Australians would have to wait 70 years for affordablehousingif property values follow the “sustainable growth” path advocated by the two major parties.
Labor and the Coalition this weeklaunched signature policiesto tackle the worsening housing affordability crisis, but both sides of politics said they did not welcome the idea of falling house prices.
“Our plan is to get our country back on track to help young Australians realise the dream of home ownership again,” Peter Dutton said in his opening remarks in Wednesday night’ssecond leaders’ debate.
“I want to see them (home prices) steadily increase. I don’t want to see a situation where Labor crashes the economy and somebody who’s paid $750,000 for a house today is worth $600,000 in 18 months’ time under an Albanese-Bandt government – that would be a disaster,” the opposition leader said.
Anthony Albanese in a radio interview dodged the question of whether he wanted home prices to drop.
“Look, historically in Australia … prices tend to rise. What we want to do is to make sure that people have accessibility for home ownership,” the prime minister said.
Leery of advocating for falling house prices, politicians have instead backed the concept of “sustainable” price growth – where affordability is eventually restored by incomes growing faster than property values.
But according to independent economist Saul Eslake: “This might sound nice, but it’s actually a con.”
A simple analysis shows why.
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At the end of last year, the median price for a house in a capital city at $933,000 was 12.8 times the average adult Australian’s annual income of about $73,000.
In comparison, at the turn of the century, the median house price of $178,000 was 6.5 times the average income of $27,600.
While not a perfect measure of affordability, this doubling in the house price-to-income ratio shows how property has become far less affordable over time.
Assuming home values from here climb in line with the Reserve Bank’s inflation rate target of 2.5%, and wages grow by 3.5% a year, it will take 70 years for this “sustainable growth” path to push the house price-to-income ratio back down to 6.5.
In other words, the bipartisan approach to solving unaffordable housing is: waiting until the end of this century to return affordability to where it was at the close of the last.
Even then, factoring in house price growth of 2.5% a year is a heroic assumption.
Over the two decades to 2024, the price of the median capital city house has almost doubled to $933,000, according to CoreLogic.
That’s equivalent to annual average house price growth of more than 9%.
The Greens leader, Adam Bandt, also has a version of the sustainable growth solution to housing affordability, even as he touts more ambitious policy measures than the major parties.
“We think having house prices stay the same for a while to give wages a chance to catch up is a reasonable compromise that will give first home buyers and renters some hope,” Bandt said.
But even in this more hopeful scenario – where house prices stagnate and wages grow by 3.5% – it would take 20 years to return the affordability measure to where it was at the start of 2000.
Similarly, it would take 11 years if home values dropped by 2.5% a year. And it would still take 8 years if prices dropped by an extraordinary 5% annually.
Eslake said rapid house price falls in the order of 20% would be disruptive, have wider economic consequences, and probably be triggered by a rapid rise in unemployment.
Witness the experience such as Spain, Ireland and the US in the wake of the global financial crisis.
“But what would be wrong with a 5-10% fall in house prices over a three-year period? That would do more to boost affordability than anything any government has done in the past 60 years,” Eslake said.
Such a result was difficult to engineer via government policy, but Eslake said governments should at least not actively work to stem falling prices, as they have repeatedly done in the past.
Ironically, this has been done via first homeowner grants – the same type of measures the two major parties are offering now as a cure for high prices.
Cameron Kusher, an independent property expert, said the question of whether house prices should fall was a fraught one.
“We have created this housing system where most of our wealth is held in residential property, especially when you exclude super,” Kusher said.
“We’ve become accustomed to the idea that the way you get wealthy in Australia is you buy and hold property, and get wealthier over time.
“It will take a big shift in mindset to change that.”
Kusher said the most likely answer was to create more homes at lower price points, most obviously via a big lift in the number of apartments. This is something Auckland achieved via a massive rezoning of land that led to lower prices and rents than in the rest of the country.
This, however, would demand another major shift in mindset: letting go of the dream of a standalone house.