There are a few things that are uniquely Australian, such as vegemite, the Sydney Opera House, and debating the state of the property market.
However, while there is frequently some head-scratching or incredulity at backyard barbeques, there is no mystery. The basic economic reason is that demand exceeds supply. The more fundamental point is why demand has risen but supply has not kept pace.
1. Access to credit
Interest rates are the new location when it comes to home pricing. According to Domain’s senior research analyst, interest rates are the primary driver of the property cycle, with cheap money and easy credit pushing prices higher.
Lower rates boost the borrowing capacity of owner-occupiers, allowing them to buy a larger property or outbid competitors for the home they want, while lower rates make rental income more appealing to investors.
Interest rate settings are made for reasons that have nothing to do with the property market. The Reserve Bank lowers interest rates to encourage employment and consumption, as well as inflation, rather than to raise property prices. It’s also taking place in a world of ultra-low interest rates.
2. Population growth
Population growth, which means more people need a place to reside, is the key driver driving up demand in the long run. The national population increased by 0.5 per cent last year, owing primarily to natural growth. From the turn of the millennium through the onset of the pandemic in March 2020, it grew at a rate of 1.5 to 2% each year, with Sydney and retirement living in Melbourne accounting for a significant share of that. Immigration, which usually accounts for the majority of the population increase, came to a halt last year.
Many economic and social factors, not all of which are related to housing, influence national immigration policy. Immigration has numerous advantages, ranging from increased economic growth to increased cultural diversity. However, there are drawbacks, such as increasing demand for housing.
The effect of immigration on property prices has been explored by Peter Tulip, the principal economist of the Centre for Independent Studies. He looked at the period from 2005 to 2018, when annual immigration increased from around 120,000 to around 190,000 people. He discovered that if this had not happened, rentals would be 9% cheaper and that this would have a knock-on effect on purchase prices.
3. Planning controls
When supply catches up to demand, there is always a lag, and planning limitations can worsen this by preventing supply from meeting demand. In the context of Australian cities, this entails a cap on increased densities.
The fact that developers are not permitted to build high-rise flats in most regions, according to Tulip, is the primary source of housing affordability. The fundamental reason for these planning restrictions is because local neighbours are adamant about preserving neighbourhood character, and these justifications overlook the interests of those who aren’t involved in the decision – potential buyers. However, the maintenance of neighbourhood character is worth very little in terms of neighbourhood amenities.
4. Tax policy
The tax policies in Australia favour property investment over other assets. Negative gearing refers to the ability of an investor to deduct investment losses from their income, making it tax efficient. You can negatively gear shares technically, but it’s a lot more difficult. The logic goes that it’s the same as making a loss in business; you only pay taxes on earnings. The counter-argument is that the losses were planned.
Negative gearing and capital gains tax go hand in hand (CGT). Normally, investors would avoid losses, but they make an exception since they are betting on a financial gain in a few years.
