Comprehensive Analysis: Housing Affordability in Australia

This report provides a comprehensive analysis of housing affordability in Australia, addressing the challenges faced by the current generation in entering the real estate market. It delves into the techniques and tools used to assess the situation, including Equivalent Uniform Annual Cash Flow, Present Worth, Internal Rate of Return, Modified IRR, and Cost Benefit Analysis. The report highlights key factors such as increasing property prices in Sydney and Melbourne, shifts in interest rates, and inadequate supply responses. It explores the impact on homeownership, the role of Airbnb, and the resulting economic risks. Furthermore, the report presents solutions suggested by experts, such as council planning adjustments, changes to tenancy laws, land tax implementation, and policies to address housing affordability issues. The report concludes by referencing relevant literature, providing a thorough overview of the housing affordability crisis and potential remedies in Australia.

Housing Affordability in
Australia

Table of Contents
INTRODUCTION...........................................................................................................................3
1. LITERATURE REVIEW............................................................................................................3
1.1 Overview of Project Housing Affordability in Australia Techniques and Tools.................3
1.1.1 Equivalent Uniform Annual Cash Flow..................................................................3
1.1.2 Present Worth...........................................................................................................5
1.1.3 Internal Rate of Return.............................................................................................6
1.1.4 Modified IRR............................................................................................................8
1.1.5 Cost Benefit Analysis...............................................................................................8
2.2 Solution suggested by the experts.........................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Affording a house in today's world is considered as a very difficult task. People want
their own houses but due to lack of finance they are not able to buy a house for themselves. The
situation is same in Australia, due to unaffordable houses, the next generation is becoming
dependent on their parents. This has created a fear also in Australians that they will never own a
property because of these crisis.
1. LITERATURE REVIEW
1.1 Overview of Project Housing Affordability in Australia Techniques and Tools
Unaffordable housing situation in Australia has created a situation where the current
generation is becoming highly dependent on their parents which is not the culture of Australia.
There children move out of their parents houses once their bachelors is over to become
independent but because of these problems, they are not able to take a house on rent or buy a
house for themselves. According to the research done by Core logic. It was found that approx
62% children decides to live with their parents because they could not afford to move out. The
Australians are struggling to enter the real estate market as the rates of the property is very high
ans so is the rent of the houses.
1.1.1 Equivalent Uniform Annual Cash Flow
Main reasons due to which housing affordability problem has arise in Australia are :-
 In the last five years, the Sydney and Melbourne property prices are increasing heaving
with Sydney at 73% and Melbourne at 47% which has affected the prices of Australian
housing market.
 The shift from high to low interest rates has increased the borrowing and with this the
buying power in economy is increased.
 There has been an inadequate supply response to demand of the customers which has
created problem in the market.
According to Wood & Ong, 2011 ,the graph that depicts the situation of Australian market are:-

Source:- Market situation in Australia,2017
Illustration : Market situation in AustraliaIllustration 1: Market situation in AustraliaIllustration : Market situation in Australia

Source:- income ratio in Australia,2017
1.1.2 Present Worth
It means the future amount of money converted to its equivalent value now has a present
worth value. Australian housing market is slowing down inspite of continuous economic growth.
The prices of the house rose by 4.65% in eight major cities of Australia during the 2nd quarter of
2016. These issues has created a very bad impact impact on the lives of the people of Australia.
According to Bentley and et. al. 2011, it is depicted that people who has not purchased a house in
Australia before 2015 is not in a condition to buy a house now because of the increasing rates.
The effects were as follows:-
 Around 87% of non home owners are there in Australia and they said that it doesn't seem to be
possible in future also.
 Reports also says that Airbnb is also forcing people of Australia for renting out properties which
has decreased the housing affordability,
 The proper market of Australia has pushed the rents to a very high level which has created
problem for the people who could not afford a house.
Illustration 2: income ratio in Australia

 The students who want to be independent but they are not able to because of the increasing rates
and dwelling in Australia.
 Some are saying with their parents to save money till a certain age and some are not getting a
house in their savings so they have to be dependent on their parents.
Source:- Present value of houses in Australia, 2017
1.1.3 Internal Rate of Return
Internal rate of return means the rate of return where the particular projects net present
value equals to zero. It calculates the maximum rate of interest. It is generally used to evaluate
the attractiveness of a project or investment. The risk that the economy is facing because of this
crisis are that the houses are left empty but the amount charged by the owner is not decreased. As
per the researches done, it was known that the people was living in their rented house were told
ton move out of their house because that property was under Airbnb now who want that property
to be empty. This is the situation in Australia and it is forecasted that it will same in the coming
years also only if the dwelling is stopped the situation can improve there. The graph which
shows the condition of mortgage repayment in Australia is given below:-
Illustration 3: Present value of houses in Australia

