You Want Houses to Be More Affordable? Here’s What It Will Really Take

In Australia, the dream of homeownership has become increasingly elusive.

With skyrocketing property prices, the affordability crisis is a topic on everyone's lips.

Politicians, media outlets, and everyday Australians frequently keep debating how to make housing more affordable.

But is it really as simple as some suggest?

Now, before you think I'm a rich property investor who doesn't understand the plight of first-home buyers, let me give a disclaimer - in my blended family I have six children and 12 grandchildren - so I fully understand how difficult it is for young people to get into the property market.

And I still remember the challenges I had many, many years ago when I first got into the property market.

So I really am sympathetic to the concerns of those who want to get a foot on the property ladder, but if you want houses to be more affordable, it's crucial to understand what it will really take to address this complex issue.

How can we make property more affordable?

In my mind there really are 2 ways:

1. Give home buyers more money to spend on property - either by increasing their wages or by handing out grants or incentives such as reducing stamp duty.

Unfortunately, this only works in the short term and for a few select buyers because both these measures encourage people to spend the extra money they have available, pushing up property prices and making properties even more unaffordable for the next round of buyers.

2. Decrease the value of properties - we currently have around 11 million private dwellings in Australia with a total value of $10.7 trillion dollars with, on average, 2.52 occupants in each dwelling.

Almost 70% of these are owned by ordinary Australians as their homes and they don't want the value of their homes to decrease.

So who wants property prices to fall?

They seem to fall into one of 2 groups:

1. First-home buyers wanting to get into the market but having difficulty saving a deposit, or
2. Australians who want to get into property investment, but feel they're priced out of the market.

Yet if you think about it, both groups only want prices to fall for a short while - until they can afford to buy a property.

Then they want prices to increase again - they don't want prices to keep falling further once they're in the market - do they?

What could make properties more affordable?

For properties to become more affordable to a wide range of buyers, property values would need to fall significantly.

By this, I mean we'll need more than the typical cyclical correction in values.

Remember, at the end of every property cycle, property price growth moderate in some locations, prices stagnate in others, and in some areas, home values fall.

But if we're talking about creating "affordability", property values will need to drop considerably, meaning that people will be forced to sell their homes, at a time when there won't be anyone willing or able to buy them, making property prices drop significantly.

For this type of property crash to occur we are going to require one of the following:

1. A very severe recession, leading to significant unemployment - high enough to trigger forced home sales - this is not going to happen any time soon.
2. A severe credit squeeze or interest rates rising even further could cause a raft of mortgage defaults, but that is unlikely to happen now that inflation is slowly coming under control.
3. A significant oversupply of property - and we know this won't happen in the next few years, as we just not building enough dwellings for our growing population.
4. A halt to immigration as our rising population is underpinning property demand.
5. A substantial slowdown in foreign property investment, even though this is at much lower levels today than it was a number of years ago.
6. A major change in government legislation that affects property.

The simplistic view: just build more homes

One of the most common solutions proposed is to simply build more homes.

The logic seems sound at first glance: if supply outpaces demand, prices should fall, right?

While there's some truth to this, the reality is far more nuanced.

While increasing housing supply is indeed a critical piece of the puzzle, it's not the silver bullet many believe it to be.

Here's why:

1. Location Matters: Building homes in areas where people don't want to live won't solve the problem. Australians are drawn to certain locations for employment, lifestyle, and amenities. Building more homes in less desirable areas where land is cheaper doesn't alleviate demand in the high-demand zones.
2. Infrastructure is Key: Even if we build more homes in the right areas, without the necessary infrastructure-transport, schools, healthcare facilities, and other amenities-these areas won't be sustainable. People need more than just a roof over their heads; they need a community and the infrastructure to support their lives.
3. Zoning and Regulations: Local zoning laws and regulations often make it difficult to increase housing density in areas where people actually want to live. Changing these laws is no easy task and can take years, if not decades, to have a meaningful impact. However, some local councils are now starting to recognise the need to densify their suburbs.

The economic realities

The Australian property market isn't just influenced by local supply and demand; it's also shaped by broader economic factors such as:

Wages vs. Property Prices

One of the biggest challenges is the growing disparity between wages and property prices.

Incomes simply haven't kept pace with the rapid rise in property values, making homeownership increasingly unaffordable for many Australians.

Without significant wage growth or a dramatic drop in property prices, affordability will remain a challenge.

