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Window of opportunity

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Setting Australia on a path to improve housing affordability is a challenge but a holistic strategy may maintain market stability over time.

Geordan Murray

Executive Director - Industry Policy

Is improved housing affordability too much to expect from the new federal government? The recent growth in the national median home price has slowed recently. In some areas, median prices have even declined, but the rise in prices over the past two years will have an enduring impact on Australia's housing market and households.

In the two years since March 2020, the median home price in Australia has increased by more than 25 per cent. Those fortunate to have owned property at the beginning of the pandemic have seen a marked increase in wealth. However, entering the market became much more difficult for those that didn't.

Homeownership remains an aspiration for most households who don't currently own their own home. Research commissioned by HIA found that more than 85 per cent of those currently renting aspire to own their own home, but less than half think they will ever achieve this.

The figures for NSW were particularly alarming. Only 42 per cent of those aged 18-34 who are currently renting believe they will never own a home. This is markedly lower than the rest of the country (67 per cent for this age group nationally).

The research showed that age was an important factor influencing homeownership aspirations. Optimism fades with age. Where 67 per cent of renters aged 18 to 34 believe they will someday own a home, this drops to 34 per cent for the 35 to 54 age group and to 15 per cent for those aged over 55. This reflects the reality that there's an age window where homeownership is achievable. People need to be in the workforce and earn enough to save a deposit and then service the mortgage.

Homeownership remains an aspiration for most households who don't currently own their own home
How long?

They also need enough time to remain in their working career to repay their mortgage.

There has been plenty of focus on how long it takes an aspiring home buyer to save a deposit. Estimates depend on assumptions about purchase prices and savings rates. Reasonable estimates are that it would take the best part of a decade for average income earners to save a 20 per cent deposit for a median-priced home in the more expensive capital cities and slightly shorter times for the smaller cities.

Young people remain in education longer and enter the workforce later than previous generations, so they begin saving for a deposit later in life. The higher home prices and the fact that price growth has outpaced growth in wages means a larger deposit is needed, and it's taking longer to save. As a consequence, first home buyers have been getting older.

The Australian Bureau of Statistics has previously estimated that the average age of a first home buyer was 33 years in 1996 and 34 years in 2016. More recent estimates have the average age of a first home buyer at around 36 years.

Financing the purchase of a home is more difficult for older households, particularly when a standard loan term of 30 years takes someone beyond the pension age (67 years). The higher home prices create larger mortgages. While younger buyers may opt for a longer loan term in order to lower repayments, this is not an option for older households.

Getting narrower

The window of opportunity for homeownership is getting narrower. Measures to support a first home are often criticised as there's no evidence that they enable a greater number of households to purchase a home.

In addition, these measures merely bring forward home buyers to buy a property at an earlier date than initially planned.

In context of the advancing age of first home buyer households, bringing forward homeownership is becoming a more justifiable policy objective.

Housing affordability was again a prominent issue during the recent federal election campaign. The new government now has a huge challenge if they're to set the country on a path to redress the deterioration in affordability and restore the homeownership rate.

In order to improve housing affordability, there must be a sustained improvement in the year-on-year supply of housing in all forms. Households must have a greater choice of housing. Frictions that prevent people from seeking appropriate housing for their needs must be minimised.

However, we shouldn't expect Australia's housing supply challenges to be overcome in one electoral term or by the federal government alone. The barriers to housing supply have accumulated over several decades. Restoring supply could take just as long and will need a concerted effort from all tiers of government.

A larger deposit is needed now, and it takes longer to save
Improving affordability should be the overarching policy objective
Most valuable asset

While improving affordability should be the overarching policy objective, this mustn't be done at the expense of housing market stability. Housing accounts for a large share of household wealth, and an owner-occupied house is the most valuable asset for most households.

Households must have confidence in the value of their homes. Household wealth is an important determinant of household spending, investment and economic participation. The housing market must remain stable. But to improve affordability, household incomes must increase relative to home prices.

Achieving this will require a combination of tax reforms at the state and national levels. In addition, there will need to be reforms to disparate planning systems, maintaining efficient supply chains for materials and ensuring there's an adequate supply of skilled workers.

An inadequate reform will mean little improvement in housing affordability, while an overly aggressive reform agenda risks destabilising the housing market or the supply chain.
Setting Australia on a path that delivers sustained improvements in housing affordability will be a challenge. A holistic strategy while maintaining market stability may take several electoral cycles but will pay dividends.

Part of the challenge for the government will be demonstrating that there has been sufficient progress within each electoral term to provide a foundation for re-election. Furthermore, meaningful reforms will require a coordinated approach from all levels of government, each with its own electoral cycles.

The pandemic has demonstrated the federal government's difficulties in coordinating a national response. However, housing affordability is an issue worthy of the effort. The living standards of Australians will be higher if affordability can be improved.

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