With surging housing prices and stagnated wage growth, many people believe that housing affordability is getting worse in Australia. However, if we see things from a different perspective, it might be easier to buy a house now due to the low interest rates and high saving rates. Why housing affordability is important? Housing affordability generally means the relationship between housing expenditure and household income. It can affect society from both economic and social perspectives. Let’s say Bob and Mary are a newly married couple. They both work as baristas in a café in Sydney. They are now renting an apartment in Sydney and the rental costs are 40% of their income. They have to set aside a relatively large proportion of their income for housing costs and so they can spend little money on entertainment such as going to a fancy restaurant and travelling. From the economic perspective, inefficient consumer expenditure is detrimental to economic development. Businesses such as cafes, restaurants and cinemas cannot have enough support, and workers like Bob and Mary cannot have satisfying wages. Therefore, it is even harder for normal people to afford a house. Since Bob and Mary can just afford a small apartment, they are not planning to have kids in the near future. Also, they often complain about the high housing costs in Sydney to their friends in regional NSW and so many of their friends are not willing to come to Sydney for study or work. From the social perspective, high housing costs may have impacts on family formation and demographic trends in an area. The city may be less favourable for young people and become less energetic. What caused the record high housing prices? The surging housing price has been widely discussed in Australia in recent years. Upon our analysis, we believe that the rapid increase in demand and slow improvement in supply led to a higher housing price equilibrium. On the one hand, the demand for housing has been strong in recent years. The continuous increase in immigrants, as well as international students and workers, led to the steady growth of the population in Australia. According to ABS, nearly 30% of the Australian population were not born in Australia and the population increased by around 200,000 due to net overseas migration. Every year, there is new blood in the housing market in Australia. Besides, the low home-loan interest rates have encouraged more people to buy properties. In 2021, the cash rate in Australia was cut to a record low at 0.1%, which showed the sign of lower interest rates for banks. People are encouraged to take out loans and they just have to pay back the loans with little interest. With such low interest rates, many people consider it as a good chance to enter the property market. Finally, speculative demand led to more property investments. With the growing population and low interest rates, people expect that housing prices will increase rapidly in the future. They start to consider property as a safe and profitable investment and so more and more money flew into the property market. On the other hand, the supply of dwellings has failed to match the strong demand. According to National Housing Supply Council, the gap between housing demand and supply will continue to increase and the expected shortfall will be around 640,600 dwellings in 2029. The growth of supply cannot keep up with the pace of the surging demand due to complicated planning processes for governments and expensive infrastructure charges for developers. Why houses are more affordable even prices are high? The pandemic has caused many impacts on the economy. People are saving more due to lockdowns and other restrictions and RBA cut the cash rate to a record low to boost the economy. For property investment, high saving rates mean that people have more deposits to pay the down payment and low interest rates imply that they can have less interest repayment, which actually makes them easier to afford a house. Let’s take the Sydney property market as an example. Average annual income | Saving rate | Average annual saving 1990 $24,440 6.7% $1,637.48 2001 $34,481.2 2.9% $999.95 2021 $67,901.6 19.8% $13,444.52 (Table 1, sourced from Australian Bureau of Statistics) Median house prices | Loan | Deposit | Interest rate | Interest repayment 1990 $184,600 $147,680 $36,920 15.15% $22,373.52 2001 $322,500 $258,000 $64,500 6.3% $16,254 2021 $1,300,000 $1,040,000 $260,000 2.36% $24,544 (Table 2, sourced from Australian Bureau of Statistics) Table 1 shows the average income and savings in Australia throughout 30 years and Table 2 shows the Sydney housing prices and interest rates during the same period. In Table 2, the loan-to-value ratio is 80%. According to these two tables, we could get that it would take around 22.5 years to save the down payment in 1990, 64.5 years in 2001 and only 19.4 years in 2021. In the past, Australians tended to consume most of their income and save little, while today, Australians are saving more which makes it easier for them to have enough deposits. Also, we could calculate that the ratio between annual interest repayment and annual income was 15.15% in 1990, 47.1% in 2001 and 36.1% in 2021. Compared with 20 years ago, people now can set aside a smaller proportion of income to pay the interests. The pandemic has posed a lot of risks to the housing market, but it also brought out chances for many Australians. With low interest rates in the following years, it is now a good time to consider entering the property market for people who are willing to save.

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