Rather than enter the raging debate about the affordability of Australian houses or attempt to predict a correction in house prices (according to some it will never happen – “this is Australia, mate!”), we feel it is more insightful to present our views as to why house prices have risen strongly in the last five years. In doing so, we place no credence on the overtures of our political leaders. Their claim that the only way to attack affordability is to address supply has some superficial merit, but it is a defensive statement made to excuse the absence of making substantive policy changes. Obviously the simplest way to address affordability is to either pull down house prices (no votes in that) or allow a substantial lift in average wages (we cannot afford that as a country).

Figure 1. House price index growth, as at January 31, 2017
Source. CoreLogic

Figure 2. Housing prices by capital city
Source. CoreLogic RP Data, ANZ Research

Figure 3. Change in dwelling prices

Source. CoreLogic

Figure 4. City median house* price forecasts
Source. CBA
There is no shortage of “supply” of land in Australia – rather there is a shortage of “developed” land and first class infrastructure. The development of regional residential hubs connected to major cities by fast transport infrastructure is a glaring omission in the development of Australia’s east coast. There are thousands of kilometres of desirable places to live but families are inhibited by poor access to jobs or careers that primarily exist in major cities. If this was addressed by a regional development blueprint, residential prices would at least stabilise because alternatives would abound.
There is a clear connection between national income, wages, debt and the prices of residential property. These interconnected drivers are left to inter-play if the government and regulators lack the political heart to move prices to an affordable level. Indeed, in a recent opinion piece in the AFR written by the one-time Chairman of the Parliamentary Enquiry into Housing Affordability (John Alexander, NSW Liberal Member), he argued that controlling housing inflation should be a policy requirement of the Reserve Bank and Government. Why target 2% inflation for consumer prices with no concern for the consumer’s biggest lifetime expenditure – his/her house or rent?
With no targeted pricing policy, the property market continues to be driven higher by both growth in income and debt. While higher national income is a policy imperative, it is not desirable if the purchasing power of wages is eaten up by rising housing expenditure. Australians tend to believe that higher property prices are to our society’s ultimate benefit. But we suggest that ballooning residential prices is not a true measure of our economic success. Rather it shows that Australians bask in economic excess with little concern for our future generations.
Overlaying this is the excessive growth in Australia’s residential debt promoted by the banks and unchecked by the regulators. Non-resident purchasers of housing and local debt driven investment in residential property are supported by tax breaks. Negative gearing is a hot discussion point as it relates to the pressure on house prices and rent. However its fairness should be considered from a different perspective: if we allow some citizens to reduce their tax by negative gearing, then other taxpayers must make up the difference. There is a requirement for all members of society to contribute to the fiscal position of Australia. We all seek health services, education, defence, security, infrastructure and support when in need. How can some say they should have all of these benefits and yet not contribute fairly to what we all need and expect?
There seems no great national desire to feel the real benefit of higher national income by focusing upon real disposable income after the cost of housing or accommodation. This means that as income grows we should seek that the percentage needed for housing expenses should decline. If that occurred, then more income would become available for improving our standard of living, plus more savings and capital could be invested in productive enterprise to generate returns for our self-funded retirements. At this point higher housing prices benefits some, but inhibits the future of many. Indeed Australia’s great national retirement scheme is seriously compromised by a complete lack of policy concerning residential property prices and expenses.
It is indeed fortunate that Australia has avoided recession for 24 years. However we have a strong suspicion that a recession-driven property correction will hit housing prices hardest.