Australia's housing problems will take 'generation' to fix, NAB economist

Australia's housing problems will take a 'generation' to fix, NAB chief economist warns In short: NAB is forecasting a peak-to-trough decline in dwelling prices of about 7 per cent across Australia's combined capital cities. But Sally Auld, NAB chief economist, says the price declines will not solve Australia's housing affordability issues. What's next? Luci Ellis, Westpac chief economist, said relatively low inflation and financial deregulation had also contributed to rising house prices to household incomes in Australia in recent decades. Australia's property price declines are forecast to be relatively large, but they will not solve this country's housing affordability issues, an inquiry has heard. Sally Auld, NAB chief economist, says Australia's housing problems have been accumulating for so long that they will take a "generation" to fix. NAB is forecasting a peak-to-trough decline in dwelling prices of around 7 per cent across Australia's combined capital cities, equivalent to a fall of around 5 per cent during the 2026 calendar year. "While some will welcome the drop in prices, this will not solve Australia’s housing affordability issues," Dr Auld said on Thursday. "Meaningful improvements in affordability will only be achieved through a sustained increase in housing supply over a long period of time. "This is a challenge that is likely to take the better part of a generation to resolve." Dr Auld made her comments before the Senate select committee on intergenerational housing inequity. "House prices have risen much faster than incomes since around the turn of the century, driven by factors including lower interest rates, taxation settings and strong demand," she said. "Housing affordability is one of Australia's most significant economic and social challenges." 'Multi-decade consequence' of low inflation and financial deregulation Luci Ellis, Westpac chief economist, and former Reserve Bank assistant governor (economic), also appeared before the committee. She said Australia's inflation-targeting framework, introduced in the early 1990s, and banking deregulation in the 1980s and 90s, had both contributed to today's high property prices. "A large part of the reason why housing prices have increased relative to household incomes over the past 30 years is we now have lower inflation," she said. "That was deemed to be a good thing." Dr Ellis said when inflation declined and remained relatively low after the 1990s recession, it led to a lower average level of nominal interest rates in Australia, and that meant that people could service bigger mortgages as a share of their incomes than they used to be able to do. She said that contributed to the size of mortgages and deposits increasing in Australia over time, relative to household incomes. "So a lot of the increase in house prices to household income has been a multi-decade consequence of lower inflation and financial deregulation that happened some decades ago," she said. Dr Ellis said in the early 2000s she was writing about the obvious pick-up in house prices, relative to household incomes, that had begun in the 1990s. The graphic below comes from an article she wrote, published by the Bank for International Settlements (BIS) in 2005, which showed how Australians were taking advantage of their increased ability to borrow in the 1990s, and what was clearly happening to house prices. But Dr Ellis said in recent years, Australia's housing markets were also facing short-term questions of demand and supply. "We are a country that's very welcoming to skilled migrants. We are better off for having strong migration," she said. "But it does then increase the degree of difficulty in housing all residents and there are systematic issues in our ability to supply enough new housing to house a growing population." Greens senator Barbara Pocock, chair of the committee, said talking in broad terms about "housing supply" was "a very unsophisticated way" of talking about a complex problem. She said, for example, that there had been a "massive shrinkage in public housing" in Australia in recent decades and the supply of entry-level housing in most capital cities was very tight. Dr Ellis agreed it was a complex problem. Developers' profit margins are 'getting squeezed' Separately, Liberal senator Andrew Bragg asked NAB chief economist Sally Auld about the mismatch between housing approvals and housing completions that was also plaguing Australia's housing system at the moment. It led into a discussion about how a large number of housing projects are approved but then never go ahead, or are delayed by years, because they do not stack up financially for builders in an environment of high inflation and rising building costs. Dr Auld said that was a genuine concern. She said Australia had problems with planning approvals, problems with the provision of essential infrastructure to complement new housing projects, a shortage of skilled labour, and there had been a large fall in productivity in the construction industry in recent decades. "There are some projects that don't ever get built, despite having approval," she said. "This is one of the issues that we're not going to solve overnight, there's no one lever that we can pull, but there are lots of different things we can do. "And to be fair, we are starting to see in the data a pick-up of dwellings under construction, so it does feel like we have made some progress on the supply side. "But we're not yet at the point where we've moved on from having a structurally under-supplied housing market," she said. Senator Bragg asked her what impact she thought the Albanese government's tax changes were having on the supply of new properties at the moment. Dr Auld said there was "a lot going on" in the housing sector right now and the tax changes were just one variable. "We clearly have had higher funding costs as a consequence of the Reserve Bank's interest rate rises earlier this year," she said. "We've had the impact of the Middle East crisis which has brought about a fair bit of uncertainty across the economy ... and then we've had the taxation changes in the federal budget, which again, I think, people are working through the implications of those," she said. Dr Auld said for developers' profit margins, developers were dealing with an environment in which building costs were rising and property prices were falling, so the revenues builders receive from selling their properties were going down. "So margins are getting squeezed," she said. [Image text:] Senator Raubaa Pocock