Australia does not have a housing shortage, but it has an affordable well-located housing shortage

Well – is it any surprise?  Over and over again we see a drop in new homes sales.  The most recent Housing Industry Association data shows new house sales dropped 5.5% in July (barring Queensland) and new apartment sales dropped 6.4% over the same period.  As usual, the blame is placed firmly in the real estate sector’s go-to excuse of the year, namely “consumer sentiment” – or to quote the HIA “weak consumer - and business – confidence”.

It’s true the housing market has been in the doldrums of late.  However, this doesn’t mean there is no activity.   Only a few weeks ago we were informed by the ABS that “first-home buyers as a proportion of total owner-occupier housing finance commitments” had increased to 18.3% in June – a five-month high. However, it’s clearly not stimulating one of the most affordable segments of the market, the new home sector.

In new housing estates, off-the-plan prices start under $300,000 – a price unachievable in inner-suburban localities. On top of this, developers have been playing Santa Clause, offering “new cars, $10,000 cheques” and “free” ‘would you like an extra bedroom with that?’ upgrades.

Terry Ryder, who last week eloquently pointed out we don’t have a housing shortage in Australia, was quick to point out examples of outer-suburban “affordable” localities such as Albury-Wodonga. “Affordability isn’t a major issue,” he writes, clearly expecting home buyers or renters suffering increasing rental yields  (up 50% over the past four years) to flock to these areas if there’s a so-called “housing shortage”, or at the very least, a “shortage of affordable accommodation”.

As Ryder briefly touches upon, the differences between underlying demand and effective demand need to be clarified.  The first is assessed from the level of migration and changes in population growth (predictive speculation.)  The second – effective demand – is driven by the buying market and dictated by market forces.

Ryder is therefore correct in his assumption that the house buying market is currently over-supplied in the new estates.  If we weren’t oversupplied in these areas, developers would be building and selling more homes.  They are not building and selling currently because no one wants to buy the properties on offer – and more importantly no one wants to buy in an area that offers poor capital growth, where the closest doctor is an hour’s bus journey away!

However, to take the data above and conclude that we haven’t got a “housing crisis” is a little misleading.  As I’ve pointed out many a time, Australia is on her way to becoming a rental nation, which trending statistics detailed across the 2011 and previous census results underline.

Issues surrounding housing affordability are at a peak predominantly because town planners, along with state and federal governments, have failed to effectively cater to the demands and needs of a rapidly increasing population. If you didn’t know better, you’d be forgiven thinking there’s been a “vested” conspiracy to keep inner-city inflation high, with everything possible done to prevent a fall in established house prices by way of generous tax incentives for investors favouring old over new – and intermittent policies to inflate the prices of new housing by way of Mickey Mouse incentives.

I should think first-home buyers are thoroughly fed up with all the reports telling them Australia has an abundance of affordable homes just waiting to be snapped up and when questioned, wafting a finger towards the hills as if commanding a dog to fetch a ball.

It’s one of the reasons extending the city boundaries in a senseless urban sprawl is hopelessly flawed. Greenbelt lands, or designated city borders, were essentially designed to protect against the sprawl of ‘Noddy’ style houses across valuable countryside needed for recreation, food production and essential wildlife preservation.  Not only this, but it’s essential to locate homes within easy commutable distance to employment centres, shopping malls, schools and community facilities. Unless the provision of such amenities has been costed and funded at the time of development, with a fixed-term plan set in motion, the result is “Lego land” suburbs containing isolated homes, disconnected residents, and unhealthy car-dependant families.

Even protected areas are not immune from the gruesome determination of profit-driven developers and investors, who aren’t shy of a little lobbying all in the name of providing a “much-needed supply of affordable accommodation”. Hence why we have groups such as the Adelaide Parkland Prevention Association and community complaints battling poorly designed high-rise towers popping up in inner-suburban localities.    

However, time and time again the same mistakes are made.  Most recently, there’s been a “new vision” for Parramatta Road - transforming it from a bleak “inner-west corridor” to a city of apartments – no doubt in tower format.  Parramatta Road has been named the most congested, poorly maintained strip in NSW.  Six lanes of nose-to-nose traffic on a route you’ll always regret taking. However no new public transport improvements have been timetabled and funded to accommodate the proposed new development of 100,000-plus apartments – aside from ongoing promises to complete the M4 East extension, which is unlikely to occur due to budget cuts.  Hands up who wants to live there?  No one – and most certainly not first-home buyers.

Then, as if to confuse the mystery of the “missing buyers” further, RP Data releases a free rent vs buy report “in time for the spring selling season” providing an “in-depth look at the difference between the cost of paying rent and paying a mortgage across each suburb or town around the country.”

RP Data pinpoints 238 suburbs or towns where “the mortgage repayment is lower than the median rent, based on a principal and interest loan on a variable mortgage rate”.  Obviously the list expands two-fold when assessing interest-only loans, and there are hefty disclaimers explaining how the research was pinned together.  The resulting calculations are derived from the “median” unit price (or house price depending on suburb) and median “weekly advertised rental price”, with the “buyer” purchasing on a 90% loan-to-value ratio at an initial 6.15% variable 30-year loan. (Other examples are calculated on terms of interest only; however the above example is most applicable to the classic first-home buyer profile).

The results, however, assume a great deal – to take median values and use them as a barometer of affordability against a median rental price has significant flaws.  In Carlton, for example, Melbourne's hub of student apartments and one of the suburbs highlighted in the report, obviously the median unit price is comparatively very cheap. However, try and acquire a non-student residential apartment (one worthy of buying – at the very least, providing 40 square metres of floor space) for the median price and it quickly becomes apparent you'll need to pay a good deal more than the median value represented in RP Data’s report.

As for the advertised rental – well, obviously student apartments command a higher rental yield than residential listings, therefore taking the two figures out of context will evidently produce the misleading fantasy that it's cheaper to “buy” than rent.

Similar results can be examined in their other examples and they are numerous.  In fact my own calculations – based on a handful of real sold data examples in outer-fringe locations of Victoria –  show that although the margins between renting and buying reduce considerably the further from the city you pan, it’s still broadly cheaper to rent than buy – especially if the plan is to re-locate within five to seven years.

Perhaps the only “true” representation of suburbs you can profit from purchasing rather than renting would be suburbs in regional and rural locations, where a majority of home buyers would not necessarily want to settle for an extended period, but would perhaps spend a couple of years renting due to work commitments.  This includes mining towns, for example – where rental prices are inflated due to the severe shortage of property.

This aside, until the new home market, hand in hand with suitably equipped urban planners, starts providing an increasing population of first-home buyers with feasible options, we’re not going to see a significant return to growth in construction, which is traditionally motivated by this sector of the market.

Buyers want to locate into suburbs that can provide a lifestyle suited to their needs, and whether you think their demands are unrealistic or not, we’re talking about a consumer market, not desperate, homeless individuals who are prepared to purchase any old thing because there’s a “free” iPad thrown in for good measure.

The only shortage of property Australia is currently experiencing is a shortage of affordable options home buyers actually want to purchase – and you can’t solve this dilemma with a simple “improvement in consumer sentiment”.