Housing Market

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EXPERT INSIGHT

The temporary supplement to JobSeeker payments in Australia are set to finish at the end of March 2021. The JobSeeker ‘coronavirus supplement’ was a temporary boost to new and existing recipients of welfare schemes in response to the onset of COVID-19 including JobSeeker, Youth Allowance, Austudy and the Parenting Payment. 

In early 2020, the supplement was set at an additional $275 per week, virtually doubling payments for some recipients. Recently, it was announced that as the coronavirus supplement is wound down from March, a permanent $25 increase will be added to payments. While a permanent increase will make some better off, welfare recipients will be worse off by $250 per week compared with the onset of COVID-19.

But will the removal of the JobSeeker supplement have any impact on the housing market?

First and foremost, it is important to acknowledge that the JobSeeker supplement has already been reduced significantly in recent months, with no dampening impact apparent on the housing market as a whole.

In late March 2020, the original JobSeeker supplement was set at an additional $275 per week. In late September, the supplement was reduced to $125 per week, and it was reduced further to $75 per week through the first quarter of 2021.

However, housing market momentum has increased from September to January, amid the reduction in the supplement. Between the end of September and January, the CoreLogic national home value index rose 3.2%, and rental values increased 2.5%.

Another consideration is that even as the JobSeeker coronavirus supplement was reduced, fewer Australians have been reliant on welfare due to a strong recovery trend in the labour market.

Data from the Australian Government Department of Social Services (DSS) suggests there were 11.7% fewer JobSeeker recipients toward the end January 2020, compared with the end of September. However, there is still a heightened risk to wider-spread housing stress, as the number recipients at January was still 55.9% higher than at the onset of COVID-19 in March 2020.

Changes to JobSeeker would likely have little direct impact on housing market values. With lower income households generally having lower rates of home ownership, it is more likely that households receiving JobSeeker are renters. This would imply an indirect impact on housing prices, where reduced rental return could impact an investor’s willingness to pay for a property.

However, even looking at regions with the highest proportion of JobSeeker recipients in Australia relative to the local population, rental outcomes have been mixed since the significant reduction of the Jobseeker supplement in September. 

Only one region has actually seen a decline in rental values, while other SA2 markets have seen an average increase in market rents of 4.2%, which is actually above the 2.5% increase in rent values nationally over the same period.

Importantly, there is no counter-factual for rental performance in these markets where the coronavirus supplement is unchanged. Under these circumstances, rents may have increased even further.

However, what this data does highlight is that the impending changes to JobSeeker could create increased divergence between incomes and housing costs for some of Australia’s most vulnerable households. While these rental markets may be increasing in aggregate, housing stress, and even homelessness, may be faced by individuals whose livelihoods have been impacted by COVID-19.

While changes to JobSeeker are unlikely to impact the housing market, the welfare reduction could greatly disrupt housing situations for many.

Eliza Owen is the Head of Research Australia at CoreLogic
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Will changes to JobSeeker impact the housing market? CoreLogic's Eliza Owen

