The Determinants of Homeownership Affordability in Greater Sydney: Evidence from a Submarket Analysis Mustapha Bangura & Chyi Lin Lee (2021) The determinants of homeownership affordability in Greater Sydney: evidence from a submarket analysis, Housing Studies, DOI: 10.1080/02673037.2021.1879995 (accepted version). ABSTRACT Recognising the existence of socio-economic and demographic disparities across metropolitan cities such as Greater Sydney, this study gauges the determinants of homeownership affordability in the different regions of Greater Sydney using local government area (LGA) data over 1991–2016 with a system generalised method of moments (GMM) and a panel error correction model (ECM). The results of the study showed that the determinants of homeownership affordability vary across the regions of Greater Sydney. Although house price and median personal income are the key drivers of homeownership affordability across all regions, the difference in the magnitude of these determinants between regions have also been documented. Specifically, Western Sydney is more sensitive to income and house price change than the other regions. In addition, Western Sydney is also sensitive to other determinants (i.e. housing supply, residential population, median rent, and housing investors), while no comparable evidence is found for the other regions. This clearly highlights the differences across regions and the importance of submarket considerations in the analysis of homeownership affordability. The implications of the study have also been discussed. Keywords: Greater Sydney; homeownership affordability; determinants of homeownership affordability; regional policy 1 | Page 1.0 INTRODUCTION Homeownership affordability has attracted extensive research interest in recent years. A number of factors are involved here. First, a deterioration of homeownership affordability has been observed in many metropolitan cities. For instance, using Demographia (2019) median multiple index, the housing affordability of Hong Kong, has further declined to 20.9 in 2018 from 19.4 in 2017. A similar trend is observed in Vancouver (12.6), San Jose (9.4), Los Angeles (9.2) and some Australian cities, particularly Sydney, where house prices have increased at a faster pace than income growth (Healey 2016; Bangura and Lee 2019). Second, the deterioration of homeownership affordability has a significant ripple effect on households from various aspects, ranging from economic to social (Schwartz 2016). Further, the decline in affordability also has direct and indirect repercussions on the broader economy (Lee and Reed 2014). Housing affordability index is therefore an important benchmark for evaluating households’ ability to meet their housing expenses. Although previous studies such as Muellbauer & Murphy (2008), Yates (2008), Chakraborty et al. (2010), Kim & Cho (2010), and Duffy-Jones (2018) have enhanced our understanding of the issues surrounding homeownership affordability, they generally employed a narrative approach and their findings are mixed. As reported by De Bruyne and Van Hove (2013), housing affordability varies geographically, even between neighbouring local councils. They attributed this variation to the differences in local socio-economic variables. Therefore, an examination of the relationship between affordability index and local factors is critical to developing an effective housing policy in addressing the deterioration of homeownership affordability (Gabriel et al. 2005; Yates 2008). However, the literature that links affordability index and local factors is limited. This is in spite of the socio-economic variation within metropolitan cities (Baker et al. 2016). In Greater Sydney, for example, Bangura and Lee (2019) found that the deterioration of housing affordability is more obvious in the low-income regions of Greater Sydney. The disparities between low-income and high-income regions could be supported by Stone’s (1990) shelter poverty theory in which low-income households have lower disposable income and are more likely to be “shelter poor” (i.e. with housing but without adequate non-shelter resources) compared with high-income households. This highlights the geography differential of housing affordability. Nevertheless, current government policies on housing in Australia, particularly housing affordability, are not well tailored to adequately address affordability for low-income 2 | Page earners (Beer et al. 2007; Costello 2009). Further, the empirical evidence on the determinants of homeownership affordability is mixed and it depends on the sample being examined. This can be attributed to the ignorance of housing submarkets. Acknowledging the importance of disaggregated housing analysis, this study is therefore a clear departure from previous studies on the determinants of homeownership affordability. Unlike previous studies, a disaggregated approach was utilised to identify the key drivers of homeownership affordability in Greater Sydney. It allowed us to gauge the sensitivity of the determinants of homeownership affordability in the different regions of Greater Sydney - western, inner-west, southern, eastern and northern regions1. To the best of our knowledge, this study is the first dedicated sub-city housing analysis to examine the drivers of homeownership affordability. As highlighted by Randolph and Tice (2014) and Bangura and Lee (2019, 2020), Sydney is characterised by diverse socio-economic and demographic mix. These features make Sydney an ideal case study for a sub-city modelling of homeownership affordability. An empirical analysis of local demand and supply-sides drivers of affordability could offer more information to policymakers for informed decision-making on housing affordability. The study contributes to housing literature in the following ways. First, this is the first submarket analysis to identify the main drivers of homeownership affordability in each region of Greater Sydney. We provided an enhanced understanding of the sensitivity of these factors to the residents in different regions. Specifically, we found that Western Sydney, the most socio-economically disadvantaged region, is mostly affected by changes in the drivers of affordability. Moreover, we examined the role of housing investors in determining housing affordability and found a direct and significant relationship between housing investment and affordability in Western Sydney, while no similar evidence is available in other regions. This intuitively explains the role of housing investors in worsening homeownership affordability in Western Sydney. These findings address a significant knowledge gap in housing literature in general and submarket or regional literature in particular. Unlike previous studies (e.g. Lee and Reed 2014), our findings have provided empirical evidence on how exactly these determinants impact homeownership affordability in the different regions of Greater Sydney. Our study has contributed to the debate on the effectiveness of a uniform housing policy, through which enhanced housing policy could be formulated. These findings could be of interest to 1 See Appendix 1 for the LGAs that make up each region 3 | Page policymakers, investors and other housing stakeholders for better analysis and policy formulation. Second, this study did not only examine whether there are variations in affordability, but also investigate the factors that cause the variation in affordability and how changes in these factors will affect various households in the different regions of Greater Sydney within Stone’s (1990) shelter poverty framework. The shelter poverty theory asserts that housing affordability should consider both households’ housing decision and their non-housing consumption. Importantly, housing affordability problem would be more severe among lower income households, and this could be partly attributed to a problem of widening income inequality (see the hypothesis section for the details). Recognising the income-inequality and other socio-economic discrepancies across regions, the unique research design of this study, a disaggregated approach, allows us to compare the sensitivity of changes in key drivers of homeownership affordability such as income, price, rent, housing supply, population and the role of housing investors on homeownership affordability within a metropolitan city, for the first time. Specifically, our results found that homeownership affordability in Western Sydney region is very sensitive to changes in these determinants compared with other regions especially the high-income eastern and northern regions. The results reflect the assertion of Stone (1990) which highlighted that households in low-income Western Sydney region would have lower residual incomes (remaining income after housing expenses) than their high-income counterparts. Thus, we support the validity of Stone’s Shelter poverty model and illuminate a way to apply the theory in a real practical setting of housing affordability analysis. This information could be used by policymakers to address the skewed effect of deteriorating homeownership affordability in a metropolitan city. Lastly, to the best of our knowledge, the study is the first to employ the relatively recent Westerlund (2007) error correction panel cointegration test together with a pooled mean group (PMG) estimator to establish the long run relationship between homeownership affordability and its determinants in a panel form. This cointegration model has better size accuracy and superior power