Australian Housing Crisis Explained – Forbes Advisor Australia

Compared to the previous decades, Australia’s property market recorded phenomenal growth starting around the turn of the century, led by price rises in the biggest capital city markets of Sydney, Melbourne and Brisbane. House prices are estimated to have increased by an average 6.2% between 1996 and 2010 and another 5.2% between 2012 and 2017, followed by the post-Covid boom of the last three years.

This period has coincided with several unusual events, including the global financial crisis, the mining boom, rising immigration and the Covid-19 pandemic. The main factors that have contributed to booming property prices over the last two decades include:

1. Migration and population growth

Australia’s population has jumped more than 30% over the last two decades to the current 26 million. A big reason for this has been the much higher net immigration rate since the mid-2000s, which has fuelled demand for new homes.

“Our population growth has really accelerated since the early 2000s, but our rates of homebuilding didn’t keep up, especially for apartments and units. Over the last 30 or 40 years, we’ve essentially built the same number of houses per year,” said Tom Devitt, senior economist at the Housing Industry Association

2. Supply constraints

Shortage of land suitable for residential housing has been a key factor in rising prices. Experts say the unsuitability of planning laws means the changes required to accelerate the release of shovel-ready land or to increase housing densities in existing suburbs has been quite slow.

In addition, other supply constraints such as the shortage of building materials the world over has blown out the costs of building new houses. Labour constraints have also been quite acute in residential construction, particularly over the last three years as travel restrictions locked out overseas workers.

3. Falling interest rates

Interest rates affect all asset prices, including housing. Excluding the rate hikes over the last year, interest rates had been on a downward trend since the financial deregulation of the 1980s, resulting in much higher credit availability that stimulated demand. Interest rates on mortgages averaged 8% in 2000, but had dropped to 2% during the pandemic.

“The broad trend in interest rates over the past three to four decades has been down. And that means that even though home prices have been higher relative to incomes, housing affordability has actually been easier than it used to be in earlier decades,” PropTrack economist Angus Moore says.

4. Tax breaks

Australia introduced generous tax concessions on property investment in the 1980s, in the form of negative gearing (where homeowners could set off property expenses against personal income), capital gains tax exemptions and interest deductibility.

It resulted in a boom in home lending as property investors boosted demand in the housing market. While negative gearing and other tax discounts are not the only drivers of house price growth, they have become a much more important factor in the property market as investors have purchased a growing share of dwellings over the years.

5. Government Policies such as First Home Buyer Grants

As first home buyers and younger households have increasingly found themselves locked out of the housing market, successive governments have responded by ploughing billions of dollars into schemes to assist first home buyers. Federal and state governments are estimated to have spent $20 billion in helping some young and low-income people into the market throughout the 2010s.

A recent example has been the federal First Home Guarantee scheme for first home buyers. Many housing economists believe these grants have only made housing more expensive as they boost demand further even though the lack of supply is not being tackled.