40 Years of selling out the Australian Dream

Housing Affordability 1985 - 2024

In 2010 I published an article on affordable housing, using readily available data from Australian Bureau of Statistics (ABS), Housing Institute of Australia (HIA) and other industry sources, as I had this data as part of my role at a Technical Research Board keeping track of housing activities. I decided that I would use over two decades of collated data in helping explain far more important issues such as why homeownership in Australia has become so challenging.

I explored how economic and political changes, starting in the 1980s, contributed to a growing gap between household income and housing prices. Back then, owning a home was achievable, even with high interest rates, as house prices were aligned with household incomes. But by the 2000s, housing costs began to soar while incomes grew much more slowly, making it increasingly difficult for average Australians to secure a home.

That article examined how these trends were shaped by policy decisions and market forces, highlighting the impact of the Liberal government's economic strategies in the early 2000s, which prioritized property wealth over income growth, a policy that was been maintained though governments changed. In particular, and since the cabinet papers of 2004 were recently released showed that the effect of negative gearing and capital gains tax concessions from 1999-2009 increasing property prices beyond wages, supply and demand trends.

It was policies like these that artificially inflated housing values that have locked out younger generations from the housing market, creating long-term financial challenges for society. I also discussed the risks of potential solutions, such as rapidly increasing incomes or allowing house prices to drop too sharply, both of which could destabilize the economy, which cannot be done without significant overall pain to society.

Ultimately, my aim in writing that article was to shed light on the structural issues behind Australia's housing affordability crisis and to encourage reflection on how we might approach this problem without jeopardizing the broader economy. Without addressing these challenges future generations will face even greater hurdles in achieving what was once considered a cornerstone of Australian life—the dream of owning a home.

Some 14 years later and having adapted and updated my original data tables, due to original sources being either revised, amended and or corrected as well access to more readily available data that now focuses on these same issues. The problem of housing affordability seems to be more complex and out of reach, as none of these structural issues have been dealt with and the future doesn’t look that rosy for anyone.

The 30% (of household income) threshold that is sometimes used to determine affordability has well and truly reached peaks that have never be seen before. Furthermore, the available interest rate mechanisms are limited this time around due the current state of the economy. Even if the variable rate fell to historic levels of 3.66% from its current average of around 7%, it is most likely we would be scratching at the top of the 30% threshold. This historic variable rate would also mean the Cash Rate set by the Reserve Bank of Australia (RBA) would need to be hovering around 1% (variable rate is usually +2.5% above cash rate), a very unlikely scenario in today’s economic climate.

Two historic situations where the 30% affordability threshold was topped and then dropped below happened late 1989-91 and then twenty years later in 2008-09. In both these instances Australia saw worsening economic activities such as the recession ‘we had to have’ where the cash rate was over +10%, and then the Great Financial Crisis (GFC) during the latter which had saw the cash rate reach a peak at 7.25%.

In the first event, it took two years from 1990 until the cash rate got below 7% and a further 8 years before it was below 5% where it more or less stayed before the GFC. That event saw a softer 2 years of rising rates where again we settled into a period of low rates and cheap money. The past two years (2022-24) has seen the cash rate rise from historic lows of 0.1% to now over 4.35% and there is now little room to dip below the borrowing affordability threshold as housing prices have climbed way beyond the rising household income levels.

In fact, if you were starting out today with minimal savings and apply for the average mortgage with the average household income you would show an affordability index of over 50%. Thereby making it almost impossible to borrow to get into the housing market without substantial financial support from family of other investments, most don’t have either.

In this debate about housing affordability there is always one side stating that housing supply and demand are not being met. The data I have gathered over the years has consistently demonstrated a reasonable gap between housing supply and population (household) growth, as it should, because it takes time for households to form. Historically these have never equal nor ever will, census data and ABS stats average out household populations to be 2.5 people per household, whether this is for a house of apartment, 4 bedroom or just one, it doesn’t consider these variations for such broad population and household estimates.

One thing I have noticed in the 40 years of building dwelling approvals data is that there were 3 times as many detached houses in the 80’s than apartments. Today the figure is now two times, but in a five-year period 2014-19 it was almost parity between these two dwelling types. The move away from close living conditions brought on by the recent pandemic has led to a scramble for more land to build more and more suburban sprawl. Those able to afford it have also led to the sea and tree change living and subsequent boom in property prices in these regions.

The problem now arises – how can the next generation be able to afford to secure the ‘great Australian dream’ of a piece of suburban living?

In 2010, I proposed to understand how far the property market could drop whilst household incomes rise to maintain affordability. The property market didn’t need to drop, as household incomes was raised through a period of incredibly low access to cheap money through a low interest and low inflationary economy. In 2024, it is a very much different situation, high interest rates and inflation are now settled well and truly into the economic condition of this country. There are very few levers left, and during this initial period of the past few years financial institutions have ensured that they will not be exposed to property market losses.

In Australia, the value of loans has been transferred from fixed interest rates to the majority now on the higher variable rates. Remembering these can be anything up to 3% higher than the RBA Cash Rate there has been a substantial growth in banking profit and in the past two years the big four banks in Australia have netted over $60 Billion in profits, that’s on top of their operations costs and administration fees to service housing mortgage loans.

In those years Australian households have been drained of their savings to pay for this high interest high inflationary economy, because banks have progressively moved mortgage policy holders to this variable high market, with fixed rates options often higher on the speculation of higher cash rates, which has happened. Unless banks decide to unilaterally reduce profit shares by reducing the gap between cash rate and variable market rates there maybe pressure of wholesale property value sliding due to exposure to this ‘mortgage cliff’ where cutting losses by selling property is the easiest individual solution.

While the economic outlook for 2025 as suggested by the RBA is a continuation of high interest rates with moderate inflationary growth, it provides no real release valve for existing mortgage holders or future households hoping to gain a foothold in the market. Therefore, with possibly modest property value reductions, limited movement in the variable rate we may be entering a new period where the 30% affordability threshold is no longer the measure, where household financing may need to look at multi generational mortgages, which is a major shift for the Australian mindset.

The current supply of housing products may also show signs of changes, like the mid 2010’s era where attached dwellings become the majority, and it means the suburban dream of 4 bed, 2 bath, 2 garages may be in short supply because of affordability. Perhaps the suburbs also need to change as well, built on cheap money, poor infrastructure delivery and are clearly car dependent this lifestyle shift maybe the new reality of Australia’s economic situation. The property industry through lobbying politicians for tax breaks that artificially inflate housing prosperity have progressively milked Australian households of a viable future, there is no easy solutions than structural change of the suburban development system left.

While there will be fiddling at the edges through financing mechanism such as multi generational mortgages, or even changes to some of the tax breaks for property investors, the damage for affordability is now structural, and only systematic change will ever get close to providing future Australian households with affordable housing that we and our parents enjoyed. It’s been 40 years of selling off the Australian dream, how long will it take to get it back?