What do higher residential prices in 2017 mean for affordable housing?

In Australia home ownership levels are amongst the highest in the world. For many Australians, there is an accepted view that owning your own home is important and a big part of the national psyche. However, as median house prices have continued to rise, and in some places, such as Sydney quite substantially “the great Australian dream” of home ownership has become harder to make a reality. Monitoring key residential indicators as median house and unit prices, incomes, finance, construction and housing supply data provides some insight into the market’s direction and builds understanding to where housing affordability may be headed. Analysis of these indicators and key housing reports also provides a health check on the market. In theory, this analysis can inform policy makers on what options are available to improve housing affordability, particularly for first home owners.

Some key insights have been provided by the latest report of the Household, Income and Labour Dynamics in Australia (Hilda) survey, by the Melbourne Institute of Applied Economic and Social Research. The report shows that the median incomes of Australian households stopped growing since the global financial crisis. The Hilda survey also highlights the continuing issue of housing affordability. Notably it shows that people under 35 largely missed the opportunity to capture the increase in wealth households experienced over the past 15 years.

The report also shows that home ownership is becoming less common. The rates of adults owning a home fell from 64.4% in 2002 to 59.7% in 2014. Under another more targeted indicator of legal ownership, the rate dropped about 5% over the same period to around 52%.

The  explanation  can  be  partly  provided  by  the combination of historically low income growth and sharply increasing housing prices. It is interesting to note that the massive increases at the top end of the market particularly in high-end submarkets in Sydney and Melbourne over the past few years are not really part of the affordability story. This is because they have never been in the mix for most first-home buyers.

Further insight and analysis indicates that the 10th percentile house prices (those costing more than 9% of houses sold) increased by 108% from 2001 to 2014. This was well above the 76% increase in median house prices and the 47% increase in the price of houses in the top 10%.

It is also interesting to note that much of the deterioration occurred prior to the Global Financial Crisis. Since then, housing affordability nationally, has generally moderated. This however is not great news for those seeking to enter the market. This is because the ratio of the 10th percentile house prices to the 10th percentile equivalised disposable income went from 8.2 times in 2001 to 14.0 times in 2008.

Contemporary apartment building construction in Sydney, Australia. Real estate industry

So where are house prices likely to go in the first half of 2017? The latest (mid-January) release of the Australian Bureau of Statistics housing finance data shows that investors have returned in significant numbers to the Australian residential property market. The increased level of investors seeking funding for the purchase of houses and units suggests the housing market will continue to grow solidly throughout the start of 2017. It also suggests that after an easing in Australian housing price growth in the past 12 months, that prices are likely to pick up in the next six months or so. So why is this the case?

Australia, and most notably Sydney has experienced a housing boom over the past 5 years. This has been largely powered by investors. In November 2011, the Reserve Bank of Australia (RBA) began an easing cycle in monetary policy and cut the official cash rate from 4.75% to 4.50%. It was notable that at that time the value of housing finance commitments for owner-occupiers was approaching a figure almost $3bn more than that for investors. By the middle of 2014, when interest rates were 2.5% the value of investor finance commitments outweighed that of owner-occupiers.

Finance by investors fell notably by mid-2015 after the Australian Prudential Regulatory Authority (APRA) had introduced measures aimed to limit investor finance levels. From well over half of all housing finance commitments at the end of the first quarter of 2015, investor finance fell to below 45% towards the end of the year.

Recent data shows that investor finance has rebounded strongly, over 17% in the past year. This has pushed total housing finance up over 5%, despite a falling away in owner occupied finance.

The level of investors seeking finance to buy Australian houses and apartments is an indication that the housing market is likely to continue to grow throughout the start of 2017. Historically, there has been evidence of good correlation between growth in finance commitments and residential prices. With the recent rebound in housing finance commitments in the September quarter last year it is likely that we will witness an increase in the growth of housing prices in the first six months of 2017.

