Why Australia’s House Prices Are The Highest They’ve Ever Been

Since 2000, house prices across Australia have climbed by 150%.    

Previous generations bought their first homes for around three times the average annual income. Now, that figure is more like seven times.    

When Covid-19 first hit Australia in early 2020, Australia was heading into its first recession in 30 years. Economists thought that the property market was going to tank and the housing bubble was finally going to burst.    

Only, that didn’t happen. In fact, the cost of buying a house is higher than ever before and that rise is set to continue for at least another year.    

So, why is Australia’s housing market so out of control, and how did we get to this point where it feels like an entire generation can’t afford to buy their own homes?    

To really understand how we got to this point, we have to go back a few decades to the 1940s.    

In 1945, about a month after the Second World War ended, politicians called a national conference in Melbourne to talk about Australia’s urgent lack of housing.    

Australia wanted European migrants to come and resettle here, to increase the number of workers for defence and development in the post-war period.    

It was known as the ‘populate or perish’ approach to immigration, and it helped to boost the population by 50%.    

But houses had stopped being built during the war, and those waves of Italian, Greek, and Balkan immigrants meant that the Australian population was short of about 300,000 houses.    

In 1947, housing got its own ministerial portfolio for the first time, and the next couple of decades saw a boom in the number of houses being built.    

If you’ve spent any amount of time in Australia’s suburbs, you’d probably know the type of designs that were popping up around the country.      

The national dream became focused on owning those suburban dream homes and ownership rates jumped from about 40% in the mid 40s to 70% by the time the 60s rolled around.    

Buying a house in that period was helped by a couple of things.    

Firstly, more people than ever before could actually afford it because of an increase in full-time work.    

There was also a lot of public housing being built and then being sold into private ownership, and people who had served in World War II were eligible for specific war service home loans.    

Nearly 270,000 servicemen had taken up this offer by 1975.    

It’s also worth keeping in mind that there were rent controls in place at the time that were a bit of a deterrent to landlords, which sort of discouraged people from buying houses just to rent out.    

Then a couple of important things happened in the 80s.  

Australia’s financial system started to shift from being really tightly controlled to becoming increasingly deregulated.    

Interest rate ceilings on bank deposits and loans were scrapped, and there was suddenly this greater availability of credit and options for borrowers.    

And then in 1985 this thing called negative gearing was abolished.  

It’s basically when the combined cost of holding a property – like maintenance costs and interest repayments – outweigh rental income.    

Negative gearing was reinstated two years later, but that temporary abolishment really drew a lot of attention to the concept as an investment strategy.     

Under Australian tax law, negative gearing is available to anyone who owns an investment property; if the money from rent doesn’t cover the other costs, you can deduct the loss you’ve made from your annual income tax.    

That can be really useful because it can help push property owners into lower tax brackets. 

In the early 2000s, the Howard Government then changed the way capital gains tax worked, which just mounted that interest in property investment even further.    

Dr Chris Martin, UNSW: “That meant if you made money out of house prices going up as an investor, you paid less tax than if you made money actually doing some work. When it was combined with negative gearing, the two things working together made the whole thing very attractive. It’s really at that point that you get a a growing departure in house prices and incomes and rents.” 

That massive drive in property investment has seen Australian property prices skyrocket.    

Year after year Sydney and Melbourne have ranked among the world’s most expensive cities to buy property, and over the past two decades home ownership across the whole of Australia has fallen about 15%.    

When you look at graphs of house prices, they’ve headed pretty much vertically.    

Those prices have condemned huge swathes of the country to a lifetime of renting. In fact, the number of people now living in a privately rented home has increased by about 20% since the mid 1990s.    

But is that such a big deal?    

Well, not being able afford a house can be incredibly disappointing for a lot of people, and there are a lot of issues with Australia’s tenancy laws that don’t accommodate for the renters’ rights.    

For example, in most states and territories no-grounds tenancy terminations are still totally legal.    

But not being able to afford a house has deeper implications for equality in Australian society.    

CM: “There used to be a big bulge of properties around the $200 a week mark, that was the most common price point. The shape of the market has changed and … the most common price point is $400 to $500 now. 

Low-income households, who might’ve rented for long-term anyway … they’re facing a rental market where they’re competing with higher income households. And what that means for them is, they might skip meals, they might skip dental care or health care, their kids don’t go on school, excursions and it’s that sort of deprivation that happens.” 

A total lack of new social housing being built has contributed to that problem, and for low-income Australians facing the harshest realities of our property market, life can be incredibly stressful.    

CM: “It’s an affront to human dignity and no one should have to put up with that and more and more people are.”    

That was all before Covid-19.   

When the pandemic first hit Australia, there were all these predictions that the housing market could drop by as much as 30%.    

But that didn’t happen and, in some cases, it’s actually stronger than ever.    

First home buyers in particular, have been encouraged by things like low interest rates, savings from staying in for the better part of a year, and the government’s HomeBuilder grants.    

And that’s leading to yet another spike in property prices.  

Wildly high offers are being made on houses and experts are literally saying it’s because buyers are doing anything to snap up properties, including making offers way, way over the asking price.    

Some recent data found that Australian property prices are rising at the fastest rate in 17 years.    

So, what does this all mean for the future of Australia’s housing market?    

CM: “I think the most useful tax reform would be around land tax. That’s a state government level tax. It would discourage speculative hoarding of land. 

There are reforms that could happen around Commonwealth rent assistance. There’s lots of people in rent stress who don’t get it because they’re not on some other social security payment.   

And last, but definitely not least is more social housing. We need to be investing in social housing again, so that it can accommodate a wider range of people and accommodate them securely and affordably as it has done in the past.”  

Extreme rises in house prices have almost been normalised over the past couple of decades in Australia, but it’s important to remember that it wasn’t always like this and it’s easy enough to trace where these trends came from.    

And in remembering that, it’s important to recognise that Australia’s property market doesn’t have to be like this in the future. There are ways to change policy to stop those costs skyrocketing and ensure that the majority of people do have access to secure housing again.