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GUEST OBSERVER
There’s been quite a bit of speculation over whether Australia has a property market bubble - where house prices are over-inflated compared to a benchmark - and when it might burst.
According to housing experts, there’s at least four scenarios where this could happen.
Australia could see a property bubble burst due to:
<ul class="ul1">
<li class="li2">Lending tightening, interest rate hikes and mortgage stress</li>
<li class="li2">Underemployment and unemployment creating a slow deflation</li>
<li class="li2">Government intervention failure and market repair</li>
<li class="li2">Global crisis</li>
</ul>
These four scenarios focus on different tension points in Australia’s and the global economy. One scenario focuses on the balance of actions between regulators like APRA and the Reserve Bank, combined with household mortgage stress. Another envisions the affect that unemployment might have in certain areas.
Some of the factors we may see play out, such as the federal and state government trying to intervene to “fix” problems in the market, as happens in one scenario. But other factors may be out of the government’s control, for example, where a global crisis pushes up risk premiums.
All of these scenarios highlight just how complicated and interrelated the steps that lead to a property bubble burst could be.
Lending tightening, interest rate hikes and mortgage stress
Associate Professor Harry Scheule, UTS Business School
<a href="https://www.propertyobserver.com.au/images/2017/05/01/file-20170424-25594-sr2cd9.png" target="_blank">Click to enlarge</a>
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170424-25594-sr2cd9.png" alt="">
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Following concerns of the housing bubble, bank regulator APRA increases bank lending standards, it also increases the risk weight on Australian mortgages resulting in lower loan supply and higher loan costs. Banks are encouraged to reduce interest-only loans, hold a greater amount of costly capital (making home loans more expensive) and reduce the loan amounts offered to applicants due to higher future interest scenarios.
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170421-12655-nn7let.png" alt="">
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
Following increases in interest rates in the US and Europe, as those markets recover, the Australian dollar begins to decline – forcing the Reserve Bank of Australia (RBA) to increase interest rates.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170421-12640-1lrrxft.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/" target="_blank">CC BY-ND</a>
Higher interest rates lead to higher monthly repayments, as most of Australia’s home loans are adjustable. Interest only loans are the most exposed. Higher interest rates also lead to more mortgage delinquencies.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170428-15097-i6a8cl.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/" target="_blank">CC BY-ND</a>
The banks tighten bank lending standards in response to the increase in delinquencies. This further constrains interest-only borrowers seeking to refinance after the end of the interest-only terms. This means more mortgage stress, as many had expected to roll over the interest-only period indefinitely, but now they are forced to make principal repayments next to interest payments.
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170421-12627-djg6hq.png" alt="">
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The cycle between delinquencies and tightening bank lending standards continues and as a result there’s a noticeable drop in loan supply and a fall in house prices. 
Underemployment and unemployment create a slow deflation
Danika Wright, Lecturer in Finance, University of Sydney
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170424-12658-14s147l.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
Unemployment and underemployment - workers who want to work more but can’t - increase. As the apartment development boom dies down, and without a mining boom to replace it, construction industry workers are at high risk.
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170421-12629-1g17gp1.png" alt="">
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
Households with a lot of mortgage debt are forced to limit their spending, particularly on discretionary items. This in turn affects companies that employ retail workers, reducing hours and employment.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170421-12645-1thbkt5.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
Employment opportunities are a major component of house price amenity, in part because demand for housing is pushed higher by inbound work-related migration. So, as there are less jobs nearby, the amenity value of some areas decreases.
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170428-15121-1a3mn50.png" alt="">
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
The amount of people at risk of defaulting on their mortgage increases in areas where there is a loss of employment or reduced income. In 2008, arguably the last time Sydney house prices went through a correction, the incidence of mortgage defaults and property price declines was geographically localised.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170428-15086-1qrzafm.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
Borrowers who have the least amount of equity in their homes (typically the least wealthy, younger and newer entrants to housing market) are the hardest hit by falling property values. They are more likely to end up “underwater” – that is, owing more than the property is now worth – and face the prospect of a distressed sale. This in turn contributes to the downward spiral in house prices.
Australia has tighter lending criteria than regulators enforced before the global financial crisis in the United States. But concerns by regulators, including APRA, over current lending practices and potentially fraudulent activities raise questions over the real quality of mortgages and the ability of borrowers to repay them.
Government intervention failure and market repair
Professors of Economics, Jason Potts and Sinclair Davidson, RMIT
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170424-22270-1wxliec.png" alt="">
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
A combination of low interest rates and low growth in new housing stock drive up Australian housing prices, a situation compounded by poor policy choices by state and federal governments and high demand from foreign residential property investors.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170421-12658-1w2f933.png" alt="">
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
As a result housing is misallocated in the Australian market, across demographic and especially age groups. This produces demographic pressures, as millennials delay leaving home, delay starting families. This leads to political pressure on governments – increases the urge to intervene.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170421-12669-19vk1qg.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
The federal government intervenes, blaming the secondary drivers (particularly the non-voting group: foreign investors). They increase restrictions on foreign investment in residential housing stock.
The federal government also lobbies APRA to increase rules on financial products, while promoting a scheme to subsidise and promote first home ownership.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170424-23807-i1c8wi.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
Because none of these previous measures from the federal government affect the primary drivers of the misallocation of housing, domestic interest rates don’t change, and state governments do not act to release new stock. As a result housing prices continue to grow.
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170424-27254-4qwo2z.png" alt="">
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
Increasingly alarmed that house prices continue to rise, the federal government starts to panic, threatening ever further regulation and starts to blame the financial system. This triggers the RBA to finally act, raising interest rates.
As interest rates rise, this causes mortgage stress, resulting in default among investors with high amounts of debt, pushing these properties onto the market. These distressed sales finally cause prices to fall.
Global crisis
Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, ANU
 <img src="https://www.urban.com.au/images/2017/05/01/file-20170424-12629-1juog2j.png" alt="">
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
International crisis (whether it be political, military, economic) leads to an increase in global risk premiums.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170424-12645-qj07.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
Borrowing costs for Australian banks rise because of this and supply of global capital falls, pushing up mortgage rates in Australia.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170424-12658-z8xdgo.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
The most vulnerable mortgagees can no longer afford their mortgages and are forced to sell their homes.
<img src="https://www.urban.com.au/images/2017/05/01/file-20170424-12658-1fhdu2b.png" alt=""> 
The Conversation, <a href="https://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a>
House prices fall which, coupled with rising interest rates, adds further distress to households’ balance sheets, leading to more selling of houses and so on.
Jenni Henderson is editor, Business and Economy, The Conversation and can be contacted <a href="https://theconversation.com/au/team#jenni-henderson" target="_blank">here</a>.
Wes Mountain is<a href="https://theconversation.com/au/team#wes-mountain"> </a>deputy multimedia editor, The Conversation and can be contacted <a href="https://theconversation.com/au/team#jenni-henderson" target="_blank">here.</a>
 
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Four ways an Australian housing bubble could burst

