Demographia International’s latest (13th) annual International Housing Affordability Survey provides yet more evidence of the burning issue of housing affordability in Australia, particularly in our largest cities. Sydney ranks second most unaffordable, and Melbourne is only a few places behind that.
Countries covered in the 84 page report include Australia, UK, USA, Canada, NZ, Ireland, Japan, Singapore and China (Hong Kong), with comparable information by other survey organizations also included covering mainland China and Malaysia.
Of the over 400 metro areas measured, Demographia ranks Sydney second only to Hong Kong in unaffordability. Melbourne comes in as sixth least affordable. Of the 94 (out of 406) international markets rated “severely unaffordable”, some one third are in Australia. All 5 of Australia’s state capitals are so rated.
“Median Multiples” the key measure
Demographia ranks affordability based on “Median Multiples”, representing median house prices divided by median household incomes for each relevant area.
Median Multiples of 5.1 and over are “Severely unaffordable”, and those between 4.1 and 5.0 are “Seriously unaffordable”. Only multiples of up to 3.0 are “Affordable”.
As recently as the 1980s and 90s, such multiples were commonly in the 2.0 to 3.0 range for many countries in the survey, including Australia.
In the latest Survey, Sydney is accorded a Median Multiple of 12.2, up from 7.6 in 2004 (the first year of Demographia’s annual survey). This staggering statistic places Sydney at more than twice the threshold of 5.1 for “Severe unaffordability”, while still well below Hong Kong’s stratospheric 18.1. The Survey accords Melbourne a Median Multiple of 9.5, making it the sixth (out of 406) most unaffordable market surveyed.
Densely populated Singapore is an interesting case study in Demographia’s survey. Its Median Multiple is ranked 4.8, less than half that of Melbourne, and light years below Sydney’s.
The Singaporean government has for decades made it a policy priority to ensure its population is satisfactorily housed and property prices are kept under control.
Singapore enjoys an 88% rate of home ownership, the highest among the countries included in the Survey.
Restrictions on foreign ownership have certainly helped keep a lid on price pressures and Singaporean citizens are given significant government financial help in entering the home ownership market.
Singapore’s active and publicly sponsored housing construction program, administered by the Government “HDB”, has probably made the greatest contribution to housing affordability.
Interestingly, tight housing regulation (including mandated urban densification) has been the norm.
So, who or what is the culprit in Australia’s evident crisis?
The Report is peppered with references to excessive housing regulation (“urban containment policy”) in the most unaffordable markets. The authors clearly consider this the chief culprit in such markets, despite Singapore’s compelling experience that tight housing regulation seems to work.
Liberally regulated markets, it is claimed, have historically exhibited Median Multiples of 3.0 or less.
The Report makes the obvious point that severely constrained supply tends to put upward pressure on prices.
This conclusion, however, raises but does not answer the Whodunnit questions of whether it is more constrained supply or excess demand that is to blame, and the various dynamics underlying each factor.
Many would lay part of the blame at the door of speculative demand stimulated by excessively generous fiscal incentives such as negative gearing.
Planning regulations do undoubtedly play an important role in constraining supply, but references to the urban fringe “supply valve” are hopefully not a veiled call for more urban sprawl.
Increased densification (rather than more urban sprawl) in central areas already served by jobs, infrastructure and services is surely a cheaper, easier and more sustainable solution.
And even if densification in central areas increases land value, it is the land value component of a dwelling that matters. Densification means more dwellings per unit of land. Therefore, provided the land value per dwelling increases proportionately less than the increase in dwelling capacity (which it does), the increased supply from densification is a net gain.
While widely adopted and providing a useful snapshot, price income multiples like the “Median Multiple” are not perfect analogues of housing affordability.
For example, they do not take account of house size or household composition or suitability, or proximity to jobs, infrastructure and services. These too are important factors in determining house price affordability.
Focus on middle-income housing market
We tend to think of housing affordability as affecting only those on lower incomes. The Demographia survey instead focuses on affordability in the middle-income housing market.
It also does not address rental affordability, concentrating as it does on house prices.
For these reasons, the survey findings are of secondary relevance to Australia’s most severely impacted groups, namely first home buyers and long-term renters unable to even contemplate the great Aussie dream of home ownership.
That said, the market does generally operate as a continuum and impacts in one price bracket have ripple effects on adjacent price brackets.
Also, prices and rentals are ultimately linked. Sustained upward price pressure can adversely affect rentals as investors try to maintain returns.
Demographia’s latest survey is a welcome contribution to the database of information for policy makers struggling to come to terms with the nature and extent of our housing affordability crisis.
The authors justly call out high house prices as a policy failure and are right to highlight overly tight planning rules as one of the main areas needing reform.
However, to formulate a comprehensive response to the affordability crisis we still need a better understanding of its other key causes and their impact.
Oliver Frankel is a former corporate finance and M&A lawyer, who has spent the second half of his career in finance, investment and management. Most recently, he has taken a strong interest in how to address the affordable housing crisis.