House prices climbed 20.3% higher over the past year, the fastest rate of annual growth since 1989.

The pace at which dwelling prices are growing might have slowed down in September but concerns about housing affordability remained elevated.

Latest CoreLogic figures show a 1.5% monthly increase in median dwelling values across Australia for the month, similar to the growth recorded in August. The median value now stands at $674,848.

This latest monthly growth pales in comparison to the peak of 2.8% achieved in March.

On an annual basis, the price growth was more pronounced at 20.3%, the fastest annual pace since June 1989.

Hobart was the biggest monthly gainer among all capital cities, hitting an uptick of 2.3%. Adelaide and Sydney followed with a 1.9% increase in median dwelling prices.

Hobart also registered the biggest annual growth with 26.8%, bringing its median value to $659,622, a few thousand short of the national figure.

In terms of dwelling type, the national median value for houses posted a 1.6% monthly and 22.9% annual growth rates during the month, outpacing units' 1.1% monthly and 11.4% annual gains.

Price growth slows as affordability worsens

CoreLogic research director Tim Lawless said the increasing concerns on affordability and the end of some of the government support programs in response to the pandemic led to the moderation in dwelling prices.

"With housing values rising substantially faster than household incomes, raising a deposit has become more challenging for most cohorts of the market, especially first-home buyers," Mr Lawless said.

First-home buyers dwindling home-loan activity reflects the impact of rising home values.

In fact, the number of first-home buyer loans have fallen by 20.5% between January and July.

Interestingly, the number of first-home buyers taking out an investment home loan increased by 45% over the same period. This, however, came from a low base.

"This suggests more first-home buyers are choosing to rentvest as a way of getting their foot in the door," Mr Lawless said.

Why housing has become expensive

AMP Capital chief economist Shane Oliver said over the past two decades, housing affordability has become a "chronic" issue.

"Over the last 20 years average capital city dwelling prices rose 200% compared to an 82% rise in wages,” Mr Oliver said.

“Over the last 10 years dwelling prices went up 58% and wages by only 26%.”

Compared to other countries with similar economies, Australia's housing affordability has deteriorated more profusely.

In fact, the 2021 Demographia Housing Affordability Survey showed that the median multiple of house prices to income for major cities is 7.7 times in Australia compared to 4.8 times in the UK and 4.2 times in the US.

Zooming in to two of the biggest cities, the measures are more extreme at 11.8 in Sydney and 9.7 in Melbourne.

Over the years, it has become harder for first-home buyers to break into the market.

It can take first-home buyers around seven to eight years to save for a deposit if they were to enter the markets of Sydney and Melbourne.

"While government grants and deposit schemes can help speed this up the higher debt burden, it  will take today’s borrowers far longer to pay down than was the case a generation ago," Mr Oliver said.

There are two factors are to blame for the surge in house prices relative to income over the last two decades: low interest rates and the anemic housing supply relative to the growing population.

"Starting in the mid-2000s annual population growth surged by around 150,000 people per annum and this was not matched by a commensurate increase in the supply of dwellings resulting in a chronic shortage," Mr Oliver said.

"The supply short fall relative to population driven underlying demand is likely the major factor in explaining why Australian housing is expensive compared to many other countries that have low or even lower interest rates."

What can be done to improve affordability?

While Mr Oliver believes the market is getting closer to the end of its 25-year bull run, there is still a need to address concerns on lending to address affordability.

"A tightening in macroprudential controls to slow lending is warranted," he said.

"The main options are restrictions on how much banks can lend to borrowers with high debt to income ratios and high loan to valuation ratios and increased interest rate servicing buffers.

“Ideally first home buyers will need some sort of exemption."

The Council of Financial Regulators (CFR) recently said the Australian Prudential Regulation Authority (APRA) is looking to publish a framework about the likelihood of a macroprudential tightening policy in the next few months.

Mr Oliver believes looking into the lending policy is just one of the things needed to be addressed to improve affordability.

"This is just a cyclical response and more fundamental policies are needed to address poor housing affordability,” he said.

“Ideally these should involve a multi-year plan involving state and federal governments.”

Mr Oliver outlined five key priorities, which include:

  • Boosting housing supply by relaxing land use rules, releasing land faster, and speeding up approval processes.
  • Ensuring that housing supply can meet the level of immigration in a post-COVID world.
  • Promoting regional markets to encourage decentralisation.
  • Investing in infrastructure in regional markets.
  • Tax reforms such us replacing stamp duty with land tax and reducing capital gains tax discount.

Photo by Nik Shuliahin on Unsplash.