The latest ABS building activity data recently revealed a record number of dwelling which were completed or under construction. In recent years, there has been a significant increase in the construction of apartments in Sydney, Melbourne and to a lesser degree, Brisbane. So large has been the addition to existing apartment stock that the RBA has indicated that there may be an apartment glut in some markets. While there remains more than 33,000 non- house dwellings that have been approved for construction status, but which are yet to commence, it is considered likely that many of the projects will never be built. It is also notable that in recent months there has been a notable drop in the commencement of apartment construction.

One of the positive features of the massive apartment construction phase is that housing may be more accessible for first home owners. Affordability may be improved by the record high number of new apartments that have been built or are coming onto the market in Sydney, Melbourne and Brisbane over 2017 and beyond.

One of the key variables in the affordability equation is the cost of finance. Even though bank housing finance has decoupled somewhat from the OCR, movements in the official cash rate are still important. In a world of increasing uncertainty, it is difficult to forecast where the OCR may be heading. There is the Australian domestic economic conundrum of low inflation and poor wages growth accompanied by rising house prices. Each of these would traditionally require opposite monetary responses. If that is not difficult enough for the RBA who conducts monetary policy in Australia, there is also the impacts of the significant changes in the global political and economic landscape. For example, the new Trump administration will impact the US economy in ways yet to be determined. The flow on effect into global markets and exchange rates will be hard to predict. Not to mention the potential global impacts of the Brexit and other changes to the EU and other global, geo-political trade agreements.

At present the OCR sits at a historical low of 1.5%. Low interest rates are a positive for affordability. However, it is the cost of the loan over the full term of the loan that ultimately effects affordability. In other words, what may be affordable now may not be in three year’s time should interest rates rise by 1% or 2% notably for those on low incomes who have exposed themselves to high levels of housing debt to gain access to the market.

One of the interesting aspects about affordability is its definition. Affordability has tended to mean various things to different people, or groups with vested interests. It is sometimes confused with access to market, serviceability and valuation. Access really refers to the barriers or difficulties of purchase, whereas serviceability quantifies the burden of mortgage loan repayments relative to household income.


In a recent discussion paper released by the Queensland State Government; affordable housing refers to that which is appropriate for the needs of a range of very low to moderate income households and priced so that these households are also able to meet other basic living costs such as food, clothing, transport, medical care and education. The Paper, prepared by the Department of Housing and Public Works also notes that “as a general rule, housing is usually considered affordable if it costs less than 30% of gross household income.”

Another key consideration is that affordable housing for rent and purchase varies in many markets across each state. This represents a challenge for the housing system overall to respond to people’s changing needs. For example, each community in each State has its own unique social, cultural, and sometimes local climatic factors that impact people’s housing needs. A balanced housing market which includes a mix of rental, ownership and other housing options - may be different from place to place.

Australia’s record high and rising housing prices are hotly debated and led to several government inquiries into housing affordability. Some have sought to clearly define affordability and then set out recommendations to address the issue.

The policy debate, research and reports into housing affordability continue. On January 19, the Australian Prime Minister Malcom Turnbull, as part of a reshuffle of his ministry, appointed Michael Sukkar MP, as the new Assistant Minister to the Treasurer. Mr Sukkar’s key focus will be on housing affordability. This is a pleasing decision as it should mean that the Federal Government is prioritising the need to address the housing affordability crisis in Australia’s major cities.

With our track record of quality advice and intimate understanding of the comprehensive data sets relating to housing markets, MacroPlan will remain very much involved in providing the most current research and best available advice regarding housing affordability. If you would like to knowmoreaboutthis topic, please contact MacroPlan on 02 9221 5211 or email mark.courtney@macroplan.com.au.


About the author:

Mark Courtney General Manager – Queensland courtney@macroplan.com.au

Mark Courtney is MacroPlan’s General Manager – Queensland.  Mark’s is an accomplished property professional whose experience uniquely positions him to provide leadership in property research and consultancy. He has considerable experience in the analysis and development of Australia’s industrial property sector, as well as extensive market trend analysis, feasibility assessment and land demand and supply modelling expertise.

About MacroPlan: MacroPlan’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities.  Contact Mark Courtney, General Manager – Queensland, today to discuss your property research requirements.