Australia has had poor housing affordability for over a decade. The 2020 Demographia Housing Affordability Survey showed the multiple of median house prices to median annual incomes in Australia is 5.9 times, in Canada is 3.9 times, in the UK is 4.5 times and in the US is 3.6 times. Up until the last decade Australia was considered to have relatively cheap and affordable housing. There have been some recent cyclical downswings including the GFC, in 2011, and in 2017-19, but prices quickly bounced back each time.
The reasons often cited include; tax concessions, foreign buying, government related housing infrastructure charges, stamp duty, low interest rates and easy credit. Each of these only have a minor impact and rather the surge in population is the main cause, with an inadequate supply response. Since 2006 average annual population growth was about 150,000 people above what it was over the decade to the mid 2000s, requiring an extra 50,000 new homes per year. The surging demand and restricted supply caused price increases and poor affordability, and continued after each cyclical downturn.
The coronavirus has already pushed capital city prices down 2% since April, with average capital city prices potentially falling 10% to 15% to mid next year with a greater fall likely in Melbourne. There are 3 reasons this may not simply be a cyclical downturn and may have longer term impacts on affordability.
1. The economic hit from coronavirus is bigger than anything in the post war period. While some areas may recover quickly, other areas, such as travel and tourism and shopping, education, health care and sports may take longer to recover. This may mean high unemployment for longer, potentially at 9% at the end of 2021. This may result in more forced property sales.
2. Immigration has been significantly reduced due to travel bans, down as low as 35,000 this financial year from 240,000 last financial year. The 2020-21 population growth will be the lowest since 1917! This could reduce demand for homes by 80,000 dwellings and reverse the years of undersupply. If this drop in immigration is only short term it may not have a lasting impact, however with high unemployment the government may need to keep immigration low for some time.
3. The shift to working from home could have a huge impact on residential property prices. It has sped up the shift to remote working with a significant amount of white-collar workers able to even increase productivity. This could lead to less demand to be close to the CBD and increase demand for regional property. Office space and potentially some retail (with the shift to online shopping) could be repurposed to residential use, also boosting housing supply.
The combination of higher unemployment, diversification of location, falling demand and potential increased supply may lead to more affordable housing in Australia.
Please see the full article for more of Shane Oliver’s thoughts.
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About the Author
Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
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