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A recent suggestion that new housing on inner-city public land should start from a presumption of 100 percent social housing prompted indignation in government circles. “We can’t condemn another generation of Victorians to live in housing poverty,” huffed the housing minister, Martin Foley.
It’s curious, then, that we heard barely a peep about the latest government announcement that the height of an apartment tower associated with the Queen Victoria Market makeover will be reduced by removing the original affordable housing component to a separate, smaller development.
It is tempting to conclude that both responses accord, naturally, with the interests of the developers of private housing. But that would be to over-simplify the complex issue of social mix. It is increasingly clear there is no one-size-fits-all.
The principle of social mix now routinely drives public housing estate renewals and new housing builds on surplus public land. This is usually expressed in a 50:50 mix of social (public and community) and private housing, though the social component is often much smaller. As the stock of public land is ever diminishing, and affordable housing is in such short supply, this is problematic.
I have argued before that government commitments to social mix are often disingenuous. They are more likely to be driven by an ideological imperative to privatise public assets, or at best to secure upgrades to public housing without having to fund them directly.
What does the evidence tell us?
Soon-to-be-published research by Abdullahi Jama and I on the Carlton public housing estate redevelopment supports these conclusions.
Our findings show that public and private residents on the new estate are not mixed. They are divided into separate buildings with separate gardens, explicitly with a view to increasing the value of the private apartments.
The case that normally follows from such a finding is that public and private households should be “salt and peppered” through new apartment buildings to encourage social mixing. While Abdullahi and I agree this is a necessary precondition for social mixing, this is not the entirety of our argument. We question the very basics of the policy orthodoxy on social mix.
The rationale for building upmarket private housing in low-income areas draws on the neighbourhood effects thesis, which says that concentrations of poverty exacerbate its effects.
This might be the case in large areas of disadvantage, such as the US Rust Belt cities, parts of the UK and even some outer suburbs of Sydney and Melbourne. But it doesn’t stand up in highly resourced, gentrified inner cities where community facilities and opportunities for interaction are plentiful.
Even where poverty is widespread, studies from Toronto, Vancouver, Amsterdam and London show that imposed social mix disrupts support networks and social structures. Involuntary displacement from a neighbourhood often has serious effects on physical and mental health.
Minority communities may benefit from concentration in terms of safety and maintaining their cultural heritage. A substantial body of research shows that social mix policies do not replace the social capital they displace.
So, are there good reasons to introduce social mix?
The strongest argument is the reduction of stigma that for some people comes with public housing. If the public housing is indistinguishable from private housing, the public tenants’ wellbeing is considered to be improved.
It’s not entirely clear, however, whether this is due as much to the housing being new and decent as to having private residents as neighbours. Also unresolved is the question of whether stigma is felt as keenly on estates in gentrified cities, which are islands of public housing in seas of inner-city privilege, as it may be in widely disadvantaged neighbourhoods.
There is certainly evidence that, for some people, being thrust among others from different class and socio-economic groups can increase feelings of inadequacy, discomfort and sometimes hostility.
So how do we provide affordable housing?
These issues vary across place, time and individuals. What is clear is that different responses are needed accordingly.
It is also clear that, with dire shortages of affordable housing in so many cities, all opportunities should be seized to build as much affordable housing as possible. That’s not just public and community housing, but “key worker” housing, “below market rent” housing, co-op housing and community land trusts. Models for all these exist and should be encouraged and explored.
A diversity of housing types must include diverse sources of funding, with a range of support programs. Involving future residents in design and ensuring they know what they’re moving into, and enabling people to organise their own housing, are far more effective ways of building social harmony than enforcing a rigid notion of mix.
Separate buildings for social tenants and private residents next to the Vic Market might be a perfectly reasonable response. But it should come from nuanced public policy and optimal use of public resources, rather than the developers and their sales people.
<a href="https://theconversation.com/profiles/kate-shaw-39629" target="_blank"></a>
<a href="https://theconversation.com/profiles/kate-shaw-39629" target="_blank">Kate Shaw</a> is Future Fellow, University of Melbourne and author for <a href="https://theconversation.com/au" target="_blank">The Conversation</a>.
<a href="https://theconversation.com/profiles/kate-shaw-39629" target="_blank"></a>
 
<a href="https://theconversation.com/profiles/kate-shaw-39629" target="_blank"> </a>
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Social mix in housing? One size doesn’t fit all, as new projects show