Source:- Repayment situation of loan in Australia, 2017
Source:- Risk in economy,2017
Illustration 5: Risk in economy
Illustration 4: Repayment situation of loan in Australia

1.1.4 Modified IRR
This technique is used to attract Investors towards the project. It mainly deals with two
factors which are:-
 Problems described by IRR
 Methods of applying MIRR which are discounting method and Reinvestment technique.
The interest rates charged by banks should start increasing so that the buying power of people is
decreased and the economy should come in control. The investors are playing a significant role
in the residential properties in Australia. Some of the effects are :-
 Apartments that are made in Sydney and Australia is least attractive as per the reviews
and also area in which they are made is also not much developed which means that the
investment done by the investors is in loss now.
 The Australians has left a strong mark in the Australian housing market by having a
share of almost 60% in market.
 The investors are forced to become independent on capital growth due to low net income
of the residents there.
1.1.5 Cost Benefit Analysis
The cost benefit analysis of housing affordability in Australia is conducted to analyse the
situation of houses and people. Various market based approaches like stated preference, revealed
preference, subjected well being approach, direct assessment is used to do cost benefit analysis.
New south Wales, Sydney consists of most expenses housing of Australia whereas Tasmania has
the cheapest. So, the Govt. of Australia should try to bring a balance in prices by little bit
reducing the process in Sydney and increasing where ever required.
The whole outlook of the problem in Australia can be described as :-
 Sydney and Melbourne who has seen the highest gain in the market is facing huge risk
now.
 Prices are supposed to fall this year too but it is expected to grow in next year .
 The other capital of Australian economy is seemed to have moderate growth in the
coming year but it is expected to see a down fall in 2019 as forecasted b the data analysts.
 It is estimated that if the rent falls in the economy then the amount of loss caused to the
investor will be around 15 to 20%.

2.2 Solution suggested by the experts
There are various solutions which are suggested by different people in the economy but
to implement them is a difficult task. Some of the recommended measured were like;-
 the council planning restrictions should be made consistent and more relaxed and then
density of housing in Australia should also be increased.
 Some changes are required to be made ion h tenancy laws for the people who are long
term renters ad have no future plans to shift.
 Annual land taxes should be charged by the government instead of various transaction
taxes like stamp duty ad others.
 Capital gain should be charged as a large component by the income tax officers.
 Policies should be made to focus on poor housing affordability problems and should try
to improve the supply in the market.
These are some of the steps which were presented by the experts. According to Henman
& Jones, 2012 , if these solutions are implemented then there are chances improvement in
housing affordability problems in Australia. It is observed that Australia has high no. of
immigrants which means that the need of affordable houses is very much in Australia. The big
problems that is arising with housing affordability is the there is too much demand for houses
and that too big houses and the investors also adds up to the demand which then becomes
unaffordable.

Source:- Housing Affordability,2016
Illustration 6: Housing Affordability

REFERENCES
Books and Journals
Bentley, R. and et. al. (2011). Association between housing affordability and mental health: a
longitudinal analysis of a nationally representative household survey in Australia.
American Journal of Epidemiology. 174(7). 753-760.
Henman, P., & Jones, A. (2012). Exploring the use of residual measures of housing affordability
in Australia: Methodologies and concepts (No. 180, pp. i-35). Australian Housing and
Research Institute.
Kupke, V., & Rossini, P. (2011). Housing affordability in Australia for first home buyers on
moderate incomes. Property management. 29(4). 357-370.
Mason, K. E. and et. al. (2013). Housing affordability and mental health: does the relationship
differ for renters and home purchasers?. Social science & medicine. 94. 91-97.
Rowley, S., & Ong, R. (2012). Housing affordability, housing stress and household wellbeing in
Australia.
Wood, G., & Ong, R. (2011). Factors shaping the dynamics of housing affordability in Australia
2001–06. Housing Studies. 26(7-8). 1105-1127.
Worthington, A. C. (2012). The quarter century record on housing affordability, affordability
drivers, and government policy responses in Australia. International Journal of
Housing Markets and Analysis. 5(3), 235-252.