Reviving The Australian Dream

The housing unaffordability crisis in Australia has been highlighted by the results of an international survey which has examined housing prices in 227 cities around the world. 18 Australian cities make it into the list of the 50 most severely unaffordable cities in the world. The worst of these, Mandurah in Western Australia, comes in at sixth on the list, while Sydney is just outside the top ten at number eleven. None of Australia’s cities made the other list, the top 50 most affordable.

The measure is quite easy to understand: it is the multiple of average household income required to buy an average house. In Sydney the figure is 8.6. Housing is considered to be affordable when the multiple is 3 or less. The challenge that confronts us now is: how do we restore the Great Australian Dream?

There are three ways to get the ratio back to a reasonable level. One way is to dramatically reduce the price of housing. The difficulty with this is that all those who have already invested into the market will lose out badly. Worse, those who have borrowed heavily would be wiped out. The second way is to dramatically increase average incomes. As appealing as that might sound for many people, the economic impact of such a shift would also be devastating. Inflation would explode, interest rates would skyrocket, productivity would be undermined, companies would go broke, and unemployment would swamp the community.

The third, and only sensible way is to manage housing prices so that they remain relatively stagnant while the rest of the economy catches up. The most obvious way to do this is to address the readily identified supply issues of land release, development taxes, and timely approvals processes. Even if that could be pulled off, there would still be some pain and suffering in the process of adjustment, primarily among those who have made a livelihood out of speculation, or who have invested on the basis of strong capital growth.

Either way there will be a housing correction, whether it is a savage market driven adjustment that litters the landscape with victims, or a more controlled, managed rebalancing of the price / income ratio which takes the steam out of the speculation business. That’s the choice we have.