Sydney's price of success: Sky-high housing costs, long commutes

Residential properties are seen from Sydney Harbour in Sydney, on April 4, 2017. PHOTO: AFP

SYDNEY (BLOOMBERG) - Akhilesh Mehta flops into his bus seat and readies himself for the hour-and-a-half commute from his job in central Sydney to his home on the city's outskirts. As the bus crawls through bumper-to-bumper traffic, the 48-year-old accountant says he puts up with the journey for a simple reason: when it came to buying a family home, the city's fringes were "the only place I could afford."

New South Wales has taken over as Australia's economic engine as the mining investment boom tails off, with central Sydney contributing almost a quarter of the nation's growth last fiscal year. That success has come with a price. As workers flock to Sydney, an under-supply of housing, coupled with record-low interest rates, has made the city the world's second-most expensive property market. Home prices jumped 19 per cent in the past 12 months, stoking concern home ownership is increasingly beyond the reach of younger people.

That's a big political problem for the state's new Premier Gladys Berejiklian, who made housing affordability one of her priorities when she took the job in late January.

Housing affordability is "a barbecue stopper," Berejiklian, 46, said in an interview in her Sydney office on Thursday (April 6). "We are convinced if we put downwards pressure on prices through supply, that's the best way we can solve it as a state government."

Sydney's housing completions reached a 15-year high in 2016, though Berejiklian says the state is only now playing catch-up after "a decade of under-investment." "There are about 100,000 dwellings we are behind on in terms of really digging into the demand," she said.

Australia's economy is forecast to grow faster than any of the Group of Eight economies over the next three years, according to economists surveyed by Bloomberg News, with New South Wales driving the expansion. Sydney's growing pains are evident in commutes that now rival New York and London.

The nation is also luring increasing numbers of global millionaires, helping make it one of the fastest growing wealthy nations in the world, according to New World Wealth. The lack of affordable housing is a side-effect of the city's global prosperity.

The daughter of Armenian immigrants and a former executive at Commonwealth Bank of Australia, Berejiklian became just the second female premier of the nation's most-populous state after the surprise retirement of predecessor Mike Baird in January. First elected to parliament in 2003, she served as transport minister and treasurer before ascending to the top job.

There are several barriers to boosting housing supply in Sydney. The city is bordered by mountains to the west, the ocean to the east and rivers and national parks to the north and south, restricting the supply of new land, while moves to increase housing density in established suburbs have run into opposition from residents.

That's meant in the past three years, almost 70 per cent of new detached houses have been built more than 30 kilometres from Sydney's central business district, according to analysis of state government data by property consultancy Charter Keck Cramer. Even those houses don't come cheap. In Rouse Hill, near where Mehta lives, prices in the new housing estates that dot the once semi-rural area have surged 63 per cent since 2012, including a 7.8 per cent increase in the 12 months through February, according to data provider CoreLogic Inc.

"To pay these mortgages, you need to be earning A$120,000 (S$126,648) minimum. That means working in the CBD," said Dean Fribence, who runs a private bus service to the city, offering air-conditioned express coaches to reduce some of the grind of the daily journey. "It's a vicious circle that can have a huge impact on family life."

Berejiklian points to a A$53 billion infrastructure spending-spree, including a metro train line linking Rouse Hill to the city and new motorways, as part of her government's effort to cool housing prices and shorten commutes.

Beyond that, her policy options are limited.

"I can't control macroeconomic policy, I can't control what the Reserve Bank does with rates" or what regulators and banks do with lending, she said in the interview. The Australian Prudential Regulation Authority last month tightened restrictions on interest-only loans, which are favored by property investors.

Meantime, tax breaks that make property a popular investment are a federal government issue, and Prime Minister Malcolm Turnbull has resisted calls for change.

Berejiklian is also wary of acting to cool demand, such as increasing stamp duty on home purchases. In Hong Kong, for example, government attempts to cool property prices have nearly halted the supply of older, existing homes, while stoking demand for new units.

"The biggest issue is the public wants you to do something on the demand side, whether it is tax or what have you, but that can have unintended consequences," she said. In February she appointed former central bank Governor Glenn Stevens to advise on policies to help first-time buyers.

Berejiklian says the increase in housing supply means Sydney's median home price is A$50,000 less than it would have been had the government not acted.

That may be cold comfort for young buyers struggling to save a deposit, given the median house price is now 8.4 times average household income, up from 5.8 times 15 years ago, according to CoreLogic.

"I don't know what the solution is, but I fear for the kids," Mehta says.

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