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Op-Ed: Why are alarm bells ringing again over housing affordability in Australia?

"First home buyers are grappling to make their way into the market, with the price trajectory undergoing a historic transformation" Kunal Sawhney , CEO, Kalkine Group.

Despite the slowing pace of property price rise, housing affordability continues to remain a cause for concern as prices stay above the pre-pandemic levels. In fact, property prices again surged to unseen levels in September 2021, with the national home value index rising by another 1.5 percent last month.

It seems the soaring property prices are seeing no end in sight, which could create new hurdles for the housing market.

As per CoreLogic, Australia’s housing values soared by a massive 17.6 percent in 2021 up to September and by 20.3 percent over the past 12 months. Rising prices are better reflected in the median housing price of Sydney, which now stands at over $1.3 million. Overall, house values are increasing faster than the unit values across major Australian cities.

A combination of factors is behind the recent surge in housing prices, starting from record low-interest rates and favourable government grants to lack of adequate housing supply. Fears loom that these varied causal factors may not see a resolution anytime soon, which could ultimately delay the onset of the recovery period when prices start to retrace back to their normal levels.

Even as the latest lending data depict a slight decline, its effect on the value of housing has not yet taken shape. In the current scenario, first home buyers are grappling to make their way into the market, with the price trajectory undergoing a historic transformation.

The demand-supply tussle

Australia’s housing supply problem has long been the focal point of policymakers. While building enough houses to support the growing demand may not be an immediate solution, it can help maintain the long-term prices at relatively stable levels. Differing opinions of policymakers on the subject have further delayed developmental projects, with some making excuse that planning alone would not fix the housing sector crisis.

On the contrary, demand-side factors that have sprung up in the wake of the pandemic have given the final push to housing prices, after which there has been no looking back. To be more specific, fear of missing out or FOMO has ruled the minds of most first-time homebuyers who have flocked to the housing market.

Moreover, capital gains tax also appears to be completely ruled out as a remedial measure. Since no party wants to bear the repercussions of introducing the capital gains tax on individual’s main residence, it seems highly unlikely that such tax would be implemented to cease or control the rising demand for property. Good Read: Australian property market going wild: Boom or Bubble?

APRA to the rescue

The Australian Prudential Regulation Authority (APRA) has recently executed a masterstroke to cool off the red-hot property market. The banking regulator has raised the minimum interest-rate buffer that lenders require to account for when evaluating home-loan applications. APRA expects banks to assess new borrowers’ ability to fulfil loan repayments at a new interest rate that is at least three percentage points more than the loan product rate.

APRA’s decision seems justified at a time when the number of individuals borrowing for home loans has substantially increased during the COVID-19 era. The regulator’s move is expected to ease price pressures building in the housing market while limiting the risk of loan defaults. However, the move may to make it difficult for some borrowers to get a mortgage while reducing their maximum borrowing capacity.

Although this macro-prudential measure was much expected, it has emerged a bit sooner, raising the possibility of further actions in the days ahead to temper credit growth. In a way, APRA’s decision reflects the effort being put in to ensure that there is not enough liquidity for investors and buyers to make rampant purchases.

However, it seems to be a drastic step back from the prevailing expansionary policies that have been put into place to promote economic growth amid the pandemic-induced slowdown. Meanwhile, there is a risk that the first home buyers could again be at a disadvantage and get further locked out of the property market. In a way, such regulatory curbs may help buyers who have already been crowded out of the market.

Interestingly, Australia’s ongoing housing affordability crisis has gained the attention of even international bodies like the IMF, which has urged the government to take swift action to prevent house price surge. The IMF wants the government to work on two fronts: tightening the restrictions on lending and ensuring increased flexibility in the planning system to adjust for greater demand.

In the current scenario, Australia’s best resolution to ease housing price pressures can be to gradually deflate the price bubble rather than waiting for it to burst. A sudden hike in interest rates might be more harmful than beneficial to the housing sector. However, small regulatory steps can be the way to achieve stability in the sector. Also read: Top ASX real estate stocks in 2021.





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