With thanks to Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP
Key Points
- With the latest surge in home prices relative to incomes, housing affordability is at a new record low. This is driving a decline in home ownership and rising inequality.
- The key to sustainably improving housing affordability is to:
- Align immigration with housing supply.
- Boost housing supply.
- Encourage decentralisation.
- Implement targeted tax reform.
- There are no quick fixes – and we have a long way to go.
Introduction
Housing affordability has been a persistent issue for decades. While once a cyclical concern tied to high interest rates, since the early 2000s it has become a chronic problem. Today, with national home prices at record highs, affordability has hit an all-time low. This is alarming for a country with abundant land and a relatively small population that once prided itself on the “Aussie dream” of home ownership.
This article explores what can be done to address the problem – and why, in the face of calls to slash immigration or radically densify our cities, we need balanced solutions that avoid creating bigger issues.
Why Housing Affordability Keeps Getting Worse
Australian housing is expensive by almost every measure: relative to income, rents, long-term trends, and global standards. The ratio of average dwelling prices to wages and household income has more than doubled since 2000 and is now at record highs. The time taken to save a deposit has also doubled over the last 30 years – now sitting at around 11 years.
While first home buyers can enter the market with a 5% deposit, this often means taking on 95% debt. Unsurprisingly, home ownership rates have been falling, contributing to growing inequality.
Key Drivers of Poor Affordability
The causes are widely debated, but the main drivers are:
- Falling interest rates and easy credit: From the 1990s to the pandemic, lower rates boosted borrowing capacity. However, affordability has worsened even as rates have risen.
- Housing supply lagging demand: Red tape, capacity constraints, and planning delays have meant supply hasn’t kept pace with population growth.
- Urban concentration: Most people live in a handful of coastal cities, adding pressure to already tight markets.
The fundamental issue is a demand-supply mismatch. Since the mid-2000s, population growth surged – largely due to immigration – but housing completions didn’t keep up. This created a chronic undersupply, estimated at 220,000–300,000 dwellings today.
Four Key Solutions
High house prices and debt levels pose two major risks: financial instability and worsening wealth inequality. While some advocate for a housing market crash, that would likely trigger a deep recession and high unemployment – making home ownership even harder.
Here’s what will work:
1. Align Immigration with Housing Supply
Immigration has clear benefits for Australia, but it must be matched to housing capacity. Our estimate suggests reducing immigration to around 200,000 per year (from 316,000 in the year to March) until the housing shortfall is addressed.
2. Build More Homes
The government’s target of 1.2 million homes over five years is welcome, but progress is slow. To meet the goal, we need:
- Relaxed land-use rules.
- Less red and green tape.
- Faster construction methods (modular and pre-fab).
- More tradies – through training and skilled migration.
- A focus on units and build-to-rent housing.
3. Encourage Decentralisation
Regional Australia needs better infrastructure and housing supply to attract population growth away from congested cities.
4. Tax Reform
Replace stamp duty with land tax to make downsizing easier, and reduce the capital gains tax discount to curb speculative investment.
Avoid Extreme Measures
While addressing affordability, we must avoid creating new problems. Immigration brings major benefits – from labour supply and budget support to cultural diversity and education exports worth over $50 billion annually. Cutting it too far would harm the economy.
Similarly, radical densification of cities – such as allowing three-storey units everywhere – risks destroying the “Aussie dream” and driving inequality higher. Instead, moderate increases in density should be paired with long-term decentralisation strategies.
Bottom Line
Housing affordability is a complex challenge with no quick fixes. But by aligning immigration with supply, boosting construction, decentralising growth, and reforming taxes, we can start to restore the dream of home ownership – without sacrificing what makes Australia great.