Interest Rates

Interestingly, the 12 interest rate increases we suffered over the last couple of years have not quelled our housing markets, and as interest rates gradually fall over the next couple of years, this will only make borrowing cheaper, fueling a need for property and pushing up prices.

Investor Activity

Investors play a significant role in the Australian property market, with about 1/3 of properties being owned by mum and dad "rental property providers" fulfilling your needs that the government is unable to supply.

While investors have been blamed for pushing out first home buyers from the market, it is investors who have underpinned the development of the many apartment towers required to supply the accommodation we desperately need.

Restricting investor activity might help in the short term, but it would also reduce the overall supply of rental properties, leading to higher rents and making it even more difficult for first-home buyers to save a deposit.

Foreign Investment

The role of foreign buyers in the Australian property market has been hotly debated.

While some argue that foreign investment drives up prices, others suggest that these buyers contribute to the economy and help fund new developments.

Striking the right balance is crucial.

The social and political landscape

Making housing more affordable isn't just an economic issue; it's also a social and political one.

Here are a few key considerations:

The Homeowner Majority:

Approximately 70% of Australians either own their homes outright or are paying them off.

This significant majority has a vested interest in seeing their property values maintain or increase.

The government is acutely aware of the 'wealth effect' that comes from rising property values.

When property values rise, homeowners feel wealthier, and this encourages spending, which stimulates the economy.

Conversely, if property values start to fall, it could lead to a significant downturn in the economy as homeowners tighten their belts, leading to reduced consumer spending and potentially triggering a broader economic slowdown.

The First-Homebuyer Dilemma:

While first-home buyers struggle to enter the market due to high prices, once they do secure a property, as I said, their priorities often shift.

After all, no one wants to see the value of their largest investment-their home-decrease.

This creates a paradox where everyone wants affordable housing until they own a home, at which point maintaining or increasing property values becomes the goal.

1. Types of Property:

• Established Properties: These are typically owner-occupied homes in desirable, well-developed areas.

Given that the majority of Australians own or are paying off these types of homes, there is little appetite for policies that would cause these property values to decline.

Any significant drop in the value of established properties could have a ripple effect throughout the economy, impacting everything from consumer confidence to retirement savings.

• New Properties in Outer Suburbs:

Often aimed at first-home buyers, new developments in the outer suburbs come with their own set of challenges.

These properties are expensive, not just because of land and construction costs, but also due to government taxes, levies, and various forms of red tape and green tape (environmental regulations).

The added costs of development are inevitably passed on to the buyer, making these homes less affordable than they could be.

What needs to change?

So, if we really want to make housing more affordable, what needs to change?

Here are a few ideas:

• Comprehensive Planning: We need a coordinated approach that involves all levels of government, the private sector, and the community.

This includes not just building more homes but also ensuring that they are in the right locations and are supported by adequate infrastructure.

• Zoning Reform: Local governments need to be more flexible with zoning laws to allow for higher-density housing in desirable areas.

This will require overcoming NIMBY (Not In My Backyard) attitudes and ensuring that new developments are well-integrated into existing communities.

• Reduction of Development Costs

The high cost of new housing in the outer suburbs is partly due to government taxes, levies, and regulatory hurdles.

Streamlining these processes and reducing the financial burden on developers could help bring down the cost of new homes, making them more affordable for first-home buyers.

• Investment in Affordable Housing

The government needs to invest in affordable housing initiatives to ensure that there are options available for those who can't afford market prices.

This could include public housing, community housing, or partnerships with the private sector to build affordable properties.

In fact, our government should become a nonprofit developer providing with portable housing for the disadvantaged, like many other governments around the world.

• Economic Growth

Ultimately, housing affordability is closely tied to the broader economy.

Policies that promote wage growth, reduce unemployment, and create economic opportunities will help more Australians afford a home.

The Bottom Line

If you want houses to be more affordable, it's important to recognise that there's no simple solution.

It requires a multi-faceted approach that addresses supply, demand, economic conditions, and social factors.

It's a complex challenge, but with the right policies and a commitment to change, we can make housing more affordable for future generations of Australians.

However, it's equally important to understand that any significant change will take time and will require tough decisions from both policymakers and the community.

The reality is that any solution to the affordability crisis must balance the needs of those looking to enter the market with the interests of those who are already invested in it.

The question remains: are we ready to make those changes, knowing the broader economic implications?

Only time will tell.