The housing hurdles

The latest ANZ CoreLogic Housing Affordability report looks back on the year that was and what to watch out for in the market in 2024. What is clear is housing affordability has worsened on three fronts, driven by simultaneous increases in housing values, rent values and interest rates.

"The amount of time required to save a deposit is stark and has real consequences, particularly when we consider the impacts of higher prices for rents and other essentials that prospective buyers face while they are saving.”

So far in 2023, national housing values have increased 7.2 per cent, rent values have jumped 6.8 per cent and the cost of debt has been pushed higher by a 125-basis point increase in the cash rate, taking the total increase to 425 basis points since April 2022.

The number of years to save a 20 per cent deposit at the median income level has increased again to 10 years nationally for the median dwelling value. The amount of time required to save a deposit is stark and has real consequences, particularly when we consider the impacts of higher prices for rents and other essentials that prospective buyers face while they are saving.

The Sydney-Melbourne Divide grows starker

It now takes three years longer to save for a median-value dwelling in Sydney compared to one in Melbourne, the report found. And the portion of income required to service a new loan in Sydney is at its highest level on record.

Over the five years to September, Melbourne is the only capital city where affordability for buyers improved, due to a decline in the number of years to save a deposit. The estimated number of years to save a deposit in Sydney was 12.6 years as of September, compared to 9.6 years in Melbourne.

Quarterly housing affordability metrics – dwellings, Sydney and Melbourne

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The difference in median values between Sydney and Melbourne exploded from around $12,000 in May 2010, to a high of $343,000 as of October 2023.

While both markets have mostly seen similar timings of growth and decline, the Melbourne market saw a steep drop in home values between 2010 and 2012, and softer upswings through the 2010s and early 2020s.

The net result? The portion of income required to service a mortgage at the median income level was 58.1 per cent across Sydney in September, up from a recent low of 37.1 per cent three years prior.

While in Melbourne, the portion of income required to service a new mortgage has also increased with interest rates and higher prices, but by a lesser extent to 44.4 per cent from 31.9 per cent over the same period.

Difference between median dwelling value over time – Sydney and Melbourne

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The more modest growth in Melbourne dwelling values compared to Sydney is due to relatively more supply in Victoria: about 850,000 dwelling were completed across Victoria in the 15 years to June 2023, 21 per cent higher than in New South Wales over the same period, according to ABS building activity data.  

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Worsening affordability in Sydney may have future implications for migration trends as relative affordability of housing can be a factor which draws Sydneysiders to other cities.

This would especially be the case for aspiring home owners, where the difference between the median house value in Sydney and Melbourne was $460,000 in October this year.

In the year to March, ABS data showed a net loss of 2,895 people from Sydney to Melbourne. Sydney could face a disproportionate loss of young people and key workers.

First home buyers: Where to from here?

Since the onset of the pandemic, national home values have increased 35.1 per cent, compared to an increase of 15.5 per cent in units. The median gross household income in Australia rose an estimated 15.6 per cent in the same period.

As a result, affordability metrics for units are much more in line with long-term averages, while house affordability has worsened considerably.

The time to save a 20 per cent deposit nationally has only shifted by about two months for units since the onset of COVID-19, while for houses the time to save has blown out by almost two years.

Housing affordability metrics – houses versus units, national

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Although houses have historically been a preference for owner occupiers, the pandemic meant houses became a less likely path for first home buyers. 

The relative affordability of apartments may make them a more viable alternative. This could mean apartments become a more popular choice for first home buyers.

Regional housing: No longer the affordable alternative

Once a more accessible entry point for first home buyers, regional Australia is no longer the destination for affordable housing.

Back in 2020, affordability metrics across the combined regional market were much better than capital cities for the median income household.

The accumulation of a 20 per cent deposit was estimated to take 7.5 years, 28.3 per cent of income was required to service rents and just 25.4 per cent of income was required to service a mortgage.

The pandemic triggered stronger growth in regional dwelling values, as cities were more subject to lockdowns and many organisations embrace remote work.

The portion of income required to service rent across regional Australia has only slightly eased from a recent high of 32.8 per cent in June 2022, to 32.4 per cent.

This has come off the back of a distinct easing in the rate of annual growth in regional Australia, which peaked at 13.4 per cent in the year to August 2021, and has since eased to 4 per cent in the past 12 months.

As of October, regional Australian dwelling values have grown 44.4 per cent since the start of COVID, compared with a 26.4 per cent uplift across capital city dwellings.

While regional Australia did see some decline in home values in response to rising interest rates, the market appears to have bottomed out in January. There has been 3.5 per cent increase in the market since then.

The year ahead

Housing affordability will likely be shaped by many factors including housing demand and the state of the construction sector.

One promising trend for buyers this year was a rise in properties for sale. New listings across capital cities were below average for the 10 months between September 2022 and July 2023, before showing an unseasonal lift through winter, followed by a strong seasonal bump during spring.

This gradual lift from historic lows offers hope for prospective buyers. Regardless, the deposit hurdle will likely remain the main obstacle for first home buyers in 2024 and beyond.

Australia faces longer-term issues with housing supply, owing to a slowdown in new dwelling approvals and delayed completions across the construction sector.

Despite dwelling approvals increasing slightly since January, approvals averaged around 13,900 a month for the past year, compared to a decade average monthly volume of 17,300.

In other words, new dwelling approvals are very low at a time when new housing supply is desperately needed.

Adelaide Timbrell is a Senior Economist at ANZ Institutional & Eliza Own is Head of Australian Research at CoreLogic.