The simple housing fix that’s ‘psychologically extremely difficult’

Housing prices have soared ahead of wages over the longer term, and the recent slowdown in property prices is doing little to close the gap.

A prolonged period of stable property prices while wages grow would be needed to make housing more affordable, experts said, but risks being unpopular with those who have already bought.

The median dwelling value across Australia’s combined capital cities hit $1.01 million in the December quarter, including houses and units, Domain figures show, more than doubling since 2012 when it was just below $500,000.

Wages have risen 37.8 per cent since March 2012, ABS wage price index figures show, a moment in history when wages were edging up and dwelling prices were briefly stagnant.

Economists note that the wages data does not measure total household income, which can increase as more members of the household – particularly women – have taken on paid employment. Nor does it measure gifts.

“We’ve had more people working in a household – instead of having one income earner you’ve increasingly got more and more people who’ve got two income earners in a family,” HSBC chief economist for Australia, New Zealand and global commodities Paul Bloxham said.

“The other thing younger people are doing increasingly is borrowing from family. That’s another factor that’s driving what some households are choosing, or being able, to do.”

He added that interest rates are structurally lower than a couple of decades ago, albeit higher than the period just before the pandemic.

“People could afford to borrow more, and collectively people did borrow more, and that drove up house prices relative to incomes.”

He thought increasing housing supply would help improve housing affordability over time, as opposed to giving money to home buyers.

“If you take policy measures that just boost housing demand, you give them access to more funding or you give them more grants, it just gets capitalised into the house price and it doesn’t fix the fundamental problem.”

ANZ senior economist Adelaide Timbrell added the wages data measures hourly wages and does not account for workers who take on more hours.

She said long-term falls in interest rates let households borrow more, while supply of new homes has not kept up with a growing population.

“ANZ research does predict minor falls in housing prices in 2025 in Melbourne and Sydney at the same time as wages growth and household income growth, which improves affordability compared to a year ago,” she said, adding Melbourne’s house price downturn has improved affordability recently.

“But in terms of a big shift in affordability of housing there would need to be significant policy intervention.”

The Demographics Group co-founder Simon Kuestenmacher lauded the increase in female workforce participation over time, but warned some mothers return to work quickly out of financial necessity.

“[Many mothers] say ‘I really would have enjoyed staying home for another half a year, but it makes no sense, I’ve got a mortgage to pay’,” he said. “This is just a workaround. This is not ultimately trying to make housing cheaper.

“We want to create an environment where wages grow at a faster rate than house prices grow, that bit by bit would make houses more affordable.”

He said because wages grew at a slower rate than house prices, more wages are now required to buy a house.

“There has been zero appetite in the political system of fixing that,” he said.

Ignoring non-citizens and minors, only 26 per cent of the voting population live in rented accommodation, while almost three in four Australian voters own a home, he said.

“They, of course, want this thing to go up or at least stabilise,” he said.

“It’s so psychologically extremely difficult when you purchase a house for $800,000 and all of a sudden it is worth $600,000.”

Politicians could not say outright they did not want to make housing more affordable, though.

“The ideal thing you can come up with as a politician is a housing policy that looks like it makes housing cheaper and more affordable but does the opposite,” he said – for example, first home buyer grants.

“The market instantly factors this in, so you burn public money to increase house prices … This is terrible, terrible policy,” he said.

He warned that piecemeal reform ideas from both major parties would risk their support over the long term.

A more effective option could be to increase social housing as a share of housing stock, such as via a state-owned housing developer that could build housing at a loss when the private market does not deliver, he said.

“There is a political general ‘unmotivation’ to really tackle the issue because ultimately, to quote John Howard, he has never met a voter who complained about their house going up in value. That is still true.”