New research by the Australian Housing and Urban Research Institute (AHURI) has analysed the property market concept of filtering to make housing more affordable.
Residential filtering defined by AHURI is a process where the building of new dwellings for higher and middle-income households can lead to the additional supply of dwellings for lower income households.
As properties age and their perceived quality drops, AHURI notes this can result in moving down the economic chain to facilitate the supply of ‘naturally occurring affordable housing’.
This occurs as higher income households vacate older dwellings for newer dwellings, with lower income households then taking their place within the older dwellings.
Associate Professor, Christian Nygaard of Swinburne University of Technology, said filtering relies on several critical assumptions including the fact that any property and location in a city can be a substituted for any other property and location.
“Properties are located in different areas with different neighbourhood characteristics,” Associate Professor Nygaard said.
“Therefore, where a property is located may matter as much as, or more than, what condition a property is in.
“In practice, the housing markets of our cities consist of a system of interconnected housing submarkets, defined by both geographic and property characteristics.”
How does property filtering work?
For filtering to operate successfully, AHURI notes a number of things must occur, such as properties becoming obsolete as they age, new properties providing a superior level of housing and, crucially, the rate of new dwelling construction exceeding the rate of new households forming.
Speaking to Savings.com.au, PRD Chief Economist Dr Asti Mardiasmo said with the current state of the property market, the creation of more affordable housing through filtering is not always guaranteed.
“If say for example, a current property owner is moving into a $1 million house and selling their current home for $500 or 600K that they may have bought for $300 or 400K some years ago, then the concept of filtering can be really impactful,” Dr Mardiasmo said.
On the other side of the coin Dr Mardiasmo said there needs to be a re-think of what constitutes affordable housing in the context of current supply constraints.
“Say I bought my house for $380K. Technically I can probably sell it for about $750 to $800K right now,” she said.
“To find the same 800-square metre home in Brisbane now, I might be financially worse off, with lower equity and higher debt.
“Through filtering, technically my home could add to the affordable housing stock, but availability of substitutes in the current market prevents me from selling, as it's not financially viable.”
HIA's latest New Home Sales report revealed July and August 2022 represent the weakest pair of months for new home sales since the lockdowns in 2021.
HIA Economist Tom Devitt said this rise in borrowing costs compounds the impact of the rise in the cost of construction.
"The full impact of recent and future rate increases will continue to flow through as an adverse impact on the sale of new homes in coming months," Mr Devitt said.
“There remains a significant volume of work under construction and approved-but-not-yet-commenced that will provide a buffer for the industry and ensure building activity remains exceptionally strong through the rest of 2022 and into 2023."
Where can filtering be of benefit?
AHURI research found filtering to be incompatible as a reliable source of additional affordable housing for low-income households in Sydney and Melbourne, given the emergence of property markets within markets.
Further, even where filtering dynamics do function in the housing market, AHURI outlined it may not result in an overall increase in the supply for affordable housing for low-income households.
Dr Mardiasmo argues that there are still some pockets where filtering can be of benefit, particularly those that are now starting to see more affordable areas recording record-breaking sales.
“In NSW think places like Penrith, Tamworth, Newcastle, Port Stephens. Victoria, think Geelong and out as far as Bendigo. For Queensland, it would be Ipswich, Toowoomba, Hervey Bay and the Sunshine Coast," Dr Mardiasmo said.
“If you were to go out 30-40km from the CBD, you will start to find suburbs where filtering can happen.
“The key is to find areas that were traditionally more affordable say 10 years ago compared to metropolitan locations, still with further gentrification opportunities, and better premium homes to be built.
“These places used to be sleepy, but are now going through a revolution of infrastructure and commercial development, with more money flowing through."
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