Shortcuts / 01 April 2021

Property Prices in Australia

COVID brought on an economic downturn, the likes of which Australia hasn’t seen in almost 100 years, and some analysts thought property prices would collapse. Instead, they’re booming. In this episode of Squiz Shortcuts we’ll take you through previous economic crunches and the era of 17% interest rates, how that period compares to now when it comes to home affordability, and the factors that influence a person’s ability to buy a place to call home.

Before we get into it, how many people own homes?
Well, hello there. The most recent census data from 2016 showed 67% of households own their home – 32% of those have a mortgage, and 35% don’t.

And for young people looking to buy their first home, how does that compare to previous years?
In 1971, 64% of 30-34yos were homeowners, and as of 2016, it was 50%. For 25-29yos, the fall in homeownership was similar.

And that’s because of smashed avo?
Well, that suggestion that millennials were spending too much of their hard-earned on fancy brunches and not enough of saving for a deposit went viral. Another line that irks young property hunters is “back in the 1980s, we had 17% interest rates to contend with.”

But they did, right?
Yes, they did. And we’ll get into the relativities in a sec.

So remind me why rates were that high…
Basically, individuals and businesses were borrowing a lot. The economy became overheated, and a fall in asset prices meant that loans could not be repaid, which put a lot of stress on our banks. That saw economic growth fall, unemployment rise, and with sky-high inflation, interest rates rose to 17% in June 1989. It stayed there until March 1990 as the Reserve Bank of Australia (RBA) applied the brakes.

Hello, recession?
Indeed. Unemployment reached 11%, with many people losing their jobs or they unable to break into the workforce. It took nearly a decade for those numbers to return to pre-recession numbers.

So what was housing affordability like in 1990?
The average income was $27,000, and the average cost of a home in an Australian capital city was $117,500. So while interest rates were hefty, loan amounts were small compared to today.

And today?
They’re big numbers… The average annual income is $89,000. Meanwhile, the average value of both houses and units is $728,500, and the national cost of a house in December last year was around $853,000.

So the gap is a lot bigger between income and home price…
And the amount homebuyers need for a deposit relative to income has never been greater.

The deposit is one issue, but what about taking on debt?
Yup, that’s up too. If we go back to 1990, the annual debt rate per household to income was 68%. It’s now hovering around 185% – and most of that is housing debt.

And property prices don’t look to be cooling off anytime soon…
Aussie home prices surged 2% in February and are expected to do that again in March.   That’s despite a global pandemic, Australia’s first recession in almost 30 years, higher unemployment and virtually no growth in wages… so kinda against all odds. It’s pretty incredible.

Is that because interest rates are low?
There are many factors at play here, but the RBA’s record-low cash rate of 0.1% is a significant feature in property investors looking to buy now. RBA Governor Philip Lowe has said rates won’t rise anytime soon despite those soaring prices because inflation and wages need to increase, and that hasn’t really happened for a while.

Other than higher interest rates, what else can keep a lid on things?
Lowe says it’s up to governments and financial regulators to work out if they need to put lending controls on the banks as they did a few years ago when home prices peaked in Sydney and Melbourne. Then there are government grants for first home buyers and other incentives or taxes they could consider if they decide a dampener needs to be put on the market. 

So will prices keep going up?
The RBA reckons prices will have to start moderating soon for two key reasons. First, we’ve had no immigration for the past year, which should slow the growth in demand for housing. And second, a large number of newly constructed properties have yet to hit the market.

It’s a lot to digest…
It is. Maybe we can’t have a house and our smashed avo too, after all.

Squiz recommends:

Graphs, graphs and more graphs – an almost kinder way to see the numbersThe Guardian

A year on from the smashed avo column, Bernard Salt writes about the reaction The Australian (paywall)


Squiz Shortcuts - A weekly explainer on a big news topic.

Get the Squiz Today newsletter

It's a quick read and doesn't take itself too seriously. Get on it.