Housing Affordability

Housing Affordability: Worse Than Ever in Living Memory of Homeowners

There is a lot of discussion about the shortage of housing stock across Australia; however this shortage may not be as significant as we are led to believe.

Residex CEO, John Edwards, says he can identify shortages in Queensland, Northern Territory and New South Wales, however he is not so confident shortages exist across other areas of Australia.

“Aside from these three areas, I believe many other states are in balance, or close to it, while states such as South Australia are in surplus”, Mr. Edwards said.

Source: Residex Pty Ltd

 *Note: This number represents the number of dwellings we have calculated as needed or under supplied. An over supply is represented by a red number while black indicates there is a potential shortage. The numbers have been calculated based on ABS immigration, natural increase some 20 plus years ago and construction numbers. We have also made allowances for household people density.

Traditionally, experts in the market assume the number of people who make up household formation is not changing or getting larger; and unsatisfied shortages from prior years are carried forward into future calculations.

Mr. Edwards would argue that population density per household is increasing, and this is something that needs to be accounted for in our calculations.

Affordability is reducing and as a consequence, the younger population is living at home longer and when they do move out, it is often into shared housing. Additionally, the immigrants to our shores are more used to higher density per household living than those of us who have lived in Australia our whole lives; therefore they have a tendency to need fewer houses.

“Affordability, on my calculation, is worse than it has ever been in the memory of anyone who currently lives in their own home and looks after themselves. The only time I can see where affordability was worse than it is today, was in the early 1960's”, said Mr. Edwards.

Source: Residex Pty Ltd

Affordability across Australia is represented in the table below. The number is the percentage of after-tax income a home loan repayment takes, assuming current home loan interest rates, a 20 per cent deposit for the median home, and that a household has the median income.

As you can see, Melbourne is the most unaffordable city in Australia. In the table "Affordability Measures Melbourne" we present two measures:

• The number of times gross income divides into the current median value (Multiple); and
• The percentage of gross income that is used to make a home loan repayment on the median home if you have a median household income and have a deposit of 20 per cent (% Income).

Note: We consider the median and the average of the two measures since 1960 and compare them to the current position.

As you can see in the above table, based on the average family, 55.4 per cent of before-tax income is needed to make loan repayments for the typical home, leaving only $366 per week after tax for living expenses.

Undoubtedly, if affordability was significantly improved there would be a surge in demand as the higher density caused by the market conditions of prior periods would revert to a more happy state. However, for this to happen housing costs would not have to slightly fall but they would need to reduce by significant amounts. Remember, the current cost of ownership is taking up 69 per cent of after tax income, where historically, the more normal cost is closer to 30 per cent.