Reasons behind Australia's strong dwelling price growth
Australia’s dwelling prices are high relative to household incomes and last year defied expectations by rebounding after only the briefest of blips during 2022.
Rental markets remain hot, too. Vacancies are at, or near historic, lows while rents are climbing quickly.
Typically rising mortgage rates would see housing markets cool, but despite interest rates rising 13 times since mid-2022, housing values downunder continue to rise.
What is behind the unexpected resilience in prices?
It is partly down to global trends, such as people working from home more and so placing a higher value on their living space.
But across Australia there are three additional strong domestic factors.
1. Overseas demand
The first is that foreign demand for Australian housing is greater than ever. Net immigration was over 500,000 in the year to June, more than twice the intake in 2019.
At the same time some 650,000 international students call Australia home, and all need somewhere to stay.
And – importantly - foreigners who do not live in Australia full-time seem keen on its housing market. Such buyers snapped up 10% of newly built homes sold during 2023.
And according to the National Australia Bank’s recent survey of the Australian housing market offshore buyers purchase about 5% of established homes sold each year across the country
Much of this recent overseas demand for Australian property has come from potential owner-occupiers rather than investors as in previous waves. This is especially the case when it comes to Chinese buyers.
Last year, Australia reclaimed its position top position for net millionaire arrivals, with some 5,200 individual entries. The next highest was the United Arab Emirates with 4,500 such entrants.
Rather than buying smaller properties to let, such buyers are opting for spacious ones in which they will actually live.
Since 2020 the median price of homes around the world receiving inquiries from Chinese buyers has risen from $296,000 to $728,000.
This impact can also be felt on the ground.
According to data just released by PropTrack, some 95 additional suburbs achieved a median price over $1 million across Australia last years. The Brisbane suburbs of Sunnybank Hills and Sunnybank – both Asian nationality strongholds - recorded the strongest growth last year, with the median price rising by $209,000 (up 23%) and $204,000 (up 21% per cent) respectively.
2. Material costs
The second factor is the cost of materials.
The producer price index for construction has risen by 30% since the start of 2021. As well as making houses costlier to build, this has left Australia with fewer builders.
More than 1,500 construction firms collapsed in the year to June, mostly owing to cost overruns. The result is a reduced supply of new homes and even more upward pressure on prices.
3. Lack of new housing supply
But the biggest impact on housing values is the brake on home-building and this is the third factor driving house prices up, local councils’ planning rules.
A prime example is Sydney, where large numbers of homes face development restrictions. Meanwhile, zoning rules raise house prices well above the combined underlying cost. Research suggests that this increase is a whopping 73%.
End note
Looking forward there is likely to be a need to build some 250,000 new homes per annum across Australia over the next decade. The best the domestic construction industry has ever achieved was 220,000 builds back in 2017. The annual average is 192,000 new builds over the past decade.
And whilst the federal government's Housing Australia Future Fund and the National Housing Accord Facility – which aims to build some additional 1.2 million new homes over the next five years - have attracted strong interest from potential participants, this will be extremely difficult to achieve given the current state of Australia’s building industry; local town planning laws, including NIMBYism; and the high cost of building materials.
It is likely that Australia’s housing prices will continue to rise.
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