What are the long-term drivers of Australian house prices?

Daniel summarises the whitepaper What drives Australian house prices over the long term?, which takes an interesting long-term view on the economics of house prices including the combination of our demographic and geographic make up.

In February 2023, property settlement group PEXA and residential property business LongView published the first of three whitepapers on Australia’s housing crises. The aim of the series is to unpack and understand the economics of Australia’s housing issues to inform solutions to our housing challenges.

We’re summarising and sharing this work as housing is an issue close to our heart at .id (informed decisions) – as is using a solid evidence base when making decisions! You can find the link to the full whitepaper at the bottom of this article.

The series identifies three core issues for housing in Australia:

• Purchase affordability
• Rental affordability
• Rental experiences

This first paper focuses on the purchase affordability, with the others addressed in subsequent papers.

House prices – the usual suspects may not be the actual culprits

That residential housing price growth has far outstripped incomes over recent decades is well established. Several factors are commonly identified as key drivers of this growth, which the paper finds to have a lesser effect on prices over the long term.

Government incentives are not a key driver of house price increases. The RBA published estimates that the capital gains tax exemption and negative gearing account for less than 2% of recent growth in house prices. Likewise, first home buyer grants have had little effect on prices over the long term.

Foreign investment can influence new apartment prices. Foreign purchases are overwhelmingly concentrated on new build properties (typically apartments), which represented 57% of all foreign investment property transactions. Although foreign investment represents a small proportion of the Australian residential property market, it does have some influence on demand and price for new apartments.

Interest rates can impact pricing but the long-term effect is complex. Recent cash rate changes have demonstrated the short-term impacts the rate can have on house prices. However, house prices have grown consistently over the last 60 years at an average rate of approximately 7% even as the RBA cash rate has varied significantly over the same period.

Mixing an urbanised population with low-density cities drives demand for appropriate housing

Australia has one of the highest growth rates in the world. (We wrote recently about the nation’s return to growth following the easing of COVID-19 restrictions.) This growth is fuelled predominantly by overseas migration, meaning that growth is from a population likely to be seeking housing.

There is a worldwide tendency for people to reside in urban centres; this is particularly pronounced in Australia. 51% of our population lives in three cities (Sydney, Melbourne, Brisbane). In the UK, half the population lives in the nine largest cities. In the USA, it takes 36 cities to contain half the population. Additionally, Australian cities have unusual density profiles. Sydney, Melbourne and Brisbane all have large, low-density areas surrounding the CBDs. Many cities in comparable countries have a much higher proportion of medium-density areas, making it easier to live closer to jobs, services and amenities. Australian cities are continuing to densify, creating pressure on a fixed supply of desirable land.

Zoning laws play a key role in the density profile of Australia cities and, therefore, on housing prices. This is one area where city councils have a direct role to play. It also highlights the potential conflict between initiatives to increase housing density across a city and councils’ own development plans.

Land plays a pivotal long-term role in house prices

Australia has plenty of land, but there is a limited supply of well-located land. (Recent floods in multiple states have shown that this supply may actually be diminishing.) Continued population growth makes well-located suburban land scarce and in high demand. The natural result is increased value.

Take Melbourne as an example. Price growth between 1991 and 2006 was focused on inner city areas; between 2006 and 2021, it was concentrated in middle and outer suburbs.

Land values accounts for the difference in growth between house and apartment prices

There is an increasing divide between the prices of houses and apartments. Comparing relative increases in Melbourne between freestanding houses, townhouses, medium-density apartments and low-density apartments follows a similar pattern to the amount of land within each property type.

A simple way of looking at it: land appreciates, buildings depreciate.

Australia’s housing economics creates clear winners and losers

Home owners are the clear winners. Detached house owners have benefited from the highest growth in land value over the last 30 years. This trend is unlikely to change.

First home buyers in particular are being pushed to the edges of our cities. People living in the ever expanding boundaries of our major cities are increasingly less able to access the benefits of living “in” a major city, such as increased employment options, reduced commute times and access to amenities and services.

Low-income home owners can be disadvantaged by house price growth. Rising house prices don’t necessarily improve a homeowner’s ability to buy a better house (all properties are increasing) but they do mean that the cost of owning a house of the same quality is increasing, through proportionate costs such as council and insurance rates.

It is increasingly difficult to enter the housing market. Deposits are more difficult to accrue. Meanwhile, renters also lose out on access to the most highly protected asset class in the country.

How is .id contributing?

The next piece in the PEXA / LongView series focuses on private rental systems in Australia; the final whitepaper will focus on solutions. We will post summaries of these whitepapers over the coming weeks.

In the meantime, we are working side-by-side with those on the “coal face” of the housing crises. Macro analysis is important but, as always, there are local dynamics that must be considered for local decision making. Local governments have key roles to play, in everything from zoning laws (as discussed above) to advocacy.

.id (informed decisions) – now a subsidiary of PEXA – supports our local government partners in this area, sharing our expertise through consulting work and, most importantly, the development of new information tools in our local government suite.

housing.id Make informed, evidence-based decisions delivering affordable and appropriate housing for our communities, and monitor their impact.

views.id Represent your community’s best interests in decision making by understanding what’s important to them and their local experience.

Use the link below to view the full whitepaper.