Australia | Sep 27 2007
By Chris Shaw
With an election looming in Australia the question of housing affordability is garnering increasing attention but in the view of Commonwealth Bank equities economist Martin Arnold the issue is only going to get worse.
The amount of money being set aside for repayments is one indicator of affordability, and here Reserve Bank of Australia (RBA) data show a now record 11.9% of household disposable income is being used for debt servicing, with 9.5% of this for housing debt.
Putting this into dollar terms, in 1996 the most common repayment range for home loans was $550-749 per month, whereas last year the figure had jumped to $2,000-$2,999 per month.
This means the median home now costs around nine times the average wage, up from five times a decade ago, though as Arnold notes this can be partly explained by the desire for bigger houses, which in turn pushes up the median house price further.
A look at the current state of the housing cycle shows it is now at a low point, meaning house prices should rise and affordability should fall further as the market picks up steam, especially given there are simply not enough houses being built to keep pace with demand.
In simple terms, demand for housing is going up in line with the growth in the Australian population, Arnold noting only around 150,000 new dwellings were built over the last year. This number falls well short of the RBA’s estimate of a need for 175,000 new houses each year.
But the number of houses being built is only part of the story, as Arnold points out affluence is also playing a role in making homes less affordable. As the population has enjoyed an increased wealth effect from the solid economic growth of recent years so too have they lifted their housing requirements, to the point where an average house built today is 20% larger than one built a decade ago.
Infrastructure and development costs for new housing developments has also impacted on affordability levels, Arnold pointing out these costs were previously picked up by the government but are now being borne by developers, so increasing the price of each house developed.
At the same time more of the population wants to live closer to the centre of their respective cities, while there has been a greater accumulation of holiday homes and city residences. This creates a problem in itself as there are now more unoccupied properties, the bank estimating in 2006 there were almost 7.6 million unoccupied properties, an increase of about a million from 1996.
With supply unable to keep pace with demand the result is vacancy rates have fallen sharply to an average of 1.4%, which Arnold notes is well below the 3% usually associated with a balanced market. As the availability of places continues to fall rents have moved higher, on average increasing by a little over 30% in the past five years.
As rents increase the property market again becomes more attractive to investors but as the bank points out there will not be a strong return to property as an investment class until returns improve, as for the past few years the sector has not been able to match the performance generated from investing in equities.
Any improvement in returns will require a stabilisation of interest rates and this is still to be achieved given the RBA continues to express concerns over the level of inflation. As a result Arnold suggests any recovery in the residential property market is likely to take anywhere from six to twelve months to get started.
He also suggests some government action will be required to help kick-start any recovery, though to date there has been little in the way of potential solutions to the affordability issue.
As a result Arnold also sees a need for some adjustment on the part of potential home buyers, who may have to settle for more modest properties that are more in line with household budgets.