Australian property prices reached record levels in 2007 and while the market is likely to experience a slowdown in price increases this year, concerns regarding affordability will remain strong.

January's ANZ Australian Property Outlook recently reported that returns on residential property in Australia have accelerated significantly over the last few years and that this is "underpinned by a sharp tightening in the housing demand/supply balance that is driving both rents and house prices higher."

Indeed, increased demand for Australian property from inter-state migrants and international immigrants, coupled with a weakening and shortening of supply has significantly bolstered property prices in all major Australian cities.

"Remarkable growth in net international migration (178,000 over the year to June) and steady reductions in the number of people per household have boosted the underlying demand for housing to 185,000 in 2007–08," ANZ reports.

Despite pessimism in the global economic market following the US sub-prime mortgage crisis, faith in the Australian property market remains strong. This is partly due to the country's close links to the Asian market. The ANZ report states that Asian growth has "effectively decoupled from the US," and with the Australian economy having grown by 4.3 per cent in 2007 to September, aided by growth in household spending and gains in business investment, the knock-on effect for those with investments in the country's property market can only be a positive one.

A tightening labour market, solid gains in employment and wages and income tax cuts have also combined to create strong demand for Australian property.

However, with Australian property prices up by 18 per cent in some centres, vacancy rates at an all time low and house completions declining, affordability issues urgently require addressing by policy action.

"Difficult affordability conditions for new home-buyers and renters will deteriorate significantly further unless appropriate policy action is taken," states the ANZ report.

"A dramatic tightening of the Australian property market is forcing up house prices and rents and difficult conditions for first-homebuyers are being exacerbated by rising interest rates. House completions are forecast to decline to just 140,000 over the coming two years. Consequently, by 2009–10 we project a record housing shortage of nearly 200,000 homes."

Skill shortages in the building sector also raise concerns over the capacity of the residential building industry to deliver the 200,000 plus houses annually required to address the demand/supply imbalance.

Many are now calling for policy action to focus on the lower end of the Australian property market and on renters, and although Labour's National Affordable Rental Incentive Scheme is a step in the right direction, this alone is unlikely to tighten the gap between new housing supply and demand.

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Article first published 13 February 2008