Housing affordability worsens in major cities: Biggest price rises at entry-level, new data shows

Entry-level property prices are rising faster than other markets in some of our largest cities, pushing the Great Australian Dream of home ownership further out of reach for first-home buyers.

The top end of town led the price rebound as cities emerged from coronavirus restrictions, but it’s the cheapest homes now driving the market recovery – and in some capitals, entry-level prices are hitting new peaks.

Price rises in the affordable end of the market outpaced the midway point over the past five years in multiple cities, new Domain data modelling shows, climbing at more than double the rate in Melbourne.

The new figures — which break down property value growth over the past five years by price percentile — show Melbourne’s lowest house prices increased almost 45 per cent between the September quarters in 2015 and 2020, and at $465,000, are now more expensive than at the peak of the market, despite the subsequent market downturn and the economic impacts of the pandemic.

By comparison, house prices at the 50th percentile (the midway point of the market) rose less than 19 per cent over the five years to $725,500 and were still $14,500 short of their boom-time price.

Entry-level house prices also saw the steepest gains in Brisbane and Canberra, but the difference between price points was less stark. In Brisbane, the bottom of the market jumped 29 per cent to $355,000, compared to a 21 per cent jump at the 50th percentile to $585,000. In Canberra, they jumped about 35 per cent to an entry price of $485,000 – the highest in any of the capital cities – and 30 per cent to a mid-market price of $750,000.

In contrast, the most expensive properties in Sydney and Adelaide saw the strongest growth, climbing about 17 per cent and 28 per cent respectively.

Cheaper houses in Sydney still outpaced the city’s median growth, climbing about 12 per cent at the 5th percentile to $480,000 – just $20,000 short of its peak. The middle of the housing market rose about 8 per cent to $930,000 and is $70,000 shy of its 2017 peak.

Entry-level prices in Adelaide saw slightly lower price growth than the middle of the market but still rose by 12 per cent to $252,000.

Perth, emerging from a prolonged market downturn when the pandemic hit, also saw entry-level price growth track lower than that for mid-level homes – with prices down about 12 per cent and 7 per cent respectively. However, the cheapest houses saw the strongest growth over the year to September, climbing 4.6 per cent to $265,000.

Domain senior research analyst Nicola Powell said increased first-home buyer activity had driven the gains in lower-end property values, particularly in Melbourne.

“Over the five-year period the lower end of the market has seen extraordinary growth,” she said. “It really shows the heightened demand we’ve seen for lower-priced housing in Melbourne.”

Dr Powell said the top of the market led the previous downturn in Melbourne, while the lower end had been more sheltered by first-home buyer incentives. She said prices for cheaper properties had also held up incredibly well since the pandemic hit, with only marginal declines.

AMP Capital chief economist Shane Oliver said it had been a messy five years for the property market, particularly for Sydney and Melbourne, with both upswings, downswings and the economic fallout from the pandemic.

“The bottom end had lagged through the boom years up to 2017, and it’s played catch up to some degree, particularly in an environment through much of those years in which there have been constraints on how much people can borrow –  so that’s limited buying power for cheaper property,” he said.

Tighter lending standards also saw investor numbers drop from their record levels in 2015, with a rising number of first-home buyers taking their place as eligibility criteria for stamp duty exemptions and concessions were widened across numerous states and territories. Falling interest rates, now at a record low of 0.1 per cent, have also fuelled buyer demand.

“Stamp duty concessions would have played a role particularly in the past year or two,” Dr Oliver said. “We’ve seen first-home buyers come back with a vengeance … and they’re more concentrated buying at the lower end.”

Dr Powell added: “If you have incentives in the market that are cut off at a certain threshold, you do tend to get a clustering of sales under that price.”

This year has also created a window of opportunity for first-home buyers with secure work to get into the market for less than it would have cost them late last year.

As RBA governor Philip Lowe recently put it:  “It’s actually a good time if you’re a first-home buyer … interest rates are low, they’re going to stay low.

“There are very, very large government incentives for first-home buyers and housing prices really are – across the country – no higher than they were three years ago.”

This was echoed by NAB economist Alan Oster, who told Domain low interest rates and the retreat of investors created an opportunity for first-home buyers.

He added the potential transition away from stamp duty towards a property tax in NSW was a good idea, and would reduce upfront costs for first-home buyers. But, he noted, this could potentially see prices climb if buyers added the duty saving on to what they were prepared to spend.

“It’s hard to tell at this stage, but you would expect people at the bottom end to take [the upfront saving] and run with it, and expect prices to go up,” he said, adding this had happened in the past with increases to stamp duty exemptions.

NAB has revised its forecasts for the property market as the unemployment rate and drop in migration has caused less grief to the market than expected. Mr Oster is expecting house prices to rise about 6 per cent nationally next year, with Sydney and Brisbane tipped to see the strongest growth.

Government incentives to support the housing sector amid the pandemic also boosted demand and mitigated the risk of price falls.

“[That] tends to make people feel wealthier and therefore keep their spending stronger than [if prices saw a substantial fall, but] I don’t think the government is trying to deliberately fire up asset prices and the Reserve Bank is certainly not either.”

His sentiments were echoed by Dr Oliver, who is forecasting a national rise of about 4 per cent, but stronger gains of between 5 and 10 per cent outside of Sydney and Melbourne.

