The issue of housing affordability has taken a decade to unfold and cannot be fixed overnight. Furthermore, recent economic conditions have increased the strain on household living costs, leading to further affordability problems.

High fuel prices and 12 consecutive interest rate rises have directly hit individual's hip pockets, not to mention record high world food prices that have thwarted potential home buyers from owning the great Australian dream‘. Some commentators say that this could be a good outcome as it will allow supply of housing to catch up with ever increasing demand. The ensuing months will confirm this theory.

International events, including the sub-prime crisis unfolding in the United States, provide a glimpse of problems that arise from changes in supply and demand. In the US, the grip on the supply of credit has significantly reduced the demand for housing, which in turn is driving down prices. This is reflected in the Standard and Poors/Case Shiller index that shows a reduction of house prices in America's top 20 cities by 15.8 per cent in the year to May. This dramatic decrease in demand and increase in foreclosures due to the credit crunch ‘has resulted in a glut of houses on the market.

Australia has seen falls in house prices too, with Melbourne prices dropping 0.6 per cent for the June quarter and experts suggesting national falls’ in the order of 10 per cent within a year. Unlike the US, however, Australia is not grossly oversupplied with houses and nowhere are there suburbs with empty homes awaiting mortgagee sales. On the contrary, Australia is more comparable with the United Kingdom, which is short approximately three million homes.

In these two continents it is the scarce supply of finance that is forcing house prices to fall. Access to mortgage products remains tight with the amount of domestic funding for housing dropping by 20 per cent since November. Banks are scrutinising loans much more carefully and more conservative valuations are reducing the chance of home loan approval. Slowing approvals, combined with the higher interest rates and declining consumer confidence will inevitably continue to provide headwinds for the housing market.

Meanwhile on the supply side, a 0.7 per cent slump in building approval rates for the month of June has slowed the increase of supply. The steadying of supply comes after slower sale rates, lower prices and increased development costs have provided challenging conditions for property developers. In turn the benefit of easing demand has not impacted to the same extent as if supply continued at its previous rate, still leaving us with a continuing housing affordability crisis.

Overall, despite a moderation in the price of housing, we are seeing that potential home buyers are still unable to afford homes due to the rising cost of credit and living expenses. At the same time the easing of building approvals is not helping Melbourne's growing population, with an increase of 1,500 new people every week. As such, demand for accommodation is still present with only one alternative to purchasing property – renting.

It is still uncertain whether property prices will continue to fall throughout the year, nor is it clear which direction interest rates will go. The one thing that is certain is that rent prices will surge with ever increasing demand and with limited supply of housing.

Joshua Davis
Consultant

jdavis@moorestephens.com.au