Is the Australian property market moving out of control?


  • Australian property prices have increased faster than the wages and inflation level in the economy.
  • RBA maintains a passive stance as it continues to monitor the situation afar and advocates for increased infrastructure to pull down prices.
  • The extension of the HomeBuilder grant from 6 months to 18 months for existing customers could further shoot up housing prices.

Housing prices have taken a steep turn in Australia as they continue to soar in an economy with incredibly low levels of inflation. The increasingly unaffordable housing prices stand in stark contrast to the record low interest rates prevailing in the economy.

Even in a near-zero interest rates environment, homebuyers have found themselves in a fix as they struggle to make ends meet. While many have been able to benefit from the moratoriums offered on their mortgage payments, it does not appear to be a favourable solution. There is a high likelihood that people would be left with little or no choice other than vacating houses after moratoriums end.

The exponential rise in property prices has turned the focus towards the central bank’s policies, with several experts evaluating the effectiveness of such policies in curbing the housing price surge. With wages and inflation not exhibiting a similar growth as in property prices, several questions have been raised on the Reserve Bank of Australia’s (RBA) policies in the COVID-19 era.

RELATED READ: Housing Unaffordability Rising Faster In Western Countries

Yes, it’s not the first time property prices are going crazy!

The current spike in prices was not entirely unforeseen, as experts had long been speculating the prospects of a housing market bubble.  The increased demand for property was visible since the year 2021 began. Sydney saw median house prices rising as people relocated near beaches in a bid to live out their dream lifestyles. This increased demand led to prices reaching new highs.

First time buyers also added to this hike in demand as most of them were able to take advantage of the low interest rates. Thus, housing prices started their upward trajectory and had long been suspected of going haywire in the property market boom. This has been especially true for Sydney and Melbourne, despite lockdown induced slowdowns.

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The inflation conundrum and housing boom

While inflation levels have not been rising despite soaring housing prices, many experts suggest that the inflation rate calculation fails to factor in property rates. The increase in inflation rates over the past decade has been almost half of the increase in housing prices.

While lower interest rates can paint a picture of houses being affordable in Australia, the reality is far different from it. The dwelling prices that are incorporated into the inflation calculation are not rising as swiftly as the actual residential property prices. This is the reason why inflation prices are not able to factor in the increasing house prices and thus, do not perfectly depict the state of the property market.

The illusion of cheaper housing in the current year is superseded by data that suggest that the cost of a house now is much more than that in the past. Compared to 20 years ago, housing prices seem to have overshot all benchmarks and are continually rising.

This can be understood via a comparison with household incomes. If you examine the ratio of house price to household income for the last few years, you will notice a substantial increase. It reflects that income has not increased as much as housing prices in the past few years.

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RBA’s stance on property prices

The RBA maintains a passive stance on the property market boom, keeping a close watch on progressions in the housing market. Recently, RBA pointed out that a shift in people’s preferences has been observed towards houses from apartments.

Despite the recent turmoil, RBA continues to monitor the situation from afar as it believes that the bank can only focus on the lending aspect of buying a house. However, the central bank also highlighted certain factors that have led the country to where it currently is.

RBA governor Phillip Lowe pointed out that better infrastructure is needed to bring property prices back on track. Planning and better availability of transport would divert the concentration of built-up demand from prime cities to newly developing areas, stated RBA.

ALSO READ: Is Australia also staring at a housing crisis, will RBA impose lending restrictions like NZ?

What lies ahead for the property market?

One cannot neglect that the housing sector has aided Australia’s resurgence from the COVID-19 pandemic. Fiscal policy extension and low interest rates have helped speed up the recovery process. Thus, rising housing prices paint a rather optimistic picture of what the future holds for the property market.

Businesses appear to have benefitted in the wake of rising property prices. Additionally, regional cities struggling with subdued property prices have seen a greater increase in prices than main cities over the past few months.

Commonwealth Bank estimates that house prices would further rise by 16% in the next two years, while Westpac has given a higher estimate of a 20% increase in the next two years. Buyers are currently operating under a sense of “fear of missing out” and are making use of lower interest rates. This is evident from the proportion of new home buyers in the recent surge, which is close to 15% of the total owner-occupiers, as estimated by Commonwealth Bank.

To add to the rising demand, the federal government has extended the HomeBuilder grant from 6 months to 18 months for the existing applicants. This would land up the total grant amount to AUD 2.5 billion. The extension of the grant is further likely to instigate the property boom, taking prices to unprecedented levels.

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