Australia Faces Unprecedented Challenges in Housing Affordability

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An “extraordinary rise” in demand, combined with constrained supply, has driven a boom in Australian home values and rents over the past five years.

Since March 2020, home values have climbed by 47.3 per cent, adding about $280,000 to the median dwelling value.

The median dwelling value in Australia is now $860,529, according to the Cotality Housing Affordability Report for November.

Eliza Owen, Cotality head of research, said it was an “extraordinary rise”.

“The recent spike in property prices can be attributed to the monetary stimulus policies and historically low interest rates implemented during the pandemic,” she explained. “These measures significantly enhanced borrowing power and stoked demand, while housing supply struggled to keep up with the pace of new household formations.”

Over the same period, the median annual household income increased just 15 per cent to $104,390.

Three out of four of Cotality’s affordability metrics — the price-to-income ratio, years to save a deposit, and the share of income needed for rent — have hit record highs.

The portion of income required to service a new mortgage has fallen slightly from a record high of 45 per cent of household income, as a result of the Reserve Bank’s three interest rate cuts since February.

“For first home buyers, the metrics are pretty disappointing,” Owen said.

“We are witnessing a significant gap between income levels and property prices, indicating a fundamental shift in market accessibility,” she added.

The five-year price surge was driven by a mix of factors boosting demand, including COVID-19-era stimulus, low interest rates, government incentives for first home buyers and a rapid bounce-back in net overseas migration after border closures were lifted.

Meanwhile, housing supply lagged behind. Construction sector insolvencies, rising material costs and changing preferences for larger homes and smaller household sizes didn’t help.

The result was a mismatch of more than one million new households formed in the past five years compared with 880,000 new dwellings completed, according to the report.

As real estate values have soared, existing homeowners and investors have been able to channel their substantial capital gains back into the housing sector. This trend has further widened the gap for first-time buyers and individuals lacking financial support from family, making it increasingly challenging for them to enter the market.

“There’s been this extraordinary separation between property prices and income,” Owen said.

“It definitely speaks to a widening in the divide of the haves and have-nots when it comes to the property market.”

In Sydney’s eastern suburbs, it would take 35 years for an average wage earner to save up a 20 per cent deposit for a median-priced house.

Even if they somehow cleared that hurdle, servicing the mortgage would take up one-and-a-half times their income.

Meanwhile, increased taxes on investment properties in Melbourne have kept home values structurally lower across the city, with the median dwelling value 7.1 times higher than income, compared with a multiple of 10 in Sydney.