Australia’s Housing Conundrum: A Crisis of Supply or the Burden of Low Interest Rates?

Australia’s housing market is under significant pressure, with rising prices and the impact of sustained low interest rates creating difficulties for first-home buyers. Two recent reports offer contrasting views on the causes and possible solutions to this problem.

Henry Thai, in his article “Could low interest rates be hurting Australia’s first home buyers?” states that the low interest rates that have prevailed in recent years have led to rising house prices, effectively pricing first home buyers out of the market. Conversely, ZM Torrazo, in “Housing crisis rooted in insufficient supply, not migration demand: Report,” argues that the principal issue is the insufficient supply of new housing.

Thai’s article centres around a research study conducted by the Australian Housing and Urban Research Institute (AHURI), involving academics from several Australian universities. The report found that house prices have more than doubled over the past two decades, while mortgage rates have dropped, exacerbating affordability issues. “Almost one third of house price growth was due to lower interest rates,” the report revealed1. According to the study, most aspiring homeowners were unable to purchase their first home, with 84% lacking sufficient savings for a deposit and 71% unable to meet mortgage repayment requirements.

“Our research indicates that while both schemes will help some households into first home ownership, the Help to Buy shared equity scheme is likely to be more accessible to people on lower incomes than the Home Guarantee scheme,” said Professor Ong ViforJ, referring to potential assistance programs.

On the other hand, Torrazo’s article draws on a report from the Business Council of Australia (BCA) which argues that the core issue is not demand driven by migration or low interest rates, but a deficit in the supply of new housing.

Business Council chief executive Jennifer Westacott says, “there [are] simply not enough new homes being built to meet demand” at a time when “housing affordability is declining”. The BCA report cites poor planning systems, restrictive zoning, and a lack of “sufficient infrastructure capacity” as reasons for the shortage in housing supply. Westacott emphasised the need for clear planning and coordination among various levels of government, stating, “There needs to be a clear plan for building new homes and infrastructure that is aligned with the growth in Australia’s population”.

The debate on the causes and solutions of Australia’s housing crisis illustrates the complexity of the issue. Regardless of the primary cause, the rising price of homes coupled with a lack of adequate housing supply has proven to be a hurdle for many Australians, particularly first-time buyers.

While it’s clear that both increased housing supply and comprehensive assistance schemes for low-income buyers will play a significant role in addressing these issues, the balance of these two factors and how they are implemented will likely be crucial in the ultimate outcome for Australia’s housing market.

References:

Thai, H. (2023). Could low interest rates be hurting Australia’s first home buyers? https://thepropertytribune.com.au/market-insights/could-low-interest-rates-be-bad-for-australias-property-market/

Torrazo, Z.M. (2023). Housing crisis rooted in insufficient supply, not migration demand: https://www.smartpropertyinvestment.com.au/research/24698-housing-crisis-rooted-in-insufficient-supply-not-migration-demand-report