What is the solution for making housing more affordable?

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.

Population growth

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.

Strategically located and zoned land

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.

Investor demand

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.

Foreign investment and low rates

Other factors affecting the demand side of housing affordability include additional demand from foreign buyers and the stimulatory effect of low mortgage rates. Foreign investment adds to overall housing demand and the fact that official figures on the level of foreign buying approvals haven’t been updated for almost two years makes quantifying the effects of foreign demand problematic. Additionally, historically low mortgage rates are also stimulating higher demand; even though mortgage rates are now edging higher, they remain close to the lowest levels since the 1960’s.

Furthermore, the inflationary effects of historically low interest rates has boosted home owner’s equity. Home owners are searching for returns and Sydney and Melbourne housing has been attractive due to the ongoing strength of returns relative to other asset classes.

Housing supply challenges

While understanding the drivers of housing demand is critical to forming a strategy for improving affordability, so too is understanding housing supply. The interplay between these two factors push housing prices higher or lower.

The Australian economy is benefitting from an unprecedented dwelling construction boom, however, one must question whether the record levels of new supply is the ‘right kind’ of supply that will help to address housing affordability. Building more dwellings is key to improving housing affordability, but if the majority of new dwellings being built have a mismatch with buyer preferences, then a disconnection between demand and supply will remain.

Based on the latest building activity data from the ABS, there are just over 152,600 units under construction across Australia and 65,700 detached houses. While detached house building is only 7.2% higher than the decade average, the number of units under construction is 85% higher than the decade average and virtually double the thirty year average. Additionally, ABS data confirms the large majority of apartments which are under construction are in high rise projects, which, at least anecdotally, are more likely to be oriented towards investors rather than first-home buyers or family households.

The current boom in housing construction is better described as a high rise building boom, with the number of detached houses under construction peaking at about the same level as previous cyclical highs. A trends towards higher densities is natural for mature cities like Sydney, Melbourne and Brisbane, however the surge in high rise dwelling construction has happened against a back drop of a substantially lower proportion of low and medium density dwellings.

Ten years ago, based on building approvals data, townhouses comprised 48% of all non-house dwelling approvals; the latest data shows townhouses now comprise only 24% of all non-house approvals, while at the same time, high rise units (classified by the ABS as unit projects with at least four storeys) have moved from being 39% of all non-house approvals only ten years ago to 70% based on the latest data.

It’s reasonable to argue that much of the housing stock that is being built at the moment, being high rise units, is more suited to investors and consequently rental markets, rather than families, who would generally prefer to live in lower density dwellings. Furthermore, the majority of new unit stock is one or two bedrooms which is generally not appropriate for families.

Other factors affecting housing supply include town planning legacies which prevent infill development in strategic locations close to major working and transport nodes, insufficient transport infrastructure linking affordable housing markets with major working hubs, and high development fees and headworks costs associated with developing land.

Additionally, high transactional costs such as stamp duty are a major disincentive to upgraders or downsizers. Many of these potential home sellers are simply staying in their home for longer which detracts from the efficient transfer of housing stock across generations.

Overall, there is no silver bullet for solving housing affordability issues in Australia. Housing demand and supply levers can be pulled, however the ability to do so is not straight forward. Changes in both demand and supply factors could have broader consequences for household wealth and economic growth.

Australian households have more than half of their wealth tied up in the residential housing sector and about 70% of their debt is housing related; a larger than expected downturn in housing values would likely result in less household consumption and impact negatively on economic growth and Australian retirement assets.

Investors are an important component of the housing market from both a demand perspective and delivering new rental supply. Turning down the volume on investment activity is important, however, reducing investment demand at the same time as a record number of off-the-plan apartments is about to settle is a proposition fraught with risk.

Perhaps the most logical course to improve housing affordability is a gradual adjustment to some of these factors.


Arguably, one of the most strategic solutions is to build more efficient transport linkages that connect the regions where housing is affordable with regions where jobs are located. New infrastructure creates greater productivity, provides jobs and opens up affordable areas that were previously less desirable.

Another long-term strategy is to work towards greater geographic distribution of employment opportunities. The past five years has seen 75% of Australia’s jobs created in NSW and VIC, with the vast majority of these positions located in Sydney and Melbourne. More businesses and government departments located outside of the largest metropolitan areas would help to attract larger populations to these regions where housing prices are typically substantially lower than what is available across the large cities. State governments should be looking at taxation incentives to attract large businesses across state borders and there should be further support for new businesses seeking to establish themselves in key areas.

Bottom line

Whatever the strategy, in order for there to be a cohesive and coordinated plan, there needs to be someone in charge. A federal housing minister who is tasked with formulating and executing a housing strategy would be a logical first step. Counterpart roles within the state governments makes sense, as well as a broader coordinated town planning strategy for the metropolitan areas that sets the framework for local government planning schemes (the Greater Sydney Commission is one of the best examples of a coordinated approach to town planning).

Source: Written by Tim Lawson []


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