Cross-posted from Friendly Jordies The Facts blog, which provides the policy speak alternative to his cunning video take on Australia’s affordability woes:

As reported by Greg Jericho for The Guardian, Australian property prices grew by nearly 25% in 2021 – a figure described as “insane”. As Jericho states, another way of describing this figure is that housing affordability is arguably 25% worse year-on-year. In 2021, it was reported that Australian land values had grown nearly 28% in a single year, a figure that trumps more than the “entire value of all of Australia’s wealthiest companies, as measured by the market capitalisation of the ASX.”

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Property Values Compared to Wage Growth

The significance of Australia’s most recent housing boom period is also expressed by comparing the growth in housing prices against wages and disposable income: Since June 2020, residential house prices having risen on average by roughly 28%. During this same period, wages have risen barely 3%.

In a similar fashion, since 2012, household disposable income has grown by 30% on average, whereas property prices have risen 82%. This is in contrast to an arguably steadier and more balanced level of growth seen across those same metrics in decades prior. As suggested by Jericho:

“Consider that in the 10 years from September 2003 to September 2013, Sydney house prices grew 31% while wages went up 41%, but since then house prices have soared 105% while wages have risen just 18%.”

Interventions into Housing Affordability

The Australian government have attempted various interventions to tackle the housing affordability crisis over the past decade. For example, the Morrison government recently announced the continuation and expansion of the Home Guarantee Scheme, which allows first home-buyers to purchase property with a deposit as low as 5%.

CoreLogic’s Eliza Owen has criticised the scheme, claiming that Australia’s housing prices would not be reduced nor even have their growth restricted as a result of the scheme. Furthermore, Owen claims the scheme would not push house prices down, nor even restrict their growth and that the scheme only serves to target housing accessibility while not actually addressing the actual issue of housing affordability:

“It is targeting accessibility of ownership, while maintaining the value of housing assets. As such, it does nothing to address the underlying factors leading to less-affordable housing.”

UNSW Sydney’s Nigel Stapledon noted that a more ideal solution, rather than the Home Guarantee Scheme, would be on that directly address the issues which are driving up prices. Stapledon also expressed concerns about repeating the same mistakes made in the lead up to the Global Financial Crisis.

The major concern with this scheme is the risk those using it to buy a home may then get into financial trouble and default on their mortgage. This was a contributing factor in the US subprime mortgage crisis that led to the global financial crisis of 2007-08. Policies designed to get low-income households into the market appeared to work until the crisis hit. Then house prices tumbled and many were forced to sell at big losses.

The Australian Dream Report

A recent report compiled by the House of Representatives Standing Committee on Tax and Revenue, titled The Australian Dream: Inquiry into housing affordability and supply in Australia, investigated the current state of Australia’s housing affordability.

The committee conducting the inquiry was chaired by Liberal MP Jason Falinski. The findings were criticised by Karl Fitzgerald from Prosper Australia, who claimed that the report “which is the product of little more than six months of deliberation, tinkers round the edges rather than tackling the fundamental problem – that housing has turned into a financial asset class.” Fitzgerald also suggested that Mr. Falinksi’s past in the property sector influenced the final recommendations of the report:

“It’s not surprising that a Senate report on housing affordability chaired by a former property developer gives a free pass to the property industry. Liberal MP and committee chair Jason Falinski’s view that developers should be given all the housing supply they want may well have been written by the Housing Industry Association (HIA).”

One submission to the inquiry stated that one of the principle causes of the rise in Australian house prices is due to monetary policy, beginning with the explicit request by the Reserve Bank of Australia to have the Australian Bureau of Statistics reform the Consumer Price Index. This change was made so that the old housing method, one based on total mortgage costs of all properties, would be changed to what is effectively “a new house construction index”. The submitter continued:

“At a stroke this removed many household’s largest item of spending from the index. Prior to 1998 income and house prices used to track each other. Since then they have diverged. Although another important factor (the capital gains tax discount) was introduced that year, the loss of the interest rate buffer is likely the primary cause of house price rises since 1998. It is notable that the housing ‘booms’ beginning in 2013 and again in 2019 and accelerating in 2020 were both associated with significant interest rate cuts. Had land not been removed from the CPI, interest rates would have risen and checked the booms.

Supply & Demand vs. Low Interest Rates

As described by Fitzgerald, the debate around Australia’s housing has often been directed towards a need to address supply: by developing enough properties and addressing demand prices would be expected to fall. However, the COVID19 pandemic has provided a case study that seemingly dismisses this argument, as Fitzgerald explains:

The pandemic induced hit to net migration of -95,300 was equivalent to an extra 36,653 homes becoming available to the market. Instead of this added supply reducing pressure on land and housing prices, we saw a record surge…As this data reflects, raw market power is the driver of such excessive increases…Instead of the focus on supply, the role of record low interest rates and the demand it is directing must be recognised. That is the one common factor across economies.

The above graph, provided by Prosper Australia, notes particular government interventions and changes to interest rates and the correlated affect to land values. It is also significant to note how land values have grown in correlation to economic crises, as Fitzgerald explains:

Two out of the three most aggressive years for land price inflation have been during major crises. The 2010 global financial crisis bailout inspired an increase of $672.6 billion — a record at the time. That record was beaten in the boom year of 2016–17, which saw a $683.5 billion increase. Now we can add 2020–21 to the record books as the worst performing year for housing affordability — by an additional $1 trillion. One thing is certain, land owners enjoy the gains of any government support offered to the market.

Property Values by Capital City

Looking at property prices per capital city, Sydney, Brisbane and Canberra each saw growth of 27%, 28% and 29% respectively, with Hobart seeing the highest growth amongst all capital cities of 30%.

As an example, a known residence in Cronulla, Sydney, referred to locally as the “spaceship house”, sold for $14 million in December of last year. The sale of the property has surpassed all previous records for property sales in the Sutherland Shire by at least $3 million. The recent sellers first bought the property in 2014 for $4.3 million, earning them a return of just above 225% in under 8 years. Built in 1973, the property was originally sold in 1978 for $185,000.

The significance of Australia’s recent property value growth can be expressed by comparing the situation of would-be property buyer from 2012 to the situation now. In Brisbane, following the GFC in 2012, house prices were growing at a steady rate of roughly 4% per year. A would-be property buyer in December of 2012, planning to purchase a house by December of 2021, would be predicting the median price for a house to grow from roughly $440,000 to roughly $585,000. With the exponential growth seen since December of 2020 however, the reality is that the median price had reached $765,000.

Brisbane’s Median House Prices, Credit: Greg Jericho, Guardian Australia

You can learn more about Australia’s capital city house prices for 2021 at the ABS website.


Land Price Increase = 86 Years’ Banking Profits

Falinski’s Free Pass to the Property Industry;fileType=application%2Fpdf

The friendlyjordies team would like to express our appreciation to Karl Fitzgerald for his work in informing this story.