Why Australian property keeps going up
According to the latest data from CoreLogic, the Australian residential property market in Australia is valued at AU$9.9 trillion dollars, dwarfing other big asset classes like Australian listed shares (AU$3.0T) and commercial property (AU$1.2T). Stakeholders, such as own-stayers, investors, banks, and governments at all levels have a lot riding on the 10.8 million dwellings – in fact, not only do they not want it to fall, but they each proactively do things to make it grow faster – and usually faster than inflation.
It’s important to start with the basic fact that overall Australia is undersupplied with residential property and has been for many years. Even at the fastest rate we’ve ever built at, we still haven’t been able to keep up. Compounding this, is that certain types of property in certain locations are much more undersupplied (e.g. entry level priced landed bungalows in urban growth areas) than in others (e.g. non-landed properties in the CBD and surrounds). The simple laws of economics dictate that if something is undersupplied, and there is huge demand, that the prices will keep rising.
Now, starting with the big picture, Australia was the only country in the world with nearly 30 years of uninterrupted GDP growth – this was strongly fuelled by skilled migration. It came to halt with Covid induced border closures, but there are calls from all sectors to not only provide more incentives to attract skilled workers quickly but to also make up for those that we missed out whilst in lockdown. These skilled workers are usually well paid, and can afford to pay high rents, and then later service large mortgages. Also, a priority is getting students back in the country, many of whom will stay in Australia whilst putting their skills into practice in well-paid jobs and move to PR/citizenship over time. All these people need somewhere to live and will compete with everyone else for housing.
At the Federal government level, there are generous tax incentives (such as negative gearing, depreciation, capital gains tax & self-managed superannuation fund tax discounts) that also make investment property very attractive. History has shown that when political parties try to reduce or remove these benefits, they are punished at the polling booth – so they dare not touch these or else they may find themselves out of office. Also, most politicians own a portfolio of properties and have large mortgages against them – if they did something that had the potential to lower prices, they would have very angry voters with mortgages larger than the value of their home – resulting in very short careers for those politicians! But politicians are usually under a lot of pressure to be ‘seen’ helping first time buyers into the market since affordability is so poor – but over the last 60 years, history has shown that whatever incentives they’ve offered, the market has risen by at least as much as the incentive (usually more!). This trend is likely to continue as housing affordability worsens for first home buyers entering the market.
In fact, all levels of government need property to keep rising, not just Federal, which receives its benefit from income tax and capital gains tax. State governments get the bulk of their receipts from stamp duty and land tax, and local government receive rates based on the land value (i.e., the higher the land value, the more they can charge in rates to pay for services including garbage collection, maintenance of local roads & parks, funding local libraries and community centres, etc). In addition, local (and sometimes state governments) charge developers ever increasing amounts for permits/approvals and contributions to infrastructure (e.g., roads, parks, schools, etc). Plus, government authorities (such as water and roads authorities) will also charge developers a lot of money or require them to pay for certain civil works. These additional costs, additional complexity with expensive specialist consultants, and the holding cost of ever longer delays in approvals, all add up and are passed onto the buyers with constant price escalation.
In the last quarter, Australia’s inflation hit 5.1% (annualised), which was mostly attributed to soaring materials costs due to lack of supply, supply interruptions, and competition from other sectors (e.g. commercial, and infrastructure) plus transport costs (due to shortages of oil because of the war in the Ukraine). Building materials are usually bulky, heavy, and only manufactured in specialty factories – so they have long distances to travel to work sites. In addition to these costs in home building materials, the lack of skilled tradespeople due to competition from commercial & infrastructure projects, and many builders/tradies going bankrupt and permanently leaving the industry, plus delays from Covid interruptions on worksites have also continued to push house prices higher. It is expected that these issues will continue for many years to come.
All the items mentioned so far, are considered ‘supply side’ drivers which effectively ‘underwrite’ the residential property market and ‘push’ up the price and prevent it from falling. However, in addition to this are ‘demand side’ drivers, which ‘pull’ up the price.
Since Covid lockdown (especially in Melbourne, which had the longest in the world) and with working from home considered a highly valued (and almost mandatory) benefit, there has been a fundamental shift in the types of property own-stay buyers and renters want. The highest demand is for properties which gives families a great balance and the lifestyle they want. They do not need to live in the city or surrounds and can have more space and a healthier lifestyle in areas with great amenities (as found in master planned communities). Since Australians have been saving record amounts during Covid lockdowns, they are willing to spend more (and more!) on properties that meet those criteria – as they see it as an investment too based on future own-stay buyer demand (NB the latest CoreLogic report showed that entry level homes have grown faster than the middle or the top of the market in Melbourne, plus properties with greater amenities have been shown to be in greater demand than those without).
According to the latest data from the Reserve Bank of Australia, investors are starting to come back strongly into the residential market. Many are seeing that vacancy rates are at all-time lows, producing competition amongst tenants and driving rent amounts to their highest level of growth in many years. The combination of strong rental yields, high capital growth, easy borrowing with low interest rates, tax benefits, and providing a hedge against (ever increasing) inflation are prompting many investors to take money out of the share market and pour a lot of it into the property market – thus driving up prices.
Lastly, in the latest report from FIRB (Foreign Investment Review board), they found the number of foreign investors had dropped (but the values had actually gone up) in the last year. They attributed this to fewer residential buyers, but since Australian borders are now open to all double vaxxed travellers (without testing or quarantine), it is expected that many of those buyers who want to invest in a ‘safe haven’ with strong & steady capital growth, easy lending, and good yields will be able to come to ‘see and touch’ the properties and make a purchase.
So, whilst nothing can ever be guaranteed to grow, there are many, many factors on both the ‘supply side’ and the ‘demand side’ that help not only underwrite the cost of Australian residential property but pull up its price due to diverse and eager buyers, helped with easy (and cheap) funding from the banks. This trend is expected to continue for many, many years providing great cashflow and capital gains for local and overseas investors.
Disclaimer: This article is for general information purposes only and should not be taken as advice. Always seek professional advice from suitably qualified professionals familiar with your situation and goals.
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Steven Molnar is Head of Research and Education for Resimax group. With over 25 years in property and finance in Australia and internationally, he brings a unique perspective to each interview with interesting guests and property insights. Resimax group is one of Australia’s largest private property developers, Resimax Group Investor is headquartered in Kuala Lumpur MY.