What’s all the fuss about housing affordability?

April 7, 2014 Sam Saggers

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Housing affordability is not a simple topic. In fact, it is such a convoluted topic that we need a multi-faceted approach when dealing with the issue. Perhaps this is why the question “why is housing unaffordable” receives a myriad of responses, depending upon whom you ask.

What is affordability, anyway?

In its simplest terms, housing affordability means the ability to enter the housing market, taking in cost and availability. The impact of housing costs affects low-income individuals the most, especially when you expand the definition of affordability to take in the costs of running a home, service costs and transportation costs. The ABS reports that from February 2000 to February 2011, wages grew by 61.1%; however, the average loan size during this same time period grew by 102.2%! If wages are not growing at the same rate as housing finance costs, affordability issues arise.

Land Supply

You cannot separate the issue of land supply from that of housing affordability. It’s impossible to have any chance at affordable housing without dealing with the supply of available land. Factors that impact the supply of viable land include the following:

  • Topographical features that complicate or add to the cost of development
  • Approvals process
  • NIMBY for high density developments
  • Environmental complications
  • Urban planning (future development)
  • Poor coordination between agencies causing delays

These are the most common; however, this list is not conclusive. See what I mean by complex?


In his article, How Taxing Housing Diminishes Affordability, Stephen Kirchner, the Senior Lecturer in Economics at University of Technology, Sydney, states that:

  “The pre-occupation of many commentators with the principal residence exemption from capital gains tax and negative gearing has diverted attention from the fact that housing in Australia, far from being supported by the tax system, is in fact very heavily taxed. A recent report by private consultancy, the Centre for International Economics (CIE), “Taxation of the Housing Sector in Australia,” prepared for the Housing Industry Association, quantifies the tax burden and its adverse implications for housing affordability.

  “The tax burden on new housing includes direct taxes such as the goods and services tax, stamp duty, land tax and council rates, as well as a variety of indirect taxes on inputs into housing and hidden taxes that arise from the planning and approvals process. CIE estimate that these taxes account for 44% of the purchase price of a representative new home in Sydney or around $267,879. Most of the burden of these taxes falls on homebuyers and not homebuilders because the demand side of the housing market is less price sensitive than the supply-side.

  “The tax burden on housing also accounts for much of the financing cost of a new home and thus the burden of mortgage debt and associated interest payments. The cost of financing the tax component of the price of a new house in Sydney is equivalent to 33% of the after-tax income of a young couple aged between 24 and 35 on average wages. The burden is even higher in the first year when stamp duty is paid, accounting for a staggering 72% of after-tax income.

  “Australia’s under-supplied housing market and housing affordability problem is largely due to the tax burden on housing. Abolishing the principal residence exemption from capital gains tax and negative gearing would only add to this tax burden and further reduce housing supply.

  “The solution to Australia’s housing affordability problem is to build more and cheaper houses. This can only be achieved by easing the tax burden on housing and not through the abolition of existing tax concessions.”


Affordability is inexorably tied to mobility. Housing mobility gives individuals the freedom to choose locations that best serve their interests. Infrastructure built to meet the needs of a population helps improve housing affordability by easing the burden of excessive transportation costs.

One example of poor infrastructure planning involves a development in South Africa. Construction of “affordable housing” in areas which lack adequate infrastructure to meet the needs of the populace have resulted in little more than a poverty trap for unlucky residents. Long, expensive commutes eat up any cost savings they may have obtained by moving into a so-called affordable housing situation.

Governments are responsible – through the power of eminent domain and approvals processes – for designing and constructing infrastructure as well as providing a supportive environment for an influx of business to the area. Without a real focus on providing – and maintaining – a strong infrastructure support, any talk of making housing more affordable is nothing more than talk. Without mobility, affordability cannot truly be attained.


We have already established that one key to affordable housing is a ‘competitive land supply’. Governments are aware of this fact, yet their actions are mandated by policies that look good on paper, but fail in the real world. As a result, out-of-control house price increases can weaken economies, retarding both job creation and economic growth.

In the 10th Annual Demographia International Housing Affordability Survey economist, Brian Jensen and urban economist Edwin Mills point the finger at restrictive land use regulations, concluding that these onerous rules played a definitive role in the Great Financial Crisis:

  “Indeed, it is difficult to imagine another plausible cause of the 2008–2009 financial crisis. Popular accounts simply refer to a speculative housing price bubble. But productivity growth in housing construction is faster than in the economy as a whole, and the US has an aggressive and competitive housing construction sector. In the absence of excessive controls, housing construction would quickly deflate a speculative housing price bubble.”

