Price falls won’t fix housing affordability, big four banks tell Senate inquiry

Australia’s major banks say the country’s housing shortage remains the central affordability challenge, with NAB warning meaningful improvement could take the better part of a generation.

Falling property prices will not be enough to restore housing affordability in Australia, with senior economists from the country’s major banks warning a Senate inquiry that the underlying shortage of housing remains the more difficult problem to solve.

The Senate Select Committee on Intergenerational Housing Inequity has been examining the widening gap in housing outcomes between generations, including home ownership, affordability, supply and the barriers confronting younger Australians trying to enter the property market.

During evidence before the inquiry, NAB chief economist Dr Sally Auld warned that even a significant correction in property prices would not be enough to solve the problem.

NAB is forecasting a peak-to-trough decline of around 7 per cent across Australia’s combined capital cities. But Dr Auld said Australia’s affordability problems were the result of structural pressures that had accumulated over decades.

“Meaningful improvements in affordability will only be achieved through a sustained increase in housing supply over a long period of time,” she told the committee.

Dr Auld said addressing the imbalance was likely to take “the better part of a generation to resolve”.

A price correction is not the same as affordability

The distinction is important.

Lower property prices can reduce the amount buyers need to pay for a home, but affordability is influenced by far more than the sale price alone.

Household income, interest rates, borrowing capacity, deposit requirements and the availability of suitable housing all determine whether a buyer can enter the market.

At the same time, falling established property values can place additional pressure on the feasibility of new housing projects.

If the expected sale price of a completed development falls while construction, labour, financing and land costs remain high, some projects may no longer stack up financially.

That creates one of the central tensions facing Australia’s housing market.

Prices can soften while the country remains undersupplied.

Supply remains the central challenge

Dr Auld told the inquiry that increasing Australia’s housing stock would require more than simply approving additional developments.

Planning processes, infrastructure availability, skilled labour shortages and construction productivity were among the constraints affecting the industry’s ability to deliver homes.

Some projects, she noted, receive approval but are never ultimately built.

The latest Australian Bureau of Statistics data illustrates the challenge facing the construction pipeline.

Seasonally adjusted dwelling approvals fell 3.6 per cent in July to 17,687.

Approvals for private sector houses declined 4.2 per cent to 10,199, while approvals for private dwellings excluding houses fell 0.4 per cent to 7,119.

The state figures were mixed.

Total dwelling approvals fell 13.9 per cent in Queensland and 8.1 per cent in New South Wales during July, while Victoria recorded a 9.7 per cent increase.

The figures reinforce a distinction frequently overlooked in the housing debate: an approval is not a completed home.

A development must still secure funding, remain commercially viable, obtain labour and materials and move through construction before it adds to the housing stock.

Westpac points to decades of structural change

The Senate inquiry also heard that Australia’s affordability problems cannot be attributed to housing supply alone.

Westpac chief economist Dr Luci Ellis, a former Reserve Bank assistant governor, pointed to longer-term changes in Australia’s financial system and economy.

She said the shift to lower inflation and the effects of financial deregulation had allowed households to service larger mortgages relative to their incomes, contributing over time to higher house prices relative to household earnings.

Population growth has added another dimension to the challenge.

Strong migration can produce broader economic benefits, Dr Ellis told the inquiry, but a rapidly growing population increases housing demand where construction cannot respond at the same pace.

Committee chair Senator Barbara Pocock also challenged the idea that simply increasing aggregate housing supply would address every part of the affordability problem, pointing to issues including public housing and the availability of lower-cost homes.

The exchange highlighted the complexity of the task confronting governments.

Increasing the total number of homes does not necessarily determine where those homes are built, what type of housing is delivered or whether the resulting properties are affordable for first-home buyers.

What it means for the property industry

For Australia’s real estate sector, the evidence suggests the next phase of the housing market may be more complicated than a straightforward story of rising or falling prices.

Agents could operate in markets where property values have softened while buyers continue to struggle with borrowing capacity.

Developers may face strong underlying demand for additional housing while simultaneously finding new projects harder to make financially viable.

Property managers may continue to experience pressure from limited rental supply even where established sales markets weaken.

That means Australia’s affordability challenge is increasingly becoming a question not simply of what homes cost, but how quickly the country can convert demand, land and development approvals into completed dwellings.

The construction pipeline remains uneven, while the evidence presented to the Senate inquiry suggests Australia’s major housing imbalance cannot be corrected through one property cycle alone.

For buyers, falling prices may provide some relief.

But for the broader housing system, the warning from some of Australia’s most senior bank economists is that the harder problem remains the same: delivering enough homes to meet demand.