The pace at which house prices are rising may have slowed in September, but housing affordability concerns remained high.

The latest CoreLogic figures show a 1.5% monthly increase in average home values ​​across Australia for the month, similar to the growth recorded in August. The median value now stands at $674,848.

This latest monthly growth pales in comparison to the peak of 2.8% reached in March.

Year-on-year, price growth was more pronounced at 20.3%, the highest annual rate since June 1989.

Hobart was the largest monthly gain of all capitals, up 2.3%. Adelaide and Sydney followed with a 1.9% increase in average house prices.

Hobart also recorded the largest annual growth rate at 26.8%, bringing the median value to $659,622, a few thousand less than the national figure.

In terms of housing type, the national median home value posted monthly growth of 1.6% and 22.9% yoy during the month, outpacing increases of 1.1% yoy and 11.4% yoy .

Price growth slows as affordability deteriorates

CoreLogic’s research director, Tim Lawless, said growing concerns about affordability and the end of some government support programs in response to the pandemic have led to a moderation in home prices.

“With home values ​​rising significantly faster than household incomes, it has become more challenging for most cohorts of the market to make a down payment, especially for first-time home buyers,” Lawless said.

The declining mortgage activity of first-home buyers reflects the impact of rising home values.

The number of loans for first home buyers even fell by 20.5% between January and July.

It is striking that the number of first home buyers taking out an investment mortgage has increased by 45% in the same period. However, this came from a low base.

“This suggests that more first-time home buyers are choosing to rent vests as a way to get their foot in the door,” Lawless said.

Why housing has become expensive

Shane Oliver, chief economist at AMP Capital, said housing affordability has become a “chronic” issue over the past two decades.

“Over the past 20 years, average house prices in the capital have increased by 200% compared to an 82% increase in wages,” Oliver said.

“Over the past 10 years, house prices have increased by 58% and wages by only 26%.”

Compared to other countries with comparable economies, the affordability of housing in Australia has deteriorated more sharply.

In fact, the 2021 Demographia Housing Affordability Survey showed that the median multiple of house prices to income for major cities is 7.7 times in Australia, compared to 4.8 times in the UK and 4.2 times in the US.

Zooming in on two of the largest cities, the measures are more extreme: 11.8 in Sydney and 9.7 in Melbourne.

Over the years, it has become more difficult for starters in the market to break through.

It could take anywhere from seven to eight years for first home buyers to save for a down payment if they entered the Sydney and Melbourne markets.

“While government subsidies and deposit schemes can help accelerate higher indebtedness, it will take today’s borrowers much longer to pay off than it did a generation ago,” Oliver said.

Two factors are responsible for the increase in house prices relative to income over the past two decades: low interest rates and the subdued housing supply relative to the growing population.

“From the mid-2000s, the annual population growth rate increased by about 150,000 people per year and this was not matched by a commensurate increase in housing supply, resulting in a chronic shortage,” Oliver said.

“The shortage of supply relative to underlying population demand is probably the main factor explaining why Australian housing is expensive compared to many other countries with low or even lower interest rates.”

What can be done to improve affordability?

While Mr Oliver believes the market is nearing the end of its 25-year bull run, there is still a need to allay credit concerns to tackle affordability.

“A tightening of macroprudential controls to slow credit is warranted,” he said.

“The main options are restrictions on how much banks can lend to borrowers with high debt-to-income ratios and high loan-to-valuation ratios and increased interest rate buffers.

“Ideally, first-time homebuyers need some sort of exemption.”

The Council of Financial Regulators (CFR) recently said that the Australian Prudential Regulation Authority (APRA) to publish a framework on the likelihood of a macroprudential tightening policy in the coming months.

Oliver believes that examining loan policies is just one of the things that needs to be addressed to improve affordability.

“This is just a cyclical response and more fundamental policies are needed to address poor housing affordability,” he said.

“Ideally, these should include a multi-year plan involving state and federal governments.”

Mr Oliver outlined five key priorities, including:

  • Increase housing supply by easing land use regulations, speeding up land clearance and speeding up approval processes.
  • Ensuring housing supply can meet immigration levels in a post-COVID world.
  • Promote regional markets to encourage decentralization.
  • Investing in infrastructure in regional markets.
  • Tax reforms such as replacing stamp duty with land tax and reducing the capital gains tax credit.

Photo by Nik Shuliahin on Unsplash.