Unfortunately, Australia is also in the midst of a housing affordability crisis. For many, the dream of owning a home is fading. Rising interest rates and property prices act as gatekeepers to both the hopeful and the aspirational. 

As shown in the graph above, housing affordability has deteriorated in most capital cities and regional areas to within a doorbell of its lowest level ever, according to the latest Housing Industry Association (HIA) – Commonwealth Bank of Australia Affordability Report. Measured as an index combining interest rates, household incomes and home prices, Sydney remains the most unaffordable city, followed by Melbourne, Brisbane, Perth and Canberra. The HIA says mortgage repayments now account for 27% of total income, which is only marginally below the historical high of 28% seen at the beginning of 2008.

To try and get around this problem, first home buyers have sought cheaper housing in new areas on city fringes. And why not?  A number of state governments encourage it. In Victoria, first home buyers constructing new homes in the metropolitan area qualify for a $13,000 bonus, with new homes in regional areas attracting a $19,500 boost.

Nonetheless, with all this ‘financial support’, research shows that suburbs on city fringes are still moving out of reach of most first-home buyers. A study from the National Land Survey Program found that at the end of 2010, three out of 10 lots for sale in new housing estates were accessible to average-income first-home buyers. Not surprisingly, in Sydney only one out of 10 lots is sold under an industry-accepted affordable land benchmark of $200,000 a lot. The loss of affordability has been pronounced in Melbourne as well, with 26 percent of lot sales meeting the affordability benchmark, down from 90 percent two years.

Developers have repeatedly blamed soaring prices on dwindling land supply, calling for more rural land to be re-zoned for housing and faster planning processes for new estates. Residential land sales fell by 74 percent in the year to September 2010, yet median land prices grew by 25 percent to $225,750 in the year to December 2010, despite house blocks getting smaller. Poor affordability in Melbourne, south-east Queensland and Sydney could cause people to go to Perth, where new housing is somewhat cheaper and the job market better. Unfortunately, the challenge facing the development industry is to keep prices down and maintain a healthy number of homes accessible to first-time buyers.

Does this mean there is a looming bubble waiting to burst? Unlikely. One of the most plausible ways of dealing with the insatiable demand is to increase supply. However, this will take time and a lot of red tape no doubt. While no one is suggesting a permanent move to Perth be an interim solution, however, first-home buyers are encouraged to save for that deposit. First home buyers should also be made aware that there financial strategies available to achieve that goal.

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