Why are houses expensive in Australia? 2 factors that influence prices

Over the past few months, housing prices across Australia have accelerated, after a tumultuous 2020. So, where are we headed? In this article, we discuss some factors that are influencing Australian house prices.

According to data from CoreLogic, Australian capital city property values have increased by 26.17% on average over five years, with median dwelling values rising from $550,000 to $693,936 by March 2021.

ANZ Bank has predicted that house prices at a national level will rise by 17% on average across capital cities through 2021. When focusing on the major capital cities, ANZ expects Sydney and Perth house prices to increase by 19%; Hobart house prices to rise by 18%; Melbourne and Brisbane house prices to rise by 16%, and Adelaide house prices to rise by 13% by the end of the year.

Not only are these figures concerning, with Sydney’s property market already currently one of the most heated in the world with property prices continuing to skyrocket by over $1,220 a day, but it also paves way for a sobering new reality – with it likely that fewer people will be able to achieve the Australian homeowner’s dream.

Some real estate professionals are warning some average Aussies may never be able to enter the property market, given the inexorable rise in prices and influence from bigger ‘forces’. Here’s a deep dive into what some of these forces are, and how they are affecting Australian house prices.

Factor 1: Interest rates

On June 1, 2021, the Reserve Bank of Australia (RBA) announced that it would remain committed to record low interest rates until at least 2024, when it’s expected wages growth will pick up – a potential win for anyone considering taking out a home loan.

Set every month by the RBA, the cash rate ultimately influences whether debt is ‘cheap’ or ‘expensive’. Australians have what is known as ‘high elasticity of demand’ for housing, where even slight reductions in the price of debt can lead to much higher demand for housing.

The RBA’s modelling suggests that housing prices generally increase alongside other asset prices. For example, it estimates a permanent 100-basis-point reduction in the cash rate would raise real house prices by up to 30% after about three years. The modelling suggests a temporary reduction would increase house prices by about 10%.

Following changes in the cash rate, many banks and lenders can either bump up or lower their fixed rates on home loans.

Lower interest rates don’t just have an impact on housing prices. They can also increase the attractiveness of property from an investment perspective, because the return yield on property may be higher than the additional money an investor pays in interest.

Factor 2: Supply and demand

When the demand for housing is high, but supply is low, property prices can rise. Conversely, when there is a glut of housing available, homeowners may lower their prices to compete more in a buyer’s market.

At the height of the global pandemic, house prices in many parts of Australia temporarily took a nominal dip. But, consumer demand soon shifted again, with prices rebounding and beginning to rise in many cities and regional centres.

Supply and demand can also be affected by mortgages and home loans. If interest rates rise, the cost of taking out or refinancing a home loan can become more expensive. Higher interest rates may contribute to a gradual decline in overall demand for new home loans, as potential buyers can be priced out of the market.

Prior to COVID-19, Australia welcomed many immigrants, which in turn impacted supply and demand for residential housing and property investments. Many immigrants have historically moved to Australia’s big cities, which has increased demand for scarce urban housing such as houses, inner-city units and apartments.

Research from Monash University has found this demand has helped to boost house prices by as much as $6,500 a year. According to the study, in cities where the migrant population grew by 1% each year, house prices rose by around 0.9%.While it was expected that the global pandemic, border closures and travel restrictions would have a significant long-term impact on Australia’s immigration levels and house prices, statistics from Juwai IQI’s Q1 residential real estate report has forecast Asian acquisition of Australian real estate, in particular, may grow in the second half of 2021.

Alongside this, demand from cashed-up expats returning home to Australia is tipped to potentially push up prices in the property market in the near future.

In many parts of Australia, demand is currently outweighing supply, with lower numbers of listings and an exponential growth in prices. So, are prices likely to continue their record-breaking growth, or will we see house prices in Australia level out? Only time will tell…

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Brodie Haupt is the CEO and co-founder of digital and payments provider WLTH. He has extensive experience in the financial services, lending, fintech and proptech industries. Brodie has founded and developed numerous businesses in the finance sector, and is currently focused on building and growing WLTH’s payment and banking footprint globally. You can find him on LinkedIn.