In his analysis of the Demographia Survey, Economist Leith Van Onselen states, that:

  “A key reason for this land price escalation in Australia (as well as in New Zealand, the United Kingdom, and the expensive markets of the United States and Canada) is that the market’s ability to quickly provide low priced new housing supply is being hampered by restrictive land use regulations, many of which have come into effect since the mid-1990s (Sydney has had long-standing limits on housing development on the urban fringe).”

Construction costs

Another component of the housing affordability issue is the cost of building homes. It would seem logical to conclude that an increase in housing costs plays a significant part in housing affordability, but surprisingly, this may not be the case.

In the May 2013 policy paper titled Home Truths Revisited, South Australia’s Senator Bob Day maintains that land prices in South Australia have increased by “more than a tenfold” while building cost increases have essentially seen no increase. Says Day: “One can only conclude that had the private sector been allowed to manage land supply, like it has managed housing supply, we’d be enjoying land prices significantly lower than they are today.”

Day lays the blame squarely at the feet – as do many other experts – of state governments and regulatory bodies who are more concerned with adding to their coffers than releasing any control they have on land supply.

  “While influential bodies like the Productivity Commission and the Reserve Bank focused their attention on demand drivers, like capital gains tax treatment, negative gearing, interest rates, readily accessible finance, first home buyers’ grants and high immigration rates” … “the real culprit, the real source of the problem, was the refusal of state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet the demand.”

The NRAS scheme, although attractive from the outside looking in, fails in its attempts to help low and middle income families according to the not-for-profit Grace Mutual Limited. GML’s director, Andrew Tyndale notes, “Large numbers of NRAS incentives (at least 4,000) were awarded for the construction of student housing,” however “There appears little evidence that this has any positive impact on the middle to low-income families that were the target of the original policy.”

Market Solutions?

Leith Van Onselen suggests a solution – or at least a partial one – could be reached by modelling Australia’s land use policies after the more “liberal land use policies” followed by markets in the US.

  “So under an open market-based model (provided there are not also substantial physical barriers to housing supply), increased demand, such as from reduced lending standards and easier availability of credit, quickly leads to the building of additional low priced housing on the urban fringe, which helps keep house prices in check and reduces the likelihood of speculative housing bubbles developing. Further, highly leveraged speculators are less likely to be encouraged into open land markets since there is little prospect of achieving strong capital gains. Investing in open land markets is, instead, more about rental yield.

  I will add that restrictive urban planning structures should not be viewed as a one-way bet for house prices, with unresponsive land supply also more likely to result in higher levels of house price volatility and boom/bust price cycles – a fact also acknowledged by Demographia. Why? Because strict land-use policies (planning) steepens the supply curve, which makes house prices more sensitive to changes in demand, increasing the likelihood of the housing market experiencing boom/bust price cycles as demand rises/falls.”

Changes to Australia’s tax system, to Government regulations across all levels and a change in how the market functions are topics of debate heard all across the country. Now, I am no economist – not by a long shot, and I won’t even pretend to say that I know everything about housing affordability, but as Australia’s population continues to grow we must find better ways to deal with housing costs.

Bottom line – until Government and industry can resolve these issues, individuals need to be proactive in their efforts to get into the property market.

For example, would-be homeowners can take advantage of financial incentives such as low interest rates (which won’t always be available), first homebuyer credits and stamp duty exemptions.

Other things future homebuyers can do include:

  • Accept the fact that your lifestyle may seriously have to change to allow you to get into a home
  • Live debt free (allowing you to save more money for a deposit)
  • Buy an investment property before buying your principal place of residence
  • Yes, the property market has changed since our parents bought their home; however, it’s still possible to get into the market – it just takes time, a strategy and perseverance.


    How taxing housing diminishes affordability. (N.d.). Retrieved from https://theconversation.com/how-taxing-housing-diminishes-affordability-6486 (accessed February 26, 2014).

    The Consequences of Urban Containment | Newgeography.com, http://www.newgeography.com/content/003928-the-consequences-urban-containment (accessed February 26, 2014).

    Unrealised fringe benefits in the housing market – The Drum .., http://www.abc.net.au/news/2014-01-20/van-fringe-benefits-in-the-housing-market/5208276 (accessed February 26, 2014).

    The politics of home ownership, http://www.nationbuild.com/docs/pdf/hometruths2.pdf (accessed February 26, 2014).

    The Question the Government must agree to, before the Senate .., http://catherinecashmore.wordpress.com/2014/02/03/the-question-the-government-must-agree-to-before-the-senate-enquiry-into-housing-affordability-can-commence/ (accessed February 26, 2014).

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