Riddled with endless price rises, Australia’s property market is a constant source of angst among households and politicians. Although it is widely agreed that there is a national problem, no one seems certain of what to do about it. Building more homes is an often-raised avenue to relief, but economists are questioning if such a simple solution properly addresses the nuances of Australia’s pervading crisis.
Data from Corelogic, an Australian information and analytics provider, confirm that average real (adjusted for inflation) house prices have risen by approximately 50% since 2003. Broadly, more expensive housing has limited accessibility. From 1986 to 2021, the rate of home ownership fell from 70% to 67%. Younger age groups have seen the worst of the decline, whilst those over the age of 65 now make up 16% of homeowners compared with 11% in 1981.
Renters are also facing pressure as 90% of national rental markets experienced an increase in prices last year. Furthermore, most low-income households are paying over a third of their incomes in gross rent — a proportion that is significantly smaller for higher-income earners. Limited affordability is creating rental stress, defined as paying over 30% of a household’s gross income in housing costs.
For those without an Economics major (or a memory of ECON1001), prices are primarily governed by two key forces: supply and demand. When prices rise, economists will be fairly certain that either supply has dropped or demand has ramped up. Since it seems unlikely that an unreported incident has wiped out a significant proportion of Australia’s housing stock, most assume that more people are wanting more houses and, in so doing, raising prices. Consequently, both politicians and the media have advocated for a boost in supply to meet demand as a sure-fire solution to the current crisis. However, before we all head to Bunnings for some two-by-fours and an obligatory snag, it is worth considering that simply building more houses may be an unfinished policy response.
Since the 2000s, Australia’s housing stock has increased by 4.3% more than our population has grown. Australia clearly has no issue with keeping construction in-line with population growth, and yet the nation still faces a crisis. There is great need for a shift in rhetoric from this preoccupation with housing availability, to a focus on factors affecting its accessibility.
First, mortgage rates are a key issue. It has been estimated that a one per cent increase in mortgage rates can lead to a seventeen percent decrease in house prices in the long-run. By contrast, increasing the construction of new residential properties each year by 25% will only reduce house prices by roughly one percentage point. This poses a conundrum for policymakers: although lower mortgage rates imply greater affordability for home-buyers in the short term, unaffordability still looms in the future.
The distribution of incomes is another concern, especially regarding rents. Discrepancies in the proportion of income spent on rent between different socio-economic groups, as mentioned above, reflect the fact that the distribution of household income is wider than the distribution of rents. This reflects the central issue of accessibility, not availability, being the issue. There is roughly a supply of “affordable” houses and rental properties, but they are not affordable enough for the people who actually need them.
This also explains the 175,000 households currently on the waiting list for social housing. The Reserve Bank has estimated that there are 440,000 too few affordable homes for the homeless and individuals in the lowest quintile of household incomes. Despite this, however, the number of public housing dwellings decreased by over 41,000 between 2006 and 2021.
Those experiencing homelessness often face mental health problems and disorders which create greater risk of tenancy failure. In these instances, accommodation and mental health support services are necessary to improve housing stability, where a simple increase in stock could not.
Additional demographic factors are also at play. Australians are entering the workforce and getting married later in life, limiting the budgets of many households. Fluctuations in immigration have frantically altered demand for housing in and out of the COVID-19 pandemic. Short-term rental platforms like Airbnb have further wiped out a number of options for longer-term tenants. And interestingly, lockdowns and health concerns from the recent pandemic have seen individuals wish to live with fewer people, creating an estimated 120,000 new households in the past three years.
Evidently, the government’s response must account for the complexity of the housing market in lieu of a dogmatic push for increasing supply in big cities. One such approach would be encouraging economic growth in regional centres to alleviate stress on the nation’s densely populated capital cities. Greater investment and creation of higher-income jobs in the country would dramatically shift the concentration of housing demand to regions where there is adequate room and resources for expansion. Policies which capitalise on Australia’s vast geographical space will simultaneously lower the upward pressure on house prices and bolster the economy for future growth.
To combat prices with increased housing stock, more creative measures could also be more allocatively efficient than simply developing new residential areas. For example, implementation of a vacancy tax, such as in Canada, could lower the number of short-term rentals and increase supply for tenants. Furthermore, commercial properties such as office spaces in CBD areas which are no longer being used for office space could be converted into high-density housing.
Finally, greater support services to assist with accessing stable housing is critical, especially for the vulnerable. Those with greater needs have been failed by reductions in available public housing, and should not be made to wait along with hundreds of thousands of others for such a basic necessity.
Increasing supply is important. Without stock keeping up with population growth, Australia’s housing market would undoubtedly fall into further strife. However, boosting housing availability is nothing without a synergistic array of further responses to ensure housing is accessible, safe and stable for all.
