The problems in housing affordability have been building for decades, the clear result of policy failures across all levels of government that have now brought us to what can reasonably be described as a crisis point.
The severity of the problem is obvious. For example, the Demographia Group, which reports annually on house prices in eight advanced economies, found that house prices in Australia’s five largest cities have risen from about three times average income in 1987, to seven times just prior to the Covid-19 pandemic, to 10 times in 2024.
Similarly, if we look at time to save for a deposit, based on an average household income, it now takes 11 years to accumulate the required 20%. That’s assuming you can afford to put aside 15% of your income – a hefty assumption given the current cost-of-living crisis – and that house price increases don’t continue to outstrip income growth.
Perhaps the challenge of buying a home could be somewhat mitigated if there was a strong, safe and secure rental market. But the latest Rental Pain Index, which looks at availability and affordability, indicates “extreme” rental pain across most of the nation, with the exception of the ACT (where “only” 8% of suburbs are in extreme pain).
So, if the problems are that obvious, why aren’t our politicians addressing them?
It’s not like they need to look too far for solutions.
Thousands of research papers, newspaper articles and books have been written on the subject. Only last month, the Economics Society of Australia polled 49 leading economists on how best to address the problem. From the options offered, easing planning restrictions and investing in more public housing were favoured by about two-thirds of respondents, while a third also supported each of replacing stamp duty with a land tax, and tightening negative gearing and capital gains tax concessions. Addressing skills shortages was also backed.
These are similar to ideas put forward by the federal government’s own National Housing Supply and Affordability Council chair at an address to the Press Club earlier this month.
These solutions, while obvious, require bravery on the part of politicians, something that’s in relatively short supply. Improving affordability typically means reducing house prices, which in turn means those already on the home ownership merry-go-round – roughly two in three Australians – will lose value on their homes in order to let others onboard.
For the third of Australians who own their home outright, that might be bearable. But for the third with mortgages, especially younger Australians who’ve only recently been able to get their foot in the door, a sharp decline in the value of their highly mortgaged homes could pose a serious problem, especially when all forecasts point to higher unemployment in the year ahead, which could lead to increased default rates.
A recent YouGov poll undertaken for the ABC found 69% of respondents with a mortgage said it would be a “good thing” if property prices fell 5% over the next year.
Call me sceptical on that one, given that many Australians tend to view their homes as an investment, rather than as a basic human right. But, even if that’s how people really feel, a 5% decline at this point is barely scratching the surface. I doubt we’d get the same support for a 25% decline.
Another side-effect of sharp house price declines is the “wealth effect”. Even though we can’t eat bricks and mortar, lower house prices lead to reduced consumer confidence and spending, so timing matters.
It’s no surprise, then, that politicians go for the “easy” solutions, ones that give the have-nots a leg up, rather than diminishing the assets of the haves. They introduce (or try to) targeted assistance for first home buyers such as shared equity schemes, first homeowner grants, reduced stamp duty and even the enticing but ill-conceived idea of early access to superannuation. But every one of these so-called solutions is aimed at bolstering demand, without addressing supply and only serves to exacerbate the situation – something even a first-year economics student could foresee.
Housing affordability is too important to allow this status quo to continue.
Secure housing, whether through ownership or renting, underpins our economy and society. It influences educational attainment, mental and physical health and intergenerational mobility. Critically, it is a cornerstone of productivity: providing additional housing in the right places so that employees can find the right jobs and employers the right workforce.
If supply-side policies are needed to provide some price adjustment, as I and many others believe, then governments need to be looking more creatively at mitigating some of the worst impacts that some people might suffer in the short term, to provide benefits to the majority over the long term. There is no silver bullet, but there are solutions.
Nicki Hutley is an independent economist and councillor with the Climate Council
