Figure 1. House price growth vs income growth (Grattan Institute 2018).

Background

Housing affordability measures the weight of expenditure on housing within the household incomes. 

Figure 1 shows that house price in Australia has grown much faster than income since mid 1990s, which indicates that housing affordability is getting worse to the extent that Australian government has placed improving housing affordability to the forefront of a range of policy debates.

Worsening housing affordability has serious social and economic consequences. It reduces the welfare of Australians, limits the expendiure on innovation and economy expanding, increases the inequality over generations, etc. 

Australia’s property market has entered into the adjustment phase after the boom.

Government measures

To control house price, the Government can work on the housing demand or supply, or both. The main measures adopted by the Government in the past 2 years include:

1. ASIC and APRA has implemented strict prudential rules which limits buyers’ purchasing power, especially investors.

2. Government has gradually increased the standard of the immigration point test system to control the migrant intake.

3. Government has lifted up the barrier for foreign investors to buy properties in Australia.

4. A mixture of taxation adjustment, e.g. land tax, concession for retirees to downsize, has been adopted. 

5. Government has taken actions to improve the infrastructure and the transport system.

6. More greenfield land is released and higher living density is enabled for certain areas and corridors.    

Author’s comment on these measures

1. Strict prudential rules will reduce the risk of the financial sector. It has successfully contributed to this house price adjustment. However, it  prepares for the next property market boom. 

2. The level of migration is still strong. The purchasing power of the migrants are getting better. 

3. Higher barrier for foreigners to buy has significantly reduced the foreign investment activity. However, the sector is still active. Local demand has been again made the main force of the buyers market.

4. The new taxation policies are modest adjustment to the old system which has not generated significantly impact on the market.

5. The level of investment on new infrastture and transport system is behind the population growth, at least this is the case for Melbourne and Sydney. The traffic congestion will not be alleviated overall in the near future.

6. Even though Government has released more greenfield land and higher density for certain areas, Councils such as Whitehorse, Boroondara and Monash in Melbourne, have made land subdivision less feasible in most of their governed areas according to their current planning regulation. This restricts new townhosue and unit supply. Comparing with the high rise apartments or properties in the outer suburbs, properties in the neighbourhood of those middle ring suburbs are still what buyers want. 

Implications for the property market in Melbourne and Sydney

Melbourne and Sydney are more relevant to the housing affordability issue in Australia. Assuming level of migration is kept healthy, unless the Government boost the density in the middle ring suburbs in these two cities and invest more on associated infrastructure, it is very likely there will soon be another property price boom.