The housing affordability crunch: how did Melbourne get here?
In the early 2000’s there was a concerted policy push (Melbourne 2030) to contain urban sprawl as new urbanism, green wedges and the preservation of agricultural land took centre stage. By 2005 net overseas migration began to significantly kick up while the affordability debate began to fuel a call for policy intervention; tying the issue to a ‘lack of land supply’ on Melbourne’s suburban edge.
The emerging affordability crisis played into the hands of the greenfield development industry and Governments across Australia began to reverse their growth management policies while single purpose authorities were born to roll out master planned communities. This period also coincided with the availability of easy mortgage finance, first home buyers grants and breaks (several in the last two decades), rising household incomes and wealth, high employment rates, household formation and investment. The GFC in 2007/8 continued to push interest rates down in the hope of shielding our economy. At the same time a view began to emerge that the combination of ‘financial and institutional policy levers’ were to blame for the emerging affordability crisis. Other than a small pause in population growth during 2009/10 the rise in median house prices has continued unabated since that time.
As ‘NIMBY’ opposition to infill development began to surface an interesting observation was starting to emerge: that the city-wide growth in house prices at around 3 times over a twenty-year period (see pink shaded area below) was consistent across most Australian cities, reflecting demand drivers (e.g. lower interest rates and easy finance). But as one moved closer to the Melbourne CBD something else kicked in (see graph below, left), a further 4 to 5 times increase in median house prices. It was a lack of land supply in the middle and inner ring suburbs reflecting shifting market preferences. By 2014 the result was an overall 7 times growth in median house prices over a 20 year period in suburbs like Albert Park.
In 2015 RMIT put forward the idea of halving the number of developable greenfield lots on Melbourne’s periphery from 610,000 to 360,000 while significantly re-directing this growth to infill locations. The study ‘8 million by 2050’ study suggested that it is possible to direct much of Melbourne’s growth into the middle ring suburbs while still protecting heritage areas and strip shopping centres. It stated the city’s middle suburbs could accommodate an additional 1 million dwellings by 2050.
It wasn’t until more recently that the Reserve Bank (‘The Effect of Zoning on Housing Prices’) has added its own weight to the debate pointing to a lack of ready zoned land and development opportunities. While RMIT and the Reserve Bank have reflected two sides of the same ‘infill land supply’ coin, with a similar idea for addressing the chronic shortage in housing supply, the Grattan Institute has suggested that “unless the states are prepared to reform their planning systems, the Commonwealth should consider tapping the brakes on Australia’s migrant intake”.
PointData recently plotted the 2017 curve of median house prices against distance from the city, and superimposed it over its previous 2014 graph (see red curve above). Not surprisingly, the situation has significantly worsened in the last 3 years:
- City wide median house prices on the city fringe (50km from the CBD) have risen a further 2-fold to a total 5-fold since 1995 (22 years). Given that the demand-supply relationship is complex and cities are not homogenous (housing type and market preferences), and further that greenfields land supply has met demand over the past two decades, one might assert that this increase is directly related to ‘financial and institutional levers’ and population growth (demand drivers).
- As one moves closer to the CBD the rise is exponential to the point that inner city locations have seen a staggering 9 to 10-fold increase in median house prices over the 22 years since 1995. This reflects a lack of land supply (ready zoned land) as shown by the Reserve Bank analysis. Therefore, one could assert that demand drivers only account for about half of the rise in median house prices, while a lack of land supply in the middle and inner ring suburbs accounts for the other half.
- The average mortgage affordability line, reflecting an average household income; a 80% LVR and a 30% household stress level, has shifted some 15 km further away from the city, from 25km to around 40+ km in just 3 years.
It’s been two decades since the current housing affordability crisis began. One can now conclude with some certainty that the crisis has had nothing to do with a lack of greenfield land supply on Melbourne’s urban fringe. While solutions have recently focused on the delivery of a varied selection of dwellings to cater to a variety of demographic groups the challenge of a housing demand-supply imbalance within 40 km of the CBD remains. Of course there is “no one size fits all” policy and social diversification along with technological advancements in communications, transport, retail, finance, personal management, as well as the way we will work in the future (electronically and logistically as we enter the 4th industrial revolution), will continue to complicate this important issue.