House prices outpacing income growth

With a growing population, projected to top 36 million by 2050, and one of the most expensive property markets in the world, is Australia in the midst of a housing affordability crisis?

According to the senate committee report, A good house is hard to find: Housing affordability in Australia, the cost of an average home is now equivalent to seven years of average earnings, up from three years in the early 1980s.

With prices rising, many would-be first time buyers are priced out of the market, stimulating growth in the rental market, and fuelling concerns about international investment, tax concessions, urban sprawl and household stress.

As gross income took a nosedive in 2009, house prices spiraled to unprecedented highs in all Australian capital cities.

House prices have continued to rise faster than income since 2013, and according to research underway at the Melbourne Institute, the difference is expected to increase further in the short term.

The number of households with a mortgage has increased substantially over the last 20 years and this is mirrored by significant growth in the rental market with one in four households now renting.

Increased supply of quality housing is required to accommodate Australia’s growing population but this must be paralleled by growth in infrastructure and amenities to service these developments.

While more affordable housing may alleviate pressure for some, a sudden drop in house prices could put some existing homeowners in negative equity, leading to rising bad debt and undermining bank share prices.

With house prices continuing to surpass income, housing demand showing no signs of abating and Australians as eager as ever to own their own homes, we asked the experts their thoughts on the future of housing in Australia.

THE ECONOMIST: SUPPLY AND DEMAND

According to economist and tax expert Professor John Freebairn, the current property market situation is a case of basic supply and demand, where demand outruns supply so prices rise.

Demand for housing is price sensitive and shifts out with population and income growth. For households the cost of housing reflects the purchase price, as well as the availability and cost of finance, and other expenses such as repairs, maintenance and rates.

Much of the increase in demand for housing in Australia in recent years can be attributed to population growth (both natural increase and net migration) and to the lower cost of finance.

The supply of housing takes time to respond to an increase in demand. Often there are lags of several years to gain approval for new housing, to obtain finance, for the associated provision of infrastructure, and construction time.

If there is an unanticipated jump in housing demand, with new housing supply restricted, most of the demand increase flows into higher prices. Only after some years to allow for supply to respond will the rate of price increase slow or fall.

The current tax system favours savings invested in owner occupied homes and, to a lesser extent, rental property, as well as the exemption of owner occupied homes from the age pension means test. Such tax incentives also increase the demand for housing.

THE PLANNER: LIVEABLE CITIES

Not only will we need more than a million new homes in both Sydney and Melbourne in the next 35 years, says urban planner, Professor Carolyn Whitzman, but we will also need infrastructure to support them.

Professor Whitzman, who has been instrumental in guiding liveability policy globally, argues that we can’t talk about the property market without considering public transport, childcare centres and schools, and health services and aged care, which are also key drivers of demand.

Australian cities need long-term metropolitan strategies that link public infrastructure investment to the growth of new homes, and provide sufficient certainty to both private developers and local residents.

Internationally many cities face similar housing affordability issues and Whitzman says that Australia could learn a lot from Vancouver, Canada, and Portland, US.

Significantly, metropolitan planning in these cities is based on local governments working together on a common vision and outlasts both state and local government election cycles.

Whitzman is leading a collaborative research project, Transforming Housing: Affordable Housing for All, to address social justice, economic resilience, and environmental sustainability challenges facing Melbourne and Australia.

Forging strategic industry partnerships and drawing on international best practice, the research project is piloting and evaluating innovative policies and programs to expand the amount and quality of affordable housing in Australia.

THE DESIGNER: THE FUTURE OF PREFABRICATION

Associate Professor Masa Noguchi agrees that Australia needs to look overseas for guidance in dealing with the current market situation. Noguchi says Australia is way behind Europe, North America and Asia in sustainable, cost efficient prefabricated building delivery.

If we look at the property bubble as innovators, we can view it as an opportunity for the exponential growth of housing performance that embraces the needs of individuals and society.

The Australian construction industry is a $AU150 billion sector, beset with rising costs and inefficient productivity associated with many traditional building methods, yet only three per centcontributes to prefab production today.

In contrast, 15 per cent of housing starts are considered to be prefabs in Japan and in Sweden prefabrication exceeds industrialised housing delivery with about 70 per cent of the market share.

Japanese housing manufacturers mass-produce net zero-energy-cost, yet customisable, homes, designed to accommodate diverse market needs and demands, and in Canada we have seen sustainable housing delivery through the EQuilibrium Initiative that leveraged the successful commercialisation of prefabricated net zero-energy houses in the local contexts.

According to Professor Prakash Singh:

This is a golden opportunity for Australian prefabrication. The training centre for Advanced Manufacturing of Prefabricated Housing at the University of Melbourne will support research and development to propel the prefabricated housing sector well beyond the current three per cent share of the construction market.

THE PROPERTY EXPERT—BUYER BEHAVIOUR

Senior Property and Finance Advisor, Jason Kuan, of Provincial Home Loans and Provincial Property Advocacy, says the consumer needs to take back the power.

Emotions can run hot when buying a property to live in. Buyers will spend more for the characteristics they see as most desirable, such as location, proximity to amenities, commute time to work, family or space, as well as presentation and style. Such sentiment can fuel bidding wars as buyers commonly seek the same thing.

Although buying power is primarily determined by our capacity to pay more than our competitors, understanding why we should or should not is a skill.

As the heated market continues, lenders are under increased pressure from the Australian Prudential Regulatory Authority, with changes in lending criteria starting to filter through to the buyer, in the form of lower LVR (loan-value ratio), and lower rate discounts for investment property lending, as well a greater income capacity requirements to borrow.

However, Kuan argues that an educated and realistic property buyer is a powerful investor even in current markets. Potential buyers can take control of the current situation if they are prepared to prioritise certain housing characteristics to meet their needs without causing undue financial or emotional stress.

Property investment is still one of the best ways to achieve long term capital growth. The property market is complex and Australia faces both challenges and opportunities.

The future of housing in Australia requires expert collaboration that crosses academic and industry boundaries to find long term, sustainable solutions.

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