Why is housing in Sydney so unaffordable?

Updated 19 June 2024

After food and water as basic human needs of humans, shelter is one of the most necessary things to live. But Australia continues to grapple with its worsening housing crisis. Housing affordability, especially in Sydney, is a serious issue.

This is a huge problem because housing is the foundation for family wellbeing, good health, and relationships. Without safe, secure, and affordable housing, everything else, including education and employment, would be difficult to achieve.

In this article, we will tackle housing affordability in Sydney, the current trends in the city’s housing market, and challenges faced by first-time homebuyers. We’ll also present some affordable housing solutions and housing market projections.

Housing affordability in Sydney: statistics

Sydney, Australia’s most populous city, is also the country’s most expensive city. It is the second most expensive city to buy a home worldwide following Hong Kong, a new report shows.

Sydney is said to be the 93rd least affordable place out of 94 metropolitan markets in the world, according to the 2023 Demographia International Housing Affordability report.

The study also noted that all the five housing markets in Australia have been severely unaffordable since the early 2000s:

• Sydney
• Melbourne
• Brisbane
• Adelaide
• Perth

Data from CoreLogic shows that Sydney’s dwelling prices increased 25.4% from the start of the COVID-19 pandemic to their cyclical peak in January 2022. But the prices suffered a 13.8% decline through to the trough in January 2023.

The median dwelling price in Greater Sydney increased to $1.12 million over the year with over 90% of suburbs increasing in value.

The Sydney suburbs of Bungarribee, Quaker Hill, and Kings Park were among those suburbs where median house values surpassed the one-million-dollar mark over the 12 months to October 2023. Their median house prices are rising by over 15% year-on-year, Property Update said.

Meanwhile, more than 70% of Sydney suburbs now have a median house price higher than $1 million, an increase from 65% the previous year.

The report from Property Update also noted that unit prices in nearly a third of 302 suburbs analysed reached seven figures, an increase from a quarter the previous year.

Some inner and middle ring areas also joined the ranks of the $2 million plus club, which rose to almost 170 suburbs, an increase from 140 in 2022, Property Update said.

The strong pace of annual growth for Sydney’s property market is due to strong demand and population growth, not to mention the limited supply that offset the effects of higher rates.

Experts believe that the rising demand from homebuyers and investors, as well as strong Australian immigration, will further increase the property values in Sydney throughout 2024.

What challenges do first time homebuyers face?

The typical first-time home buyer couple needs to save for nearly 5 years to put a 20% deposit down for an entry-level unit, a report from digital lender Domain and Unloan shows.

Here are some of the most common challenges faced by first-time homebuyers:

Disparity between rising prices and flat wages

The Australian housing market has seen a sharp increase in property prices over the last two decades, with the CoreLogic Home Value Index rising by nearly 150%. While that happens, earnings only rose to about 82%.

Because of this disparity, people who are planning to buy their first house are finding it more difficult to do so, making them buy their homes at an older age.

Mortgage stress due to rate increases

Some first-home buyers can put down a deposit on their house, but they are still bound to face a problem: paying for their mortgage.

Higher interest rates are making home loan repayments more difficult, which is why more people are facing mortgage stress. According to the Domain and UnLoan report, mortgage repayments are taking a sizeable portion of household incomes.

Many first-time buyers are using over 30% of their salaries for their house repayments, which is the common threshold describing mortgage stress. The report shows that Australians need to put more than 30% of their income towards repayments if they have entry-level houses in Sydney, Brisbane, and Melbourne.

First-time home buyers are not alone in meeting their goals of home ownership. The government can help through state-sponsored programs like the New First Home Owners Grant.

How does Sydney compare with other cities?

With the worsening housing crisis intensified by high interest rates and inflation, Sydney is the most expensive city to buy a house in Australia.

Currently, the median house price in the most populous Australian city has reached a record high of more than $1.4 million.

Data from CoreLogic shows that capital city dwelling values in Sydney increased 0.8% in May 2024, up 8.3% over the previous year.

The recent report also shows that Sydney’s overall dwelling values rose 0.6%, with median house value rising $20,000 to $1.44 million. Meanwhile, unit values increased 0.7% to a record $848,961, CoreLogic said.

Sydney house values increased 8.2% over the past 12 months, which is more than double the city’s inflation rate, while unit values have increased by 5.4%.

Below is a table showing the median property values in the various housing markets (city), as of May 2024.

According to CoreLogic’s data, Melbourne is becoming more affordable for potential homebuyers as the city’s median house value was steady at $937,289. Unit values in the southern capital increased 0.3% to $614,299, CoreLogic said.

Meanwhile, Brisbane’s median house value is $200 more than that of Melbourne after increasing another 1.4% in May. Melbourne’s median unit value increased 1.9% in May, sitting almost $1,200 more than the value of Melbourne units.

With current house and unit values, Brisbane is now the second most expensive capital after Sydney. It’s seen as a property hotspot for 2024.

The CoreLogic report noted that there were positive signs in the rental market despite house prices continuing to climb.

In May, rents increased 0.7%, which is the smallest hike in 2024 so far.

According to CoreLogic Research Director Tim Lawless, there has been a reduction in rental growth relative to the first three months of the year as the annual pace of rents also start to ease.

