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Building high-quality housing doesn’t make older properties more affordable

Filtering, the process of building new high-quality homes for higher income earners, doesn’t necessarily make older homes more affordable, according to new research.

New Australian Housing and Urban Research Institute (AHURI) research shows that the price and occupant characteristics that should follow on from housing market filtering are complex, and frequently absent in Australian housing markets.

In theory, as properties get older and their quality declines, they should trickle down to lower market segments, creating naturally occurring affordable housing.

However, the research found this wasn’t the case in Melbourne and only occurred to some degree in Sydney.

Analysis of Melbourne house prices suggests that, between 2006 and 2016, suburbs with older housing stock, which are close to the CBD and have higher paying jobs, start off with higher relative incomes and increase their relative income more than areas with newer housing stock. 

This provides evidence of filtering up, rather than filtering down, in some market segments. 

While across Sydney, detached houses didn’t filter down consistently as they aged. 

Associate Professor Christian Nygaard, of Swinburne University of Technology, said filtering is complex and not present in all locations.

“We found that filtering relies on several critical assumptions including, that any property and location in a city can be a substituted for any other property and location,” Associate Professor Nygaard said.

“However, properties are located in different areas with different neighbourhood characteristics. 

“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.”

For filtering to operate, a number of things have to happen, such as properties becoming obsolete as they age; new properties providing a superior level of housing service (better quality, better location etc) and, crucially, the rate of new dwelling construction exceeding the rate of new households forming.

While the analysis of owner-occupied housing in Melbourne suggests that areas with older housing stock frequently filter up, analysis of the Sydney private rental markets showed apartments filtered down market over time when measured by rent received for a specific property relative to market medians. 

However, rents in these apartments nevertheless increased relative to income, largely offsetting the effect of the affordability of individual properties due to price depreciation. For instance, in 1997 the actual rent for a one-bedroom was approximately 1.65 times the affordable rent. 

By 2019, the one-bedroom rent, adjusted for a 13 per cent depreciation, had increased to 1.86 times the affordable rent.

Apartments that have been rented for more than 20 years, on the other hand, pre-date the apartment design requirements that have been in place in Sydney since the early 2000s. 

This suggests this older stock will have lower levels of amenity, but not likely to have a significantly different geography to more recent additions to the rental market (as apartments are largely constrained to being built in inner city locations across all periods).

In addition, the numbers of properties at the lowest rental segments (below 40 per cent median) are vanishingly small. 

In other words, dwellings may well filter down the market over time, but there is a high level of attrition, with most dwellings’ trajectories down the rental market disrupted (by being demolished or refurbished) before they reach an affordable price for those on low incomes. 

As such, very little low-cost, or “naturally affordable” private rental housing is generated through the process.

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.