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A swell in the number of listing this spring will bring positive changes to the property market.
House-hunters will already have noticed a rise in homes for sale earlier in spring than usual offering choice, better affordability and less pressure when it comes to finding a new home.
It has started to shift into a more traditional housing market along the eastern seaboard.
As listing slowly rise, we can expect price growth to still be above average but remain at a more sustainable level.
There won’t be a dramatic fall away of prices in markets such as Sydney and Melbourne where demand remains strong, however, we won’t see street records continuously being broken. 
Vendors need to be mindful we have enjoyed an extended period of incredible growth and may need to adjust price expectations. 
The media is still going to quote these spectacular sales results but I would suggest, that these are likely to become a bit more one off.  It will be home by home. Quality will still stand out.
Real estate that offers a "lifestyle" and that is well presented, requiring minimal updating, will be on the top of buyer’s wish lists and should fetch top dollar.
Even average agents have done well over the past two years but as we shift into a more traditional scenario where negotiations will be a key, it will be important for vendors to do their research. 
They need to ensure their agency has marketing plans and a good active database.
Proper preparation of a property for sale such as styling or minor home improvements on the advice of your agent could pay off in the current market.
Buyers typically come within the first two weeks of any marketing campaign. 
There is a risk that if vendors have unrealistic price expectations and turn down offers leaving their property for sale for an extended period, then the property will lag on the market. 
Changes to investor lending is anecdotally already starting to have an impact on the market.
They are being replaced by cashed-up buyers who previously missed out on purchasing either because of strong competition, price growth or lack of supply over the past 18 months.
Grant Harrod is chief executive officer of JL Hooker and can be contacted <a href="https://about.ljhooker.com.au/leadership-team" target="_blank">here</a>.
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Swell in spring property listings: LJ Hooker's Grant Harrod

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GUEST OBSERVER 
Dwelling approvals posted a slight 1.2 percent decline in Dec in line with expectations (Westpac –1 percent, market –1.5 percent).
The Dec dip follows a 7.5 percent gain in Nov that was a partial rebound from a sharp 23 percent drop over the previous 3mths. 
That earlier move marked the first definitive sign that Australia's high-rise driven building boom was starting to turn down.
<a href="https://www.propertyobserver.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%208.17.36%20AM.png" target="_blank">Click to enlarge </a>
<img src="https://www.urban.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%208.17.36%20AM.png" alt="">
The Nov bounce and Dec stablisation scales back the pace of the decline but leaves the downtrend intact – trend approvals are now down 13%yr.
The Dec mix showed further weakness in private sector houses (–1.6%mth to be down –9.6 percent/yr) with ‘units’ up slightly (+0.9 percent/mth but still down –13 percent/yr). Our estimates suggest high rise approvals were up about 4%mth with 'low rise' broadly stable.
High rise is still at the epicentre of the slowdown although the softer picture on non high rise approvals is notable particularly for construction activity in 2017 (the longer time frame on projects means the high rise impact falls more into 2018).
<a href="https://www.propertyobserver.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%208.19.49%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%208.19.49%20AM.png" alt="">
The state detail suggests the high rise downturn is more abrupt for NSW and Qld with Vic approvals in this segment more volatile around a milder downtrend. For ‘non high rise’ approvals the weakness is much more pronounced in Qld and WA with approvals flattening out in NSW and Vic rather than trending materially lower.
Given the aforementioned timing differences, that suggests the path for construction activity will be very different across states with near term weakness concentrated in the mining states, and the high rise slowdown having more of an impact on NSW and Qld in 2018.
<a href="https://www.propertyobserver.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%208.20.46%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%208.20.46%20AM.png" alt="">
The value of renovation approvals surged 15.2 percent in Dec to be up 12.3 percent/yr. The renewed uptrend and detail suggests there was a 'pause' in activity in NSW and Vic, possibly relating to election uncertainty.
The value of non res building approvals edged up 0.7 percent but were down 6.7%yr. Extreme lumpiness makes it difficult to be sure of the underlying trend although the value of approvals for Q4 as a whole was down across most segments with a notably sharp fall in NSW.
Overall, aggregate approvals continue to track in line with our expectation of a significant high rise driven slowdown. The mix has been a little weaker for non-high rise approvals though suggesting construction activity may be a touch softer in the second half of 2017.
<a href="https://www.propertyobserver.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%208.21.42%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%208.21.42%20AM.png" alt="">
As we highlighted in a several pieces last year, the long lags on high rise projects mean the downturn in this segment will not impact construction activity until well into 2018 with work done still relatively well supported in 2017. We will be expanding on this research in coming months to provide a clearer view of the likely path for construction activity and completions across the major states. 
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Matthew Hassan is senior economist with <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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December dwelling approvals decline: Westpac's Matthew Hassan

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The value of new residential construction work completed fell nationally by 3% in seasonal terms for the June 2015 quarter according to the latest ABS Construction Work Done release. 
For the 12 months to June 30 however, the value of new residential construction work done had improved by 10.6% across the country largely due to more significant annual improvements in the value of residential work completed in New South Wales, Queensland, South Australia and Tasmania. 
The figures underscore the important role residential construction work is playing right now in supporting the broader Australian economy.
The activity underway is still very strong, however the drop over the quarter posted by most states could be signs of a slowing in commencements. 
This is something to watch as we can’t afford to see new construction levels weaken. Maintaining high activity is crucial to keep pace with housing demand, population growth and job creation. 
States such as Queensland and South Australia posted declines in the value of work done in the June quarter of 10.2% and 16.2% respectively which needs to be monitored over the forward updates. 
The value of residential construction work done in Queensland is the best it’s been since 2010, however the 2015 result still sits below the ten year annual average. 
The ABS data shows good annualised levels of activity is flowing through the residential industry and the industry is in the midst of a strong patch but supply side efficiencies will be needed to support this activity long term. 
Governments need to focus on supply side efficiencies in land release, improvements to development assessment and reform of inefficient taxes such as stamp duty to create prosperity, jobs and strong communities.
<a href="/images/2015/08/26/Screen%20Shot%202015-08-26%20at%2010.56.47%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/08/26/Screen%20Shot%202015-08-26%20at%2010.56.47%20PM.png" alt="" width="806" height="373">
Nick Proud is residential executive director, Property Council of Australia and can be contacted<a href="https://www.propertyoz.com.au" target="_blank"> here</a>.
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Mid-year drop in residential construction value

