WHAT CAN WE DO ABOUT AFFORDABILITY?

With the national real estate market currently experiencing strong growth levels of around 9.5%, there has been a lot of talk lately about the affordability of housing prices in Australia. At a national level, affordability is undoubtedly a concern and as our population continues to grow, we are going to need effective and forward thinking policy decisions to help us all move forward.

Of course, as is usually the case, no one can seem to agree on what those policies should be. A number of factors need to be carefully considered if we want to come up with a workable solution.

Growth rates vary across the country
It’s important to understand that the issue of affordability isn’t impacting the whole country, at least not in the same way or to the same extent. The tricky thing about averages is that they are just as good at obscuring what is really happening as they are at giving a general overview.

You see, the national growth rate is largely being led by the Sydney and Melbourne markets, which are currently showing incredible 14.1% and 9.9% growth rates respectively – and affordability in these 2 cities is definitely at something of a crisis point.

However, this rampant level of growth isn’t being matched by every Australian city. In the ACT we have a strong local real estate market and have been experiencing steady growth in property values of about 1.9% (despite the economic challenges we faced following the fallout surrounding the Federal Budget). However, we have been noticing a rise in enquiry and sales rates recently, and as we enter what is typically our peak season, we can expect the local growth rate to start rising higher. Still, housing affordability in Canberra isn’t anywhere near the issue it is in Sydney or Melbourne

Heavy investment is helping to fuel growth rates
Unsurprisingly, high growth rates have attracted a lot of interest from investors (both locally and internationally). Investors now make up close to 40% of Australia’s residential finance commitments and as more and more people invest in real estate, it continues to push housing prices higher, making it more and more difficult for new buyers to enter the market.

Again, this isn’t something that is happening across the whole of Australia. While we have seen a significant increase in investment activity, and we are starting to see more interest from overseas investors, Canberra is still a relatively accessible market for new homeowners. When you take into account the ACT’s high median incomes, housing in Canberra is actually pretty affordable. In fact, so far this year over a third of Independent’s sales have been to first home buyers.

Despite this, some so-called experts have suggested a blanket approach to affordability, such as abolishing negative gearing in Australia.

Deterring investment isn’t the answer
When people are talk about getting rid of negative gearing, what they are really trying to do is curb investment – which is not a good thing for the real estate market or for the economy in general.

Property investment has a wide reaching impact and brings a lot of wealth to the economy. More investment means more new dwellings are being built, it means more building material are being sold, more purchases of home furnishings, more appliances being bought, and more jobs across all those industries. All of those are good things.

Aside from the negative impact abolishing negative gearing would have on the economy, it’s also likely it would result in higher rental rates as investors try to offset their financial losses. This would make it even harder for renters to save money to buy their own home.

By getting rid of negative gearing you are essentially trying to regulate or manage demand, and there is another group of experts who think this is the wrong way to approach the problem and claim the real issue is a lack of supply.

Increasing the supply of affordable homes
The idea is that the best way forward is for state and territory governments to release more and more land for residential development. The idea is pretty straightforward – to ease affordability tensions, we just need to raise the supply of homes to meet the current level of demand. As the market starts to balance out, prices should become more affordable and there will be fewer obstacles stopping new buyers from entering the market.

The ACT is actually doing a reasonable job of this already. New land is released on a regular basis and currently a proportion of new housing developments must be allocated for affordable housing. However, this is not necessarily the right solution for other parts of Australia and so the debate surrounding affordability inevitably continues.

So what is the solution?
There’s no easy fix to housing affordability in Australia. It’s a complex issue with many different factors that need to be taken into account. Trying to single out one small aspect of the real estate industry as the root of the problem isn’t going to cut it. We need a measured and well-thought out policy approach and a concerted effort from government and industry stakeholders at both the national, state and local level to find an effective and long-lasting solution.

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