Affordable Housing

The State and Future of Housing Affordability

By Kevin Abbott - 18, April 2010

There is something really wrong regarding affordability of housing in Australia. Why is it now impossible for your average Australian to live in the very city they grew up in? When did it become unaffordable and what can be done about it?



In Australia, housing affordability is an ongoing and timeless debate among the political and ultimately the general community. Everyone is affected by the very ‘Australian’ norm to generate personal wealth through property investment.

This maybe the dream of attempting to own your own home or by building a real estate portfolio, what ever the case home ownership is seen as an essential quality of ‘making it’ in our society.

So when did this dream become unaffordable?

In the mid 1980’s where we witnessed new labour accords, deregulation of our economy and heralded a recession far harder to hit Australia than the current Global Financial Crisis, yet housing was very affordable to the average Australian.

In December 1985, using Australian Bureau of Statistic data, it would require just under 2 years of the average Australian household income ($37,000) to purchase an average home, priced at $67,800 as suggested by the Housing Industry of Australia.

This was also during when interest rates rose to around +13%, equating to a monthly payment of around $650.

Traditionally, a person’s income was used as a benchmark, but in reality houses are bought by a household, as it requires these combined incomes to afford the many aspect of housing costs, in this article household income is the basis of measurement.

The 80’s it seems was a good time to realize the dream of home ownership, it was hard work but many Australian’s did take full advantage of this opportunity.

Subsequently, even when interest rates rose to their highest point in September 1989 at a jaw-dropping17%, by today’s standards, Australian household’s ($50,900) still needed around 2 years income to afford purchasing a house ($103,000).

However, four years later in 1993, with interest rates sliding down to a respectable 10%, and Australia just coming out of a hard recession, households ($52,500) actually lost ground with house prices increasing ($121,000) requiring 2.3 years of income to secure a home. Interestingly monthly loan repayments were some 30% lower than the 1989 interest rate hike.

By the end of 1995, and subsequently the end of the Australian Labor Party Government these small discrepancies in household to housing growth would sow the seeds for the new Liberal economic resolution that helped evaporate the ‘Australian Dream’

Before this new political engine swung into full motion to drive down interest rates, constrain wage growth, and deliver the ‘Aussie Battler’ some home grown wealth, the housing dream was still achievable, but just a little less affordable. In the ten years of Labor Party rule, housing prices had risen almost 100% yet household income lagged behind at only a moderate 63%.

Four years after the recession, in 1997 the Australian economy was in full swing. Household income was pushing $60,700 while the average house price was now at $165,400 requiring 2.7 years to purchase.

Incredibly during this period, interest rates started dropping from 10% to 7.55% which meant that the increasing costs were softly felt and Australian housing consumers were bathing in a sea of ether not knowing what was happening.

The wake-up came after the North American Tech Bubble Crash in 2001, where the widening gap between household income and house prices started to get some attention from the first home buyers.

In December 2001, with housing prices raising to $210,000 the average household of $70,000 now needed more than three years of income to secure the dream.

Even though interest rates were a low 7.3% the biggest affordability effect was the increasing housing prices requiring monthly payments now passing the $1000 mark.

However, it was the next four years which ultimately broke the affordability hopes of many Australian’s not yet in the housing market. Household income rose to around $88,200 while average housing prices dramatically increased to $368,700 thus requiring over four years of household income to match the value of an average house.

However the real sting in the tail for such a windfall in private housing wealth was the cost to manage this debt driven existence. Even at a record low 7.15% interest rate it would now require almost $2000 of monthly repayments to live the dream.

In four years from 2001, household income rose only 25% while housing repayments increased by 100%. The legacy of those four years has not abated but further increased the dissolution of the ‘Aussie Dream’. If these four years caused restless sleeping for many Australian’s the following four years were things of nightmares.

Through this nightmare and at the end of the Liberal Government 11 year experiment, the Australian household income level had risen from $59,800 to a high of $99,800 a healthy 66%. Whereas the property value increase has seen housing prices rise from $142,000 to $437,000 an extraordinary 307%.

There was only one winner during this period, existing property owners, the losers of course were the future generations and people unable to get a leg up on the burgeoning gold mine, and this does not do well for Australia’s financial future.

Collectively the regimes of both political parties over the past 25 years has seen household income growth of around 260% compared to the higher rises in housing prices of nearly 650%.

It is the failure to build individual income at the expense of property wealth which has led to the current state of housing affordability; however the cumulative effect of those 25 years has been exasperated due to the Global Financial Crisis, while decimating world economies Australia has had limited impact except in household income.

While income has increased, it has not keep up with the rising property prices. Australia, unlike the rest of the world has not experienced 20-50% loss of property wealth to help even out this discrepancy.

The trends of the previous 25 years have meant that in a single generation the Australian society is destined to change from its belief of securing home ownership. It must look forward to new future and it may not like what it is about to see.

There are limited alternatives if you directly tackle these two issues individually; household income and house prices. Similarly the solution to housing affordability may need a contrasting evolution.

With regards to household incomes it would not be advantageous to generously over the next few years, lift wages to counteract the surge in houses prices. The inflationary effects to the Australian economy would wreak devastating consequences, from high unemployment, bankruptcy of the local and international business sector delivering a widening social divide.

Seeing a falling housing market can also have similar effects, as the Australian banking industry would be highly exposed at any loss of property wealth, especially when forced to resell on foreclosed properties. This would have a deflationary effect which would undermine any incomes increases.

The question is, how far can the property market drop and how far can household incomes rise and be sustained in the local economy? Simply, in the current political conditions it would seem very little each way.

By all measures the Australian property industry is headed for a correction, the depth of the correction maybe out of the hand of the political parties, but as shown overseas they will be required to rectify its financial implications. If we don’t then our nightmares will ultimately be the stark reality of our children.