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GUEST OBSERVER
At face value, Australia’s housing market appears to be broadly in balance.
However, we find that this headline result masks the fact that some people are increasingly unable to form new households, primarily due to affordability constraints. As a consequence, we believe a significant level of latent demand for housing still exists in Australia, which will underpin prices and require construction to remain elevated.
Following the release of 2016 Census data, we reviewed our analysis of Australia’s housing balance.
We found the net 780,000 dwellings built over the five years to 2016 has technically been enough to absorb the increase in demand.
This has decreased the shortage of dwellings nationwide.
This is only partially a good news story, however. Since 2011, the headship ratio (propensity of people to form new households) has steadily fallen, with the younger age cohorts the worst affected.
The relative unaffordability of housing, especially in the Sydney and Melbourne markets, means that people are waiting until later in life to form new households, and this artificially lowers demand for housing.
If the headship ratio had not dropped, Australia’s housing shortage would be 117,000 dwellings – much more significant than the 21,000 currently reported.
There are three implications from this finding:
The solid level of underlying demand is likely to provide support to house prices.
Australia’s strong population growth means that construction activity should remain around elevated levels.
There is little to suggest that the affordability picture for potential first-home buyers is going to improve in a meaningful way.  
HOUSING CONSTRUCTION BOOMING, BUT NOT ENOUGH BY ITSELF
<a href="https://www.propertyobserver.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.10.28%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.10.28%20AM.png" alt=""> 
The five years to 2016 saw Australia’s stock of housing expand strongly, with the net addition (after allowing for demolitions) of 780,000 dwellings since 2011.
The majority of this came from the construction of units and apartments, which now account for a record 27% of Australia’s total housing stock.
 This strong increase in supply was necessary, given the rapid population growth in recent years. Until the end of 2012, this was centred in Queensland and Western Australia as the mining boom was in full swing. New South Wales and Victoria have since taken the population-growth baton, with Victoria’s population increase of 2.4% in 2016 the fastest since at least the early 1980s.  
Rapid population growth is not new – it has been persistent over much of the past decade. Over the 20 years to 2005, Australia’s population growth was relatively stable around 218,000 people each year. Since then, it has accelerated rapidly, reaching a peak increase of 460,000 people in the year to December 2008.
While that rate of growth has not been sustained, an increase of 360,000 people in 2016 is still well above historical levels.  
We can see in Figure 2 that housing construction initially failed to keep up with this sustained increase in population growth.
Indeed, the delayed supply response was quite remarkable. It resulted in a significant shortage of dwellings across most of the country.
<a href="https://www.propertyobserver.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.11.36%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.11.36%20AM.png" alt="">
Although dwelling construction has certainly picked up in recent years, it is largely just playing catch up after a decade of not building enough housing. 
 The increase in construction since 2013 has helped prevent an even worse shortage of housing.
But changing household formation rates has also been a key factor in shaping our apparent transition toward an apparent housing surplus.
We find that Australians are forming new households later in life mostly because younger people are being ‘priced out’ of the housing market. 
 AUSTRALIANS ARE WAITING LONGER TO FORM NEW HOUSEHOLDS  
The 2016 Census shows that the ‘headship ratio’1 continued to fall for the younger age cohorts.
This implies that people are forming new households later in life, which lowers the indicated demand for housing.
This trend is a significant factor behind our estimate that the housing market is broadly balanced.
 Historical data show that falling headship ratios are not a new phenomenon; the national average has been declining since 2001.
But the pace of change has picked up in the past five years, driven by the key ‘household formation’ age group of 20-34 year olds.       
     Figure 3 shows that the headship ratio for the 20–34 age group has been steadily falling since 2001, and the decline accelerated over the most recent Census period.
<a href="https://www.propertyobserver.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.12.46%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.12.46%20AM.png" alt="">
In particular, New South Wales has seen a significant decline and now has the lowest household formation rate of the country.
This means that younger people across the country, but especially in New South Wales, are waiting until later in life to create their own households.
 LATER HOUSEHOLD FORMATION LOWERS INDICATED DEMAND FOR HOUSING  