Lawless attributed the slowdown in rental growth to an easing in net migration since the first quarter of 2023. Additionally, rental affordability pressures are forcing a change in the rental patterns of Australians.

Now, as Sydney continues to face the housing affordability crisis, the government of New South Wales is putting forth two planning reforms to address the problem.

Watch this video to know more:

There are other housing options outside Sydney. Check out our list of 10 most affordable places to live in Australia.

What are some affordable housing solutions?

More and more Australians cannot afford suitable housing and demand continues to rise while the supply is limited.

In the last 20 years, rental vacancies have shrunk to 1%, house prices have climbed, Australia’s population has grown by a third, and social housing has not kept up its pace with the people’s need.

But here are some affordable housing solutions that are available for some Australians:

Housing Australia Future Fund

In November 2023, the federal government of Australia established the Housing Australia Future Fund or HAFF. It is an investment vehicle aimed at providing additional funding to support and increase social and affordable housing in the country, as well as other housing needs. These include the needs of indigenous communities and housing services for children, women, and veterans.

Upon establishment, the HAFF was credited with $10 billion. The income from this investment fund will provide disbursements to deliver 20,000 new social and 10,000 new affordable homes over five years.

In the first five years, the HAFF will also provide the following:

• $200 million for repair, maintenance, and improvements of housing in remote indigenous communities
• $100 million for crisis and transitional housing options specifically for women and children affected by domestic and family violence. This will also benefit older women with low incomes and who are at risk of becoming homeless
• $30 million for building more housing and funding specialist services that will help veterans experiencing homelessness or those at risk of homelessness

The government also offers a housing loan program especially for single parents and legal guardians. Read our guide on the Family Home Guarantee for more.

National Housing Accord

The Australian government also gathered various sectors under the National Housing Accord, which set an initial target of one million new, well-located houses over five years from mid-2024.

Under the Accord, the government will deliver 10,000 new affordable dwellings over five years with state and territory governments agreeing on this commitment. In total, there will be 20,000 affordable homes delivered by market participants including investors and the residential development, building, and construction sector.

Find out what three experts say about targets set by the Accord and whether they’re achievable.

New Homes Bonus

Australia also has the New Homes Bonus, where the Commonwealth committed $3 billion for states and territories to achieve more than the share of the initial one million well-located homes target under the Accord.

Under the scheme, states and territories are incentivised to employ reforms aimed at boosting housing supply and increasing housing affordability. This will make a positive impact and practical difference for Australians who are planning to purchase houses.

Housing Support Program

Another government initiative is the Housing Support Program, also known as HSP, where the government committed $500 million. This initiative supports the delivery of increased housing supply by funding projects that will enable infrastructure and provide amenities for new housing development.

Affordable rental housing

In Australia, people can also opt for affordable rental housing, which is available to very low to moderate income households.

Affordable housing includes a range of accommodation types and sizes and is priced at less than the normal market rent. However, it is only available in specific locations and applicants must be able to meet eligibility requirements.

A rent-to-own scheme is an option that can lead to home ownership, but it comes with some pitfalls. Read all about the rent-to-own scheme in our guide.

What are the projections for the Sydney housing market?

The latest forecast from Oxford Economics Australia shows that Sydney’s median house price could reach $2 million, with interest rate cuts and sustained housing shortage being the reasons for the next price hikes.

Despite higher interest rates impacting housing affordability, an undersupply of dwellings is creating the upward price pressure across various markets throughout 2023 and 2024, according to Oxford Economics.

The Sydney affordability crisis is not limited to just purchasing houses as we have also seen an uptick in rental prices.

New research from SQM shows that Sydney has the highest median rental price out of all the capital cities, with a weekly median rent price of $1,037 for houses and $694 per week for units.

These figures represent a 13.4% increase for house prices and 13.3% for unit prices over the last 12 months. As a result, many households are having a difficult time renting property in the inner suburbs of Sydney.

According to Property Update, the surge in properties for sale in Sydney has yet to slow down demand as prices rise 0.6% in May and 7.4% over the last year.

Property values in the city are poised to gain some more ground and there is a strong demand for A-grade homes and investment-grade properties.

Meanwhile, vacancy rates in Sydney’s rental market are “traditionally very tight,” hovering well below the national baseline.

But it should be noted that due to rising demand and severe undersupply in the rental sector, the national vacancy rate in Australia is exceptionally low today by historical standards.

A balanced market’s vacancy rate is around 2 to 2.5%. In comparison, Sydney’s vacancy rate is at 1.7%, according to SQM Research.

This means that the city’s rental market is performing like any other area in Australia, with:

• record-low vacancy rates
• high rent prices
• strong demand
• a growing population

This puts the city’s market into a “pressure cooker environment,” Property Update said.

Also, as Sydney’s population increased 2.1% in the 12 months to June 2023, there will be more pressure on the city’s rental crisis.

Because of the lack of supply of good properties coupled with increasing demand, property values are likely to go higher.

Here are the most recent forecasts for the Sydney housing market this year:

Regardless of the different projections from these institutions, Sydney is undoubtedly on track to grow further in terms of value in the property market.

Do you expect housing affordability in Sydney to change any time soon? Let us know in the comments