Housing shortage will hurt affordability for the next decade, experts claim

Housing affordability will spiral out of control in the next decade if state and federal governments do not fix the lack of supply – an issue which could possibly impact economic growth and spark widespread social distress, housing experts warn.

The harsh claims come after the Housing Industry Association revealed affordability continued to decline in the June quarter, and is now at a record low.

ANZ head of property research Paul Braddick says the issue of housing affordability is one that has been rampant for a number of years, and claims “affordability will continue to worsen”.

“Given the shortage of supply, we think this is going to a problem. Unless something is done about that, we think affordability is going to be one of the biggest social and political issues over the next decade.”

“The risk is that as housing prices increase, the RBA is forced to tighten rates further. This would curb economic growth and it would be lower than it otherwise would have been. Then you go into the potential social issues, where a large group of people simply can’t move into housing.”

The HIA-Commonwealth Bank Housing Affordability Report revealed yesterday that due to rising interest rates, house prices and low wages growth, affordability is at an all-time low.

The index fell by 6.1% in the June quarter, and is 30.4% lower compared to the same time last year. The largest falls were in Sydney at 9.1%, regional Victoria at 9% and regional Tasmania at 8.8%.

And even though Braddick says growth will remain subdued over the next 18 month due to those rising interest rates, the longer-term trend is that a shortage of supply will see more entry-level buyers locked out of the market.

“Our forecasts predict very soft growth over the next 18 months, just close over zero. Largely because we think the Reserve Bank has been hawkish and aggressive,” he says.

“If we see some more price rises over the next 18 months, and that causes the RBA to lift rates maybe 150 basis points further, then minor price falls are quite possible. But the problem is the supply, which is pushing those prices upwards, and that’s the long-term issue.”

Harley agrees this is the real problem – as long as there is a lack of supply, prices will remain high. And although we might have 18 months of soft growth in order for wages to catch up, Harley says the next 10 years will see affordable housing grow out of reach for many Australians.

“We remain hopeful, but it’s all about the supply. And as those prices rise we don’t believe it’s likely you’ll see any sort of fall. We have the strongest advanced economy in the world, and a shortage of housing is only going to push up those prices.”

Braddick wrote in this week’s ANZ Property Outlook that in the absence of a major economic downturn, prices will continue to grow unless governments release more land and relax laws for developers.

“In the absence of a major economic downturn, a critical shortage of housing will see house prices and rents grind ever higher and housing affordability and availability will become major social and political issues in the decade ahead, even with a projected slowing in population growth,” the research document claims.

“As noted above, there is no panacea for this condition but temporary solutions will in all likelihood play again into the hands of volatility and do little to solve the underlying supply problem.”

Some believe this downturn will occur due to the massive amounts of debt being taken on by mortgage holders. Morgan Stanley chief economist Gerard Minack said in a research note this week that a sell-off from investors could cause price declines.

However, Dale and Braddick disagree, saying the strong economy will keep unemployment low, allowing mortgage holders to service those debts.

“Small price falls are possible,” Braddick says, “but as long as the labour market is strong, as long as household income remains strong then widespread falls won’t occur.”

Dale says he would “tend to agree” with Braddick’s assessment of the market.

“Unless we see supply fixed, we will see economic and social ramifications over the next decade. This is the reform we will be looking for.”