The most astonishing aspect of Australia’s housing market growth is its sheer uninterrupted longevity. While the market is currently experiencing a period of softness, the last time that Australian houses fell in value over a period greater than a year was before Federation.
To say that the market has done well in Australia is an understatement. House prices in the eastern capitals have risen consistently at an average rate of more than 7% for decades, far outpacing both inflation and wages and withstanding multiple major financial crises.
Today, Australian homes are among the most expensive in the world and residential land makes up 48 per cent of our national wealth.
Australian cultural iconography, from The Castle to The Block, is rooted in the ever-increasing social anxiety surrounding home ownership. Amid the current bout of soaring interest rates and inflation, it’s no wonder that homebuyers are stressed.
So why is this a problem, how did we get here, and what is behind this trend?
A watershed report by LongView, an Australian property firm, and PEXA, the owner of Australia’s digital property settlement program, answers just that in the first of a series of three Whitepapers breaking down the problems and solutions to housing in Australia.
Home ownership has fallen significantly among all age groups nationwide. This is particularly the case for younger Australians, who find it harder and harder to afford the ever-increasing deposits required to buy a house. Indeed, many first home buyers now rely on the ‘Bank of Mum and Dad’ to enter the property market.
Since 2017, 46% of first home buyers have received some form of financial assistance from their family. For 24% of first home buyers, this took the form of a cash gift, averaging $84,000 in the ACT, $88,000 in Victoria and $128,000 in NSW. For those without access to family wealth, a group that more commonly includes sole parents and children of recent migrants, the prospect of owning a home is approaching impossibility.
Part of the problem, LongView and PEXA argue, is that there is a lot of misinformation about what drives house prices. Although interest rates and housing supply both play an important role, neither fully explains the growth we’ve seen. After all, other countries have similarly low interest rates, along with supply shortages, yet have experienced nowhere near the growth in Australia.
Commentators often point to government policies as the driver of house prices – and it’s true that houses are among the most aggressively protected assets, with numerous government policies. Yet the cumulative impact of policies like the first home buyers grant, capital gains tax exemptions and negative gearing account for just a tiny fraction of the more than $7 trillion in value growth seen in real estate Australia-wide over the last 20 years.
Rather, Longview and PEXA suggest that house price growth has been primarily driven by something far more intrinsic to Australia’s profile, namely its demographics and low urban concentration.
Due to immigration, Australia has one of the highest population growth rates in the developed world, outstripped only by Israel. This growth rate fuels a constant demand for more housing.
Further, more than half of Australia’s population is concentrated in just three urban centres: Sydney, Melbourne and Southeast Queensland. Australia’s major cities are also unusually spread out, characterised by dense CBDs surrounded by expansive low-density suburbs.
The Australian population is projected to become even more concentrated, with almost 57% of the country due to live in Melbourne, Sydney, or Southeast Queensland by 2054, up from 51% in 2021. Combine this with the difficulty of increasing density in NIMBY-dwelling middle suburbs, and it’s no wonder property in Australia is so hot.
The result of this is that well-located residential land – land where people can live near to jobs and services – is in ever-increasingly short supply, more so, for example, than in the US or the UK. More specifically, LongView and PEXA found that land accounts for most of the growth in property value over the last 30 years in Australian capital cities. Indeed, the value of land also accounts for much if not most of the difference in price growth between houses and apartments. High-density apartments have grown relatively little, averaging just 1% annually for the past 15 years, even as houses have grown by more than 7% over the same period. As they put it, when thinking about property growth, “land appreciates, buildings depreciate”.
So, what does this all mean?
Put simply, there is an ever-worsening divide of winners and losers in the Australian housing market. Homeowners and those with access to the ‘Bank of Mum and Dad’ increasingly benefit from long-standing growth, while first home buyers are locked out of owning their own home.
Those who are forced to buy far from the centre of cities are denied the opportunities that may increase their quality of life, including access to the higher paying jobs that are in the central city and employment hubs. They aren’t reaping the economic benefits that living in a city should bring them, benefits that generations of Australian city and suburb-dwellers have enjoyed.
Without solutions from the public and private sector to resolve this divide – solutions that can only be developed by analysing the true drivers of our housing market – it will only worsen.