Australia's home truth is more supply – HSBC

Bubble or boom? This is a key question Sydneysiders and Melbournians are asking about housing prices in their cities and the Australian central bank has become increasingly concerned as noted by Paul Bloxham, Chief Economist at HSBC.

Key Quotes

“The prudential authority has been tightening settings to stem the build-up of risk in the financial system. This year's Federal budget, in May, is expected to have a focus on housing affordability issues. A cause for concern has been that Sydney housing prices are rising at double-digit rates and are up by 75% over the past five years.”

“In Sydney, both detached house and apartment prices have risen strongly. Investor borrowing has surged recently, suggesting an unrealistic expectation of future capital gains. The story in Melbourne is similar, with one key difference. Although detached house prices are up by a strong 60% over the past five years, apartment prices have only risen by 20%. Across the rest of the country there is no boom at all, with housing prices up only 13% over the same period.”

“This contrast between Melbourne houses and apartments helps to answer the bubble question. The root cause of the rise in housing prices is that demand has outstripped supply. But in the case of Melbourne apartments, adequate supply has been brought to market, which has kept price gains in this market more contained. For Sydney and Melbourne, the boom in detached dwelling prices reflects strong demand for the limited supply of houses that are a reasonable commute from employment opportunities.”

“Although double-digit housing price growth driven by investor demand should be a cause for concern, the lack of supply implies that the ramp up in prices is largely supported by fundamentals. Remedying this problem should ideally be about bringing more supply to market.”

“With no other policy tools, the central bank and prudential regulator have focused on demand management by constraining finance.”

“Tighter prudential policy may constrain new finance but might not do much to slow housing price growth. Indeed, if tighter prudential settings constrain housing development, they could boost rather than lower growth in prices.”

“Recent policy proposals, such as allowing first home buyers to access their pension savings or reducing stamp duty for first home buyers, are unlikely to work. In boosting demand they would most likely boost housing prices too. The solution is adding to supply. The recent experience in Melbourne may provide the answer. It may sound simple but, if you want to fix the housing affordability problem, the solution is to build affordable housing. The inner city apartments in Melbourne are what affordable dwellings in the centre of one of the world’s most liveable cities look like.”