Declining Housing Affordability – What does it mean for investors?

Housing affordability can be thought of as the relationship between average expenditure on housing and average household incomes.

In an ideal world, household income and expenditure on housing would increase similarly over time due to inflation, resulting in fairly stagnant affordability. But of course, we know that this hasn’t been the case for Australia!

In reality, housing affordability has been in steady decline for some decades. The ratio of average house price to average income has grown significantly – meaning real estate growth has significantly outpaced wage growth over time.

The following Australian government figures indicate roughly where this trend began, sometime during the 1980s:

Looking at more recent CoreLogic figures, it seems the pace of this concerning trend has only quickened post-pandemic, with the combined value-to-income ratio reaching as much as a staggering 8.5 in 2022:

While the causes and implications for the broader economy here are of course important, what about property investors in particular? How would an effective property investment strategy take declining affordability into account?

Here are a few ideas:

1. Diversification and Location Selection:

As housing affordability declines, property investors need to exercise even more caution regarding their investment options. The benefits of portfolio diversification across regions and markets increase, as lower affordability may impact the rate of capital growth. Investing in a mix property types and locations can help mitigate risks associated with a specific sector.

2. Changing Rental Market Dynamics:

With declining housing affordability, the demand for rental properties becomes more likely to increase, given that more buyers are priced out of purchasing a home. Property investors may need to reassess appropriate yield expectations and benchmarks, with vacancy rates remaining at record lows amid extraordinarily high rental demand.

3. Investment Time Horizon:

Declining housing affordability implies that property price growth could slow. Property investors may reconsider their time horizon, potentially focusing on capital preservation and steady rental income, rather than relying solely on rapid appreciation. This approach involves selecting properties that are likely to attract stable tenants and generate consistent cash flow, even during periods of economic uncertainty.

4. Household and Demographic Shifts:

In a recent study, researchers at the University of Queensland found that young adults and baby boomers in Queensland are increasingly living with other people instead of having their own households – and that this is a symptom of poor housing affordability. This trend indicates a shift in the demand for housing, with more individuals seeking shared accommodations rather than renting or owning their own homes. The decline in “householder” rates among young adults and those aged 60-plus indicates pent-up demand for housing that needs to be addressed.

Property investors may recognise this as an opportunity and focus on developing or acquiring properties that cater to the specific needs of these age groups, such as affordable housing options, multi-generational living arrangements, or shared housing solutions. Demand for alternative property types like apartments, units and duplexes may increase.

Want to discuss this further?

For expert guidance in navigating declining housing affordability as a property investor, book in for a free consultation to make informed decisions, tailored to your investment goals. Don’t let affordability challenges hinder your success. Act now with Search Party Property!