The implication of falling headship ratios is that on average, there are more people living in each dwelling.
In turn, this means that the implied demand for dwellings is less. We can quantify the impact of falling headship ratios by running the same analysis, but keeping the headship ratios constant at their 2011 levels.
See Figure 4.
 We found that if headship ratios were sustained at their 2011 levels, the added demand for dwellings would imply a much larger shortage at the national level.
In 2017, the shortage would be 117,000 dwellings, compared to the actual result of just 21,000.
The same is true at the state level, where New South Wales and Victoria would have a shortage of 40,000 (instead of 7,000) and 48,000 (instead of 10,000) dwellings respectively. 
<a href="https://www.propertyobserver.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.13.48%20AM.png" target="_blank"> Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.13.48%20AM.png" alt="">
WORSENING AFFORDABILITY DELAYS PEOPLE FORMING HOUSEHOLDS  
Given the above analysis, it is important to assess why headship ratios have been falling amongst younger people.
We believe worsening housing affordability is the principal cause.  Recent research by the Reserve Bank of Australia supports this view.
It suggests that the ‘generation rent’ phenomenon - where fewer potential first-home buyers (FHBs) enter the housing market - “is a reflection of higher housing prices rather than a shift in preferences.”2 The RBA found that higher house prices have pushed potential FHBs out of the market.
On the other hand, demographic characteristics, such as education or employment status were not found to have changed the probability of someone becoming a FHB between 2008 and 2014. So, much of the delay in forming households (and falling implied demand for housing) is, in a sense, involuntary.
 The affordability issue has several root causes.
Clearly the strong house price growth in recent years does not help.
But that has been compounded by a fall in wages growth to the slowest rate on record, and lower returns on savings due to falling interest rates.
As a result, the time taken to save a deposit for an average dwelling in Australia has been increasing for the past five years.
 The story is different across the country. Sydney and Melbourne have experienced the worst of the affordability difficulties, in line with their exceptionally strong house price growth in recent years.
For an average income earner in Sydney, the time taken to save a 20% deposit for an average dwelling price is now sitting at over 10 years.
Melbourne is not much better, at 9 years (Figure 5). And this assumes that prices do not grow faster than incomes over that saving period. 
<a href="https://www.propertyobserver.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.14.57%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.14.57%20AM.png" alt="">
 WHAT DOES THIS ALL MEAN?  
In isolation, the housing market balance has little direct impact on price movements.
The housing balance is a long-term, structural measure, whereas prices can move quickly in response to many factors, including sentiment, policy, interest rates and incomes.
The added complication of worsening affordability and falling headship ratios make interpreting the housing balance more difficult.
Our analysis does however provide useful guidance on the outlook for prices, construction, and affordability.
 This strong latent demand (FHBs currently priced out of the market) is likely to provide support to prices.
Any dip in prices may well activate the pool of potential entrants, resulting in additional demand and thereby sustaining prices.
We noted in a recent housing market update that it is hard to see house prices falling (in the absence of sharp interest rates increases), and this research supports that view.
 Australia’s strong population growth needs ongoing supply. We expect dwelling investment will slowly decline over the next two years as the current backlog of construction (primarily of high-rise apartments) clears, but the fundamentals are in place for construction activity to remain historically high over the longer term.  Finally, the outlook for FHBs is not encouraging.
<a href="https://www.propertyobserver.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.16.04%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.16.04%20AM.png" alt="">
The probability of strong population growth and the presence of many potential FHBs mean the market is likely to remain extremely competitive. We have previously noted3 that stamp duty incentives are great for a lucky few, but such measures do little to address the underlying issues.
<a href="https://www.propertyobserver.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.17.17%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/26/Screen%20Shot%202017-09-26%20at%209.17.17%20AM.png" alt="">
It is difficult to envisage Australia’s supply-side response suddenly boosting the availability of affordable housing, so it looks like home ownership will remain a challenge for 20–34 year olds.  
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Daniel Gradwell is Senior Economist, ANZ and can be contacted <a href="https://www.anz.com/corporate/research/" target="_blank">here</a>.
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Australia's housing affordability is distorting demand figures: Daniel Gradwell