NSW treasurer Dominic Perrottet said the proposed scheme’s impact on house price was expected to be minimal and would provide greater flexibility for buyers and reduce upfront costs when moving.

He said the state government helped more than 100,000 first-home buyers get onto the property ladder – and save more than $1.5 billion in stamp duty – over the past four years, but acknowledged population increases, record low interest rates and supply constraints had put upward pressure on prices, especially at the affordable end.

“We have also more than doubled our annual housing construction rates over the past decade, but at the same time population growth, which is dictated by Commonwealth policies, has seen the number of people needing a home in NSW grow by more than the entire population of Tasmania,” Mr Perrottet said.

He noted the Productivity Green Paper released by Treasury this year highlighted the need for housing supply to better match demand and made a range of recommendations such as creating a more flexible and fast planning system to boost supply and make housing more affordable.

Asked to respond to suggestions that stamp duty exemptions and concessions drove up entry-level prices, Mr Perrottet said: “While everyone has a view on how to make housing more affordable, the reality is there is no silver bullet. If there were no assistance in place, there would be a loud chorus calling for support.”

With property prices edging higher, first-home buyers are rushing into the market, with the number of owner-occupier first-home buyer loan commitments recently reaching its highest level in more than a decade.

“What we’re seeing now is a lot of pent-up demand that didn’t occur during COVID,” said Charter Keck Cramer director Angie Zigomanis.

However, there was also a demographic bulge fuelling demand, as more millennials had children and looked to upgrade to houses, which would continue for some years, he said.

Changing housing preferences off the back of lockdowns could also push more people into the housing market, Mr Zigomanis said. This, combined with the drop off in overseas migration, could leave inner city-apartment markets exposed to price weaknesses for several years.

The data shows entry-level unit prices are already cheaper in Brisbane, Canberra and Perth than they were five years ago, down about 9 per cent, 4 per cent and 14 per cent respectively since 2015.

However, over the past year, the strongest price growth in Perth was again for the cheapest units, which climbed about 4 per cent to $190,000.

Entry-level prices in Sydney have continued their rebound from the downturn, recording strong gains over the past year, but were only up about 2 per cent over the five-year period to $409,000 – though this was higher than the 0.7 per cent increase for the middle of the market.

The cheapest units in Adelaide were up 8 per cent to $197,000, but this was more subdued than the 27 per cent median price increase.

Dr Powell said Brisbane and Canberra were affected by high levels of unit supply in recent years, which helped to contain prices, and Perth was still recovering from its multi-year downturn. Adelaide has a smaller unit market, primarily in the inner city where prices would be higher, and had seen a potential improvement in the types of apartments hitting the market.

Melbourne was the only market where entry-level units recorded the strongest growth – with the 5th percentile up about 17 per cent to $305,000, with almost a third of that growth in the last year alone. Unit prices in the bottom half of the market are now back at or above peak prices. Prices at the middle increased by about 9 per cent to $550,000.

Mr Zigomanis said much of Melbourne’s supply had been limited to the inner city, where properties tended to sit at a higher price point. By comparison, in Sydney, there had been more supply delivered outside the central city, which could be keeping prices lower.

Supply could also be a factor for the stronger house price growth in Melbourne, where the rollout of new houses had been less limited than in Sydney, Dr Oliver noted.

“Melbourne has less in the way of land constraints,” Dr Oliver said. “Sydney tended to go down the path of supplying units all over, whereas in Melbourne it’s houses in the outer suburbs and they’re expanding those suburbs, and units are more of a phenomenon in inner areas.”

Both Dr Oliver and Mr Zigomanis said ramping up housing supply would do more for housing affordability than first-home buyer incentives.

“Increasing supply has more of an impact on affordability down the track than throwing more money at people because that ultimately pushes up house prices,” Mr Zigomanis said.

Dr Oliver added making it easier for people to live in regional areas – capitalising on the rise in remote working – was also key, as was making housing affordability a key consideration when setting immigration targets in the years ahead.

While generally against market intervention, Dr Oliver said it was incumbent on governments to act to improve affordability as their decisions on immigration, and housing supply had pushed up prices in the first place. He added the pandemic, for all its negative impacts, had created a window of opportunity that should be used wisely by governments.

“[Prior to COVID-19 we had] been going through a period where population growth was a lot stronger … and then, on the flip side, governments put limitations on the speed of new supply,” Dr Oliver said.

“That’s led to a massively distorted market, which has worked against Millennials and Generation Z people, for the benefit of Baby Boomers and Generation X.”

“If you were really focused on affordability you’d be doing everything you can to ramp up supply now,” he added, but noted HomeBuilder and increased stamp duty savings on new homes would go some way to boosting supply.

Mr Zigomanis said developers also had a role to play, as they too could constrain housing supply when they chose to do so.

Victorian treasurer Tim Pallas did not respond to requests for comment, including about whether his government’s first-home buyer initiatives had contributed to price rises.

In a statement sent to Domain, a state government spokesperson said a thriving real estate and development sector would play a critical role in the economic recovery of the state, and noted the “Big Housing Build” package had been designed to provide emergency tax relief and give much-needed support to the construction sector.

“With more opportunities than ever before for young people to buy the home they want or complete the renovations they’ve dreamt of, we’re helping stimulate the economy and create jobs for Victorians. We know that by stimulating activity in the property market, it will provide confidence to home buyers and investors.”