangible capital strive or stagnate based on the ability of individuals to come together and combine their knowledge and skills. It is, as any real estate agent would tell you, all about ‘location, location, location’.”
Ross Gittins in commenting on Coates work in The Age adds:
“Long commutes make it harder for both parents to work. The economy becomes less dynamic and productivity is slow to improve”.
The very uncomfortable upshot of this is that there are very sound economic reasons for desiring to have more people living reasonably close together. Its more productive, when all’s said and done.
But, its also more expensive and barely affordable – or even unaffordable depending on where you sit. What that implies is that as the housing affordability conversation unfolds in Australia, there may be other uncomfortable moments.
Land use will become more constrained and tighter, changing how much space we have per person and the types of buildings we can afford to build and live in. That trend is already evident.
Another trend, and it requires more consideration than we have time for here, is the global growth in the ‘build to rent’ sector. First foreshadowed at the end of the GFC and shelved for a few years, growth in institutional ownership of entire buildings and even suburbs destined solely to be rented over their lifetime has been significant in recent years.
Whether that is a trend we are prepared to follow, in Australia, as part of the solution to housing affordability is an open question. Other policy alternatives will also have their impacts.