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<img src="https://counter.theconversation.edu.au/content/77402/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Investors have played an increasingly important role in the Australian housing market in recent years. Our new research shows the actual return rate for housing investors almost doubled a layman’s expectation. Experienced investors are taking advantage of the knowledge gap and might continue to price out other housing buyers. 
The sharp increase in investor credit in recent years could be partly attributed to the strong growth of housing prices, particularly in Sydney and Melbourne. However, the reported capital gains might not have fully reflected investors’ actual returns as the impact of debt financing in property investment has been neglected. 
Since housing investors typically use large amounts of debt to fund their investment, using the return on equity (after adjusting for debt financing) more accurately reflects their actual return. 
In recent years, regulators such as the Australian Prudential Regulation Authority and lenders have implemented measures to moderate the growth of investor lending. Despite these efforts, investors have come back into the housing market since the second half of 2016. 
Proportion of housing investment loans
<a href="https://www.propertyobserver.com.au/images/2017/05/26/file-20170523-8895-1g4m2hp.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/26/file-20170523-8895-1g4m2hp.png" alt="">
<div class="enlarge_hint">ABS, Housing Finance, Australia: February 2017</div>
 
<h2>Higher returns come with greater risk</h2>
Our research sampled properties in 14 suburbs across Sydney, using the Property Investors Alliance database. The results provide some empirical evidence to demonstrate the housing return on equity with debt financing is significantly higher, at an annual return of nearly 14 percent per year, than the housing return on property without debt financing of about 7 percent per year.
This could explain the increasing proportion of investment loans in the housing market. The knowledge of investors’ advantage should also be used to inform the ongoing debate about regulating investment housing loans to enhance housing affordability for first home buyers in particular.
It is important to highlight the effect of debt financing on decisions to invest in housing. The results clearly show the enhanced returns are likely to have an acute impact. 
At the same time, a higher risk level as a result of the use of debt financing has also been documented. This highlights that housing investors should closely manage their exposure to financial risk from using debt financing by using a prudential risk-management tool.
Returns and risk on housing portfolios: 2009-2015
<a href="https://www.propertyobserver.com.au/images/2017/05/26/file-20170511-21598-1gyjv43.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/26/file-20170511-21598-1gyjv43.png" alt="">
Author provided
<h2>Explaining the increased rate of return</h2>
We used an assumption of 20 percent equity to demonstrate the impact of debt financing, which is in line with the current deposit requirement from major banks. Here’s an example to demonstrate the effect of debt financing. 
Say an investor buys a house for A$1 million. The investor provides a 20 percent deposit ($200,000); therefore $800,000 was borrowed. The investor took an “interest-only” loan with an interest rate of 5 percent per year – so the interest cost is $40,000 per year. The investor also receives a net rental income of $30,000 in Year 1.
A year later, the investor decides to sell the property for $1.1 million (its value having increased by 10 percent over the year). The traditional performance analysis of property (without debt financing) would show the return on this housing investment is 13 percent: ($1,100,000-1,000,000+$30,000)/$1,000,000 = 13 percent. 
Given the housing investor used debt financing, 13 percent is not the actual return for the investor. The investor’s actual return on equity for the investor is 45 percent: ($300,000-$200,000)+($30,000-$40,000)/$200,000 = 45 percent. 
Property returns vs equity returns
<a href="https://www.propertyobserver.com.au/images/2017/05/26/file-20170520-12263-sf1nd0.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/26/file-20170520-12263-sf1nd0.png" alt="">
Author provided
<h2>Experienced investors exploit their advantage</h2>
Overall, the results suggest the actual return rate for housing investors is significantly higher than the layman might expect from the major housing index providers. 
The documented returns may not be applicable, however, to owner occupiers who are also using debt financing, via mortgages, to buy their property. There are two main reasons for this:
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owner occupiers mainly use their houses for their own residency purposes, so no rental income will be generated to offset the mortgage repayment; and
</li>
<li>
housing investors are able to sell their properties whenever they want to realise gains in value, while owner occupiers do not have that flexibility.
</li>
</ul>
Importantly, experienced housing investors, in the current low interest rate environment, have realised the benefits of debt financing and taken advantage of the knowledge gap to exploit the higher returns available to them.
These findings also highlight the need for an innovative product to assist home buyers to enter the housing market.
Chyi Lin Lee is associate professor of Property, Western Sydney University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/chyi-lin-lee-368009" target="_blank">here</a>.
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Investors exploiting returns on debt financing to muscle out home buyers

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The housing market concluded 2015 with a whimper, with national house prices falling again at the national level in December. However, strong price growth in the first half of the year meant that prices were still up solidly over the past year.
But the current environment of subdued demand is likely to see price growth remain sluggish as we move into 2016.
<a href="/images/2016/01/11/Screen%20Shot%202016-01-11%20at%2010.25.42%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/01/11/Screen%20Shot%202016-01-11%20at%2010.25.42%20AM.png" alt="" width="891" height="258"> 
Prices fell across the key markets of Sydney and Melbourne in December in seasonally adjusted terms. Prices in Sydney have now fallen for three consecutive months – the first such run in nearly five years. 
Prices are being driven by softer demand and sentiment in the housing sector. Tighter regulation and higher interest rates have contributed to auction clearance rates falling from their recent peak. As clearance rates dipped further in December, to a three-year low in Sydney, house prices have been correspondingly soft (Figure 1). 
<a href="/images/2016/01/11/Screen%20Shot%202016-01-11%20at%2010.28.46%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/01/11/Screen%20Shot%202016-01-11%20at%2010.28.46%20AM.png" alt="" width="806" height="580">
Falling prices were prevalent across most of the smaller capitals too in December. However, one brighter spot was Brisbane, which experienced rising prices over the past two months. This is consistent with our belief that Queensland’s economy has turned the corner, supporting housing sentiment. In addition, the absence of earlier price growth to the extent of Sydney or Melbourne means that there is less room for unwinding over the near term (Figure 2). 
<a href="/images/2016/01/11/Screen%20Shot%202016-01-11%20at%2010.28.57%20AM.png" target="_blank">Click to enlarge</a>
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Cherelle Murphy is co-head of Australian economics, ANZ and Daniel Gradwell is economist. They can be contacted <a href="https://bluenotes.anz.com/authors/our-economists/" target="_blank">here</a>.
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Australian house prices finished 2015 on a whimper: ANZ Research

