BY WEALTH ADVISER
Introduction
The Australian housing market is a complex and multifaceted landscape that can be challenging to navigate for beginners. With its unique characteristics, diverse localities, and dynamic supply and demand factors, understanding the key aspects of the market is essential for anyone considering entering the property arena. In this article, we will explore the fundamental elements that shape Australia’s housing sector, providing insights to help you make informed decisions.
Australia’s Expensive Housing
One of the most striking features of the Australian property market is its high cost. As Dr. Shane Oliver from AMP Investments points out, “House price to income ratios have doubled since the year 2000.” This means that housing affordability has significantly deteriorated over the past two decades. Saving for a 20% deposit, which once took an average full-time wage earner five years, now requires ten years. Additionally, a valuation measure based on the ratio of home prices to rents, adjusted for inflation, indicates that house prices are around 36% above their long-term average. In global comparisons, Australia’s median multiple of house prices to income stands at 8.2 times, higher than countries like the United States and the United Kingdom.
The Diversity of Australia’s Property Market
While it is common to refer to “the Australian property market” as a single entity, the reality is far more nuanced. There is significant divergence between localities, with cities like Adelaide, Brisbane, and Perth experiencing rapid relative price growth recently. As Michael Matusik, a housing market specialist, notes, “This divergence partly reflects a combination of better housing affordability (with prices in Adelaide, Brisbane and Perth playing catchup after lagging pre-pandemic) and relative population growth (with Brisbane and Perth benefitting from interstate migration).
Moreover, the level of overvaluation varies across cities and property types. For instance, while houses are generally more overvalued than units, Perth stands out as the least overvalued market for houses and is actually undervalued for units. Understanding these local variations is crucial for making informed decisions in the property market.
Population Density and Housing Market Trends
Tim Lawless, the Executive Research Director at CoreLogic, sheds light on the relationship between population density and housing market trends in Australia. As the country experiences its fastest population growth since the 1950s, cities and towns are naturally becoming denser. Interestingly, Melbourne and Adelaide have the highest population densities among capital cities, surpassing even Sydney.
Lawless notes that population density has a varying impact on rental growth and property values across different housing segments. For units, areas with high population density have shown slightly stronger rental appreciation over the past 12 months compared to lower-density areas. However, over the past decade, high-density unit markets have generally experienced lower value growth, possibly due to periods of higher unit supply.
In contrast, population density has little influence on house rents and values. Lawless suggests that the stronger rental growth in high-density precincts is unsurprising, given the high level of amenity, proximity to employment hubs, and academic facilities that appeal to a broad range of tenants, including students, professionals, and migrants.
Understanding these nuances in population density and housing market trends can help investors and homebuyers make more informed decisions based on their specific goals and target properties.
A key factor contributing to Australia’s housing challenges is the chronic undersupply of homes since the mid-2000s. As Dr. Oliver explains, “This has been the case since the mid -2000 s when immigration levels , and hence population growth, surged and the supply of new homes did not keep up.”
Supply and Demand Dynamics
A key factor contributing to Australia’s housing challenges is the chronic undersupply of homes since the mid-2000s. As Dr. Oliver explains, “This has been the case since the mid-2000s when immigration levels, and hence population growth, surged and the supply of new homes did not keep up.” The pandemic briefly eased this pressure due to reduced immigration, but the reopening of borders has led to record immigration levels, pushing underlying housing demand to around 250,000 dwellings per year. However, home completions are only around 170,000 dwellings annually, resulting in a growing housing shortfall estimated to reach 200,000 dwellings by June.
This imbalance between supply and demand has been a significant driver of the surprising strength in home prices over the past year, despite the challenges posed by high-interest rates. As Dr. Oliver suggests, “Given home building capacity constraints and the desire to reduce the existing housing shortfall, immigration levels really need to be cut back to around 200,000 a year.”
Key Considerations for Investors
For those looking to invest in the Australian property market, several key factors should be considered. Interest rates play a crucial role, with rate hikes often associated with cyclical price falls and rate cuts usually needed for upswings. However, as Dr. Oliver points out, “forecasting property prices is fraught,” particularly in the current environment where the opposing forces of a major chronic supply shortfall and high mortgage rates are at play Investors should also be aware that property has similar long-term returns to shares, with both asset classes returning around 11% per annum since 1926. Property’s low correlation with shares, lower volatility, and lower liquidity make it a good portfolio diversifier. However, in the current market, where high-interest rates relative to low rental yields often result in negative cash flow for property investments, savvy investors should focus on properties offering decent rental yields.
Conclusion
Navigating the Australian housing market requires a comprehensive understanding of its key aspects, from the factors contributing to its high prices and the diversity of its localities to the supply and demand dynamics shaping its future. While the market presents challenges, such as affordability concerns and the difficulty of forecasting price swings, it also offers opportunities for informed investors who consider the essential elements discussed in this article. By staying attuned to these factors and making strategic decisions based on local market conditions and investment goals, beginners can confidently explore the Australian property landscape.
References: Dr. Shane Oliver, “Seven things you need to know about the Australian property market,”
AMP Investments, 09 Apr 2024. Michael Matusik, “Baby Boomer housing needs,” 17 April 2024. Tim Lawless, “Population density trends and what they mean for housing,” CoreLogic, 1 May 2024
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