What Affects Housing Affordability?

November 23, 2018 |
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‘Affordability’ is the buzzword across every Sydney real estate market today.

With median house prices above $1 million, many buyers have had to rethink their homeownership strategy. Today we’ll take a big-picture look at the factors that drive the price of real estate and the concerns for NSW buyers.

1. Supply

The most obvious factor influencing housing affordability is the number of houses available in a given market—the ‘supply’. In suburbs with fewer homes or less available land on the market vendors have the luxury of charging a higher price, while bidders at auction are more likely to push their budget limits higher.

2. Planning restrictions

Another factor that can compound supply issues is planning controls that restrict building in a particular area. If there are limits on building new houses in suburbs closer to the CBD, for example, addressing the issue of supply becomes even more difficult.

3. Population growth

A third factor related to supply is the number of people who want to live in a given area. If a suburb is more desirable due to factors like proximity to employment hubs or transport connections, it may be less affordable overall.

4. Lending

The way lending operates is one of the more complex factors influencing the cost of housing. Here are a few of the ways lending can have an impact:

  • Lower interest rates can encourage banks to lend more money, which can drive up the cost of housing as buyers are able to pay more. Conversely, higher interest rates tend to result in lower house prices.
  • Limits on the amount of money banks are able to lend investors can make housing more affordable, freeing up housing options for those with lower budgets.

5. Government policy

State or federal government policy can go some way towards taking the pressure off buyers. Policy can change things like:

  • The cost of a home loan through stamp duty concessions, or the first home owner’s grant making it easier for first time home buyers to enter the market.
  • The amount of land available for medium density housing in a given area, adding to supply.
  • The type of housing allowed in a particular suburb. For example, the government could create a policy that asks for more housing for low-income residents.

What are the affordability concerns for NSW residents?

According to the latest report from property data provider CoreLogic, just 19% of NSW residents own their home outright. NSW has the highest percentage of people living in apartments at 22%, while 24% of residents are currently living with their parents in order to save a house deposit.

According to the report, NSW residents consider stamp duty, foreign buyers, investors in the market and having a deposit as the biggest obstacle to housing affordability. Interestingly, the report also shows that for almost a third of potential sellers Australia-wide, concern about the cost of stamp duty and the ability to buy back into the market is stopping vendors from listing their property— which further compounds the supply issue.

Clearly, housing affordability is influenced by more than one factor. For NSW buyers and sellers, understanding these factors is important when it comes to making the right decision in an often challenging market.

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