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<img src="https://counter.theconversation.edu.au/content/63880/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Despite a relatively healthy supply-side picture for the general housing market, the expected trickle down of housing opportunities to low-income households in Australia has failed to materialise.
The UK Department for Communities and Local Government boasted this year of a seven-year high in construction starting on new houses; in the 12 months to December 2015, there were a little over 143,500 housing starts. With a population of 54.3 million, the English housing sector is adding one new dwelling for every 380 persons. 
Over the same period there were 231,411 housing approvals in Australia. With a population of 23.5 million in 2014, the Australian housing sector is adding one new dwelling for every 102 persons.
The supply of new housing has matched Australian population growth in recent times. The figure below profiles growth of the housing stock between 2006 and 2014, and compares it to population growth over the same period Australia-wide, as well as across the state capitals, Canberra and Darwin. 
Growth in the national housing stock has kept pace with population growth for almost a decade.
However, the picture differs across state and territory capitals. In Perth and Sydney, increases in the housing stock are insufficient to match the increase in these state capitals’ populations. But there are different patterns underlying this common outcome.
In Perth, population growth was exceptionally strong. It was faster than any other city: its population soared (by 2014) to more than 28% above 2006 levels. Such rapid growth would stretch the capacity of most housing construction sectors, even in the absence of any supply-side impediments. 
Sydney’s population growth (at 14%) is below the average across all cities (17%). Despite this relatively low increase in its population, housing supply failed to produce a matching increase in the housing stock. 
<h2>A housing system under pressure</h2>
The balance between growth in population and expansion in housing stock through new housing supply is thought to be relevant to an understanding of housing affordability pressures. New housing construction that matches population growth should ease price and rent pressures, where all else is equal. 
Although most new housing is built and sold in the higher price ranges and therefore purchased by higher-income groups, the housing they vacate will fall in price. It therefore becomes accessible to middle-income groups. And, as they shift upmarket, the housing they move out of falls in price and becomes accessible to lower-income households. 
Eventually, this filtering process opens up new opportunities for the homeless.
Housing affordability is generally thought to be worsening, especially for low-income households. Homelessness numbers remain stubbornly high. And official figures for June 2015 reveal there were 154,000 households on state housing authority waiting lists for public housing.
It is likely that the length of these waiting lists underestimates the need for public housing. We have modelled the income rules determining eligibility for public housing, and estimate that there are nearly 900,000 households satisfying these income eligibility criteria. 
More than two-thirds of these households (650,000) contain one or more persons who:
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are aged 65 and over; 
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<li>
have a long-term health condition or disability; or
</li>
<li>
have children aged under 15.
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These are people who value the security of tenure that has typically been offered by public housing, but who are unlikely to be able to buy their own homes. There are nearly 1 million individuals in these households – a group that is currently ill-served by Australia’s housing system. 
<h2>Housing solutions through private-public partnerships</h2>
The need for new housing solutions for these low-income groups is clearly a pressing requirement. However, raising the capital funding to expand public or social housing to meet their housing needs seems improbable. 
Secure leasing is a private-public partnership option that offers a rent premium to those private landlords willing to offer long-term leases to those satisfying the income tests for public housing. They would also be either of pension age, disabled or caring for children. 
In the unregulated Australian rental housing market, leases are almost always short term. This gives landlords the option to realise investments in the near term. Hence, a long-term lease proposal requires Australian governments to offer landlords a rent premium to compensate them for the money sacrificed when they enter into a long-term arrangement.
Consider a reform scenario in which landlords are given an incentive to offer five-year secure leases to households eligible for public housing who are now living in the private rental sector, with rent increases capped at increases in the consumer price index over the secure lease period.
We estimate that, over five years, the budgetary cost to the government to house these 650,000 households in secure lease arrangements is A$13.4 billion.
The uneven distribution of these households across states and territories means the program’s cost varies across the five most-populous states. Our estimates are $4.7 billion in New South Wales, $3 billion in Victoria, $2.5 billion in Queensland, $1 billion in South Australia, and $1.8 billion in Western Australia – with the remainder borne by Tasmania and the territories. 
This cost is much more affordable than the capital funding required to expand the social housing stock through the construction of new social housing dwellings.
The Australian tax system currently provides indirect support for the supply of private rental housing through tax concessions such as negative gearing and capital gains tax discounts. Is it now time to harness some of the private investment stimulated by these concessions to help improve the supply of affordable and secure housing opportunities for low-income households.
Gavin Wood is professor of housing, RMIT University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/gavin-wood-113723" target="_blank">here</a>.
Rachel Ong is deputy director, Bankwest Curtin Economics Centre, Curtin University and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/rachel-ong-113482" target="_blank">here</a>.
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