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Housing Affordability

Housing Affordability

Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion.
Briefing Paper 04/2011 by Louise O'Flynn

Introduction [1]

The purpose of this paper is to present an overview of the Housing affordability debate, in particular as this relates to NSW. It should be noted, however, that the focus of the paper is on housing affordability in metropolitan areas and not in rural and regional NSW where the issues concerned are somewhat different in nature and scale. To put it another way, a whole series of different housing markets operate in NSW.

Home ownership is the most common and most desired form of housing in Australia, yet for many it is increasingly unaffordable. The latest Annual Demographia International Housing Affordability Survey compared housing affordability in metropolitan markets in Australia, Canada, Ireland, New Zealand, the UK, the US and Hong Kong. It looked at median multiples (i.e. the median house price divided by the gross annual median household income). The survey found that the major metropolitan markets in Australia were all severely unaffordable (as they had a median multiple greater than 5.0); and that of the 82 major metropolitan markets in the countries surveyed, Sydney was the second most unaffordable (it had a multiple of 9.6).

As house prices have increased, so too have rents. In fact, the largest group of households experiencing affordability problems are households in the private rental market. High levels of rental stress mean that affordability is low and people are less able to rent housing that meets their needs. As with home ownership, affordability in the NSW rental market is also in decline. In 2007-08, 57 percent of low income households in the private rental market in NSW were in rental stress. This was the highest of all Australian jurisdictions and significantly above the national average of 47.5 percent.

Defining 'housing affordability' [2]

Although there is no single agreed definition of housing affordability, the term refers broadly to a person's ability to pay for their housing. Housing affordability can be distinguished from the term "affordable housing". In Australia, "affordable housing" is often used as an alternative to terms such as "public", "social" or "low cost" housing.

The implications of housing affordability [3]

Spatial disparities in housing affordability may influence the labour market, in particular by discouraging people from working in low affordability areas. High housing costs accentuate financial hardship for low income households by leaving too little in the household budget for non-housing expenses and place some households at risk of being unable to pay their housing costs. High housing costs and low affordability can also result in a widening of the wealth distribution between those able to purchase housing and those who cannot. Housing affordability has implications for the economy, at the national and sub-national levels.

Measuring affordability [4]

While it is generally accepted that there is a housing affordability problem in NSW, there is still debate over the threshold beyond which housing is considered unaffordable. Five key measures used to calculate housing affordability are discussed:
the '30/40' rule;
residual income;
the accessibility/ deposit gap;
house price compared to consumer prices or incomes; and
the effects on home ownership rates.

The review of these methods of measuring housing affordability suggests that each method produced a different result.

Home ownership affordability [5]

House prices in Australia have risen faster than average household incomes since 1970. In 2007-2008, 49.3% of low income households with a mortgage in NSW were found to be in mortgage stress (nationally 46.6%). Sydney is considered to have the most heated market for private housing amongst Australian capital cities. From September 2008 to September 2010, median prices for non-strata dwellings in Sydney increased by 22.8% and by 14.9% across NSW.
According to Shelter NSW, in September 2010, 1% of home purchase stock was found to be affordable for very low income households, 6% for low income households, and 25% for moderate income households.

While the overall trend in house prices in NSW is upward, there is some variation amongst local housing markets in terms of the extent of the increase. For key workers (notably, police, teachers, nurses, fire fighters and ambulance officers) looking to buy a house, 84% of Sydney LGA's in 2010 were unaffordable. In regional NSW, 75% of LGAs were affordable, with house prices less than 5 times the salaries of key workers.

Rental market affordability [6]

Although affordability problems for home buyers tend to receive the most media attention, the largest group of households experiencing such problems are households in the private rental market. Shelter NSW reports that in 2006, there was a shortage of 44,000 affordable and available private rental stock for very low income households in Sydney, 5,900 in Newcastle and 3,200 in Wollongong. In 2007-08, NSW recorded the highest percentage of low income households in the private rental market in rental stress at 57% (nationally 47.5%). Shelter NSW further reports that in NSW in September 2010, 13% of rental stock was affordable for very low income households; 31% for low income households; and 68% for moderate income households. Most affordable rental stock was located in outer suburbs which tend to have lower levels of employment opportunity and significantly poorer public transport infrastructure.

Factors affecting housing affordability [7]

The causes of housing affordability problems are said to be complex and diverse, with major driving factors found both within the housing system and beyond it. Two pivotal factors are the supply of, and demand for housing, with a host of other issues in turn influencing housing demand, including: higher incomes; demographics; lower interest rates; speculative demand; and taxation influences.

Addressing affordability [8]

NSW local and State Governments, in cooperation with the Commonwealth Government have sought to implement a range of measures to improve housing affordability. The National Affordable Housing Agreement (NAHA) provides a framework for the different levels of government to improve housing affordability. The Commonwealth Government has introduced measures to address affordability. These include First Home Owner Grants and help in the private rental market through Commonwealth rent assistance. Policies of the O'Farrell Government include the extension of the Empty Nester Transfer Duty Concessions and repeal of the Homebuyers Tax - as provided by the Duties Amendment (Senior's Principal Place of Residence Duty Exemption) Act 2011 and the Real Property Amendment (Torrens Assurance Levy Repeal) Act 2011 respectively.

The former NSW Labor Government sought to address affordability by establishing the Centre for Affordable Housing and introducing the First Home Plus One scheme. It also adopted planning mechanisms to improve affordability and increased the supply of land for housing. Some Sydney councils have introduced measures to improve housing affordability, often through the inclusion of planning provisions.

Stakeholder proposals [9]

Interest groups and stakeholders have suggested a range of solutions to the housing affordability problem in NSW and across Australia. For example, in a policy paper prepared by the Property Council of Australia, the supply of land was identified as the "key factor" affecting affordability. According to the Australian Institute of Architects, long term housing affordability requires the incorporation of environmentally sustainable design techniques into the design of new homes and the modification of existing homes. The Institute has emphasised that affordability relates to a household's access to transport, services, facilities and employment and education.

Conclusion [10]

Extensive use has been made in this paper of the 2008 Senate Committee inquiry report, both in respect to the empirical research about housing affordability and in relation to the more discursive issues involved. The Executive Summary to that report started by stating:

The majority of Australians aspire to home ownership. It should be an aspiration that through prudent management of household finances they are able to realise. Currently, there is a significant problem with housing affordability in Australia. In certain regions of the country the problem is particularly acute.

The issue of housing affordability is of major concern to many NSW households, as part of the broader concern about cost of living pressures. It is an issue which can be considered from the perspective of individual households, as well from a range of other levels, from State planning and land release policies to debates about macro-economic and broad demographic trends.

Housing affordability is an issue for all levels of government in Australia. The challenges are many and substantial. The University of Western Sydney Urban Research Centre has commented in this respect:

Though much has been written on housing affordability in the Australian context, it has proved difficult to secure agreement about the right mix of responsibilities for housing policy among the various tiers of government and how best to address housing affordability.