The Housing Affordability Crisis: Part 1 – The Challenge

Introduction

Australia is in the grip of a housing affordability crisis. Without change it will worsen, but proposed solutions are varied, contentious and untested. Solutions though are essential if we are to narrow the widening gulf between those who can afford to own their home, and those who cannot. Doing so is not just a social imperative, it is essential to our economic competitiveness and avoiding civic unrest. In part one of our two-part series, we explore the current challenge – its scale, its origins and our current trajectory. In part two we consider solutions which stand a realistic change of correcting our path and charting a course for a brighter housing future.  

The scale of the problem

Home ownership has been falling for decades. In 1994, over 71% of Australian households owned their home. By 2021 that had fallen to 66%¹. Home ownership is even lower in major cities with just 59% of households in Sydney, 64% in Melbourne and 60% in Brisbane owning their home2.  

Homes have become unaffordable for many. With the median dwelling price at $747,424 in September 2023, the median house price to income ratio is 7.53, up from 6.5 in 2020 and just 2 in the 1970s⁴. The statistics for Sydney are even more dire. A median house price to income ratio of 9.4 makes it one of the world’s most expensive cities in which to buy a home⁵.

As more households are forced to rent, rental prices are rising fast. Nationally median rents rose 11.5% to December 2023 according to PropTrack, with housing rents in all capital cities rising 12.7%⁶. This compares to a 6.6% decline in real wages over the last year to September 2023⁷. Residential vacancy sits at 1% compared to a pre-pandemic average of 3% highlighting the growing supply shortage which will heap further upwards pressure on rents.

Households are deemed to be in housing stress if they spend over 30% of their income on housing costs. With the proportion of income needed to service new mortgages at 46% in September, and 31% needed to service a new rental lease, this places the typical new owner or renter in this category⁸.

How we got here

A combination of supply and demand-side factors created the crisis:

• Financial deregulation – in the 1980s interest rate and lending restrictions were removed, leading to greater competition between banks and looser lending conditions. An RBA policy of maintaining lower interest rates to stimulate the economy has also shielded home-owners from market conditions which may otherwise constrained price growth;  
• Demographic trends – Australia’s population grew by 1.4% annually between 1980 and 2022, largely due to immigration, equating to over 11 million additional people⁹. In parallel, average household size fell from 2.9 to under 2.5¹⁰. These trends have accelerated post-pandemic – net migration reached a record 500,000 in the year to June 2023¹¹ and small household formation rose between 2021 and 2022¹². Australia hosts some 650,000 international students who need accommodation too. A minority are willing to buy property; international students brought 10% of new homes in Q3 2023¹³;
• Insufficient development – new housing supply has consistently failed to keep pace with demand, especially new public housing which rose by only 70,500 dwellings between 1980-2022¹⁴ and in urban areas which concentrate population growth. The proportion of urban Australians increased from 84% in 2001 to 87% by 2024¹⁵;  
• Investment incentives – negative gearing policies, which allow investors to offset losses, and capital gains tax concessions have encouraged small private investors to buy rental properties. Alongside this, limited inbound capital restrictions enabled overseas buyer to acquire investment properties.

The challenge ahead

Population growth will average 1.3% per year over the next decade meaning an additional 3.7m people will call Australia home by 2034¹⁶. The urban population will rise to 88% and an ageing population will create needs for new types of age-specific stock. Demand is rising fast.

The government has committed to building 1.2 million new homes by 2027, but industry bodies have warned this is insufficient¹⁷. In any case, the government is reliant on the private and non-profit sectors to deliver new supply but a shortage of labour, construction cost inflation and higher interest rates all make development harder. Over 1,500 construction firms collapsed in the year to June 2023¹⁸. As a result, the housing shortfall is expected to grow by 106,000 homes annually to 2027¹⁹.

Conclusion: The causes are not being tackled

Housing affordability is a divisive topic. The longer it is left unresolved, the greater the hardship and resentment of those priced out of the market. The challenge is daunting, and it is easy to despair, but we see reasons for hope. There are meaningful solutions which stand a real chance of turning the tide – in part two we explain what they are.

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References

1 House Affordability Report, ANZ/CoreLogic, November 2023. 231128 – ANZ CoreLogic Housing Affordability Report.pdf

2 Australian Bureau of Statistics (2021), Housing: Census, ABS Website, accessed 16 January 2024, based on analysis of the Greater Capital City Statistical Areas

3 House Affordability Report, ANZ/CoreLogic, November 2023. 231128 – ANZ CoreLogic Housing Affordability Report.pdf

4 Dwelling Prices and Household Income, Reserve Bank of Australia, 2011, https://www.rba.gov.au/publications/bulletin/2012/dec/pdf/bu-1212-2.pdf

5 ULI Asia Pacific Home Attainability Index 2023: https://knowledge.uli.org/-/media/files/researchreports/2023/uli-home-attainability-index-report_finalised_17-june.pdf?rev=c4f68e0dee1 04f64827d7504ec063958&hash=4A2783694D92C206A005399DF37C46A4

6 What is the average rent in Australia in 2024? (mozo.com.au)

7 Income slump forces households to eat into $237b stimulus buffer, Australian Financial Review, Cost of living Australia: Household incomes fall to lowest level in eight years (afr.com)

8 House Affordability Report, ANZ/CoreLogic, November 2023. . Accessible from: 231128 – ANZ CoreLogic Housing Affordability Report.pdf

9 Housing prices and rents in Australia 1980-2023: Facts, explanations and outcomes, Crawford School of Public Policy, September 2023. . Accessible from: complete_wp_abelson_joyeux_sep_2023.pdf (anu.edu.au)

10 A New Measure of Average Household Size. RBA, 16 March 2023. Accessible from: A New Measure of Average Household Size | Bulletin – March 2023 | RBA

11 House Affordability Report, ANZ/CoreLogic, November 2023. Accessible from: 231128 – ANZ CoreLogic Housing Affordability Report.pdf

12 A New Measure of Average Household Size. RBA, 16 March 2023. Accessible from: A New Measure of Average Household Size | Bulletin – March 2023 | RBA

13 Australian houses are less affordable than they have been in decades, The Economist, 18 January 2024. Accessible from: Australian houses are less affordable than they have been in decades (economist.com)

14 Housing prices and rents in Australia 1980-2023: Facts, explanations and outcomes, Crawford School of Public Policy, September 2023. Accessible from: complete_wp_abelson_joyeux_sep_2023.pdf (anu.edu.au)

15 Oxford Economics, January 2024

16 Oxford Economics, January 2024

17 Labor’s pledge to build 1 million homes on track to fail, Australian Financial Review, 10 April 2023. Accessible from: https://www.afr.com/policy/economy/labor-s-pledge-to-build-1-million-homes-set-to-fail-20230410-p5cz9b

18 Australian houses are less affordable than they have been in decades, The Economist, 18 January 2024. Accessible from: Australian houses are less affordable than they have been in decades (economist.com)

19 State of the Nation’s Housing 2022-23, National Housing Finance and Investment Corporate, 3 April 2023. Accessible from: State of the Nation’s Housing Report 2022–23 | Housing Australia

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