When will Australian property prices come down?

It has been puzzling if not paradoxical to see Australian national house prices surging at a time when wages are not growing and when most people’s bottomline is not any better than the pre-covid 2018-2019 period when prices were  actually falling.

Yes, it is rather tragicomic that the world’s most sparsely populated nation has one of, if not the most expensive housing and land on the planet. As a result, most Australians are forced to spend the best part of their life to pay the banks, rent forever, or live an undeserving life of homelessness and indignity.  Well, our leaders, or lack thereof are to blame, but this is another topic and definitely next time.

If you really thought the global pandemic that has put the world on its knees would finally deliver an era of affordable housing in Australia, you were wrong – dead wrong.  Despite initial hopes the housing market could drop by 30 per cent during the pandemic – perhaps, the only positive side of the pandemic, many home buyers suddenly woke up to booming prices.  Home prices in Australia are now at an all-time high.

Sometimes the simplest questions are the hardest to answer. Like this one: When will the housing market come to its senses?

To be able to safely say home prices will stabilise at a sensible level, we have to substantiate why the current property prices are artificially inflated, driven by the speculative mania and don’t actually reflect the real economic fundamentals (it would mean the price level and growth rate are unreasonable and unsustainable).

There are a few short-term immediate price pressures which are expected to wear off in the coming months and some long-term factors that have been around for a long time as no federal government has had interest or political win to tackle them unless the current deepening housing crisis changes this.

  1. There has been some genuine momentum given that overall market was subdued for the best part of 2020, and a large number of buyers, who were already sitting on pins and needles with their pre-approvals for months, jumped back to the market as soon as the outlook improved. The low market activity was so bad in 2020 that dwindling stamp duty revenues had inspired the Berejiklian government to come up with a strategy to overhaul the tax law by replacing stamp duty with an annual land tax. As a result, a sudden increase in demand against unmatched limited number of property listings would logically expected to lift prices for a short period of time. However, this factor will likely wear off by August-September.
  2. Scrambling to recover the financial losses of the low market activity,  Australian banks started to let themselves go as from September 2020 on the back of formally and informally relaxed lending signals by the regulators.  This can be seen from the Big Four banks’ recently more than doubling profits and higher dividends. In fact, all Australians – both buyers and sellers have been disadvantaged by the soaring prices almost equally (No matter how high the price is, the seller usually needs to buy a new property which has obviously also become expensive, with additionally high stamp duty and larger debt). So, states, lenders and property agents are the only winners.
    However, lenders can’t simply sustain the current level of lending due to their risky overexposure to the property market. This is very likely to be curbed soon either by regulators or when the hotheads come to their senses given the unreasonable prices. The current situation simply shows what happens when lenders and regulators are as irresponsible as the elected politicians.
  3. Speculative mania or the return of investors and speculators in droves to buy up in anticipation of the price recovery in the post-pandemic period has continued to provide unwanted tailwind in the home price inflation since late 2020. For example, Australian Bureau of Statistics indicators released recently show investment mortgage approvals have soared in double digits, far exceeding home loans approved for first home buyers. Investment property has some major tax advantages which makes it pretty exciting for the top earners, wealthy people and politicians to buy up a large number of properties to minimize the actual tax they pay. However, this should cool off in the coming months because firstly, investors are usually more price-cautious and try to hunt undervalued properties (increasingly impossible now) and secondly, investment lending usually triggers rapid response from the regulators.
  4. There are already early signs that price growth is slowing down as the government started to wind back support packages such as JobKeeper. Although it may take a while for its full effect to be felt, we will likely see a gradual easing of demand, especially in the low-to-medium segment of the market.
  5. An incredible recovery of the share market after a downturn a year ago has provided an unexpected windfall for some home buyers, especially after Australia turned on the money printer. This also appears to have come to an end – the share market has mostly run out of steam.

There are several long-term factors that have created extra pressure in the housing market but they are unlikely to be solved anytime soon – at least not until after next election.

  1. Irresponsible policy decisions take some blame for the current home price inflation. First home buyers have always been an easy target for successive government to mislead and get votes.
    The Morrison government has done just this by introducing policies under the pretext to help first home buyers, instead worsening the overall cost and affordability for the same buyers who they pretended to be helping. For example, one of the policies the Coalition introduced was a scheme to lower the amount first home buyers (5%) need to save to buy a property.  The point with the policy is that the money ultimately has to be paid back, so the lower upfront deposit means the first home buyers would pay higher in interest on the bigger debt over the next 30 years. The higher debt burden and artificial price pressure aside, not only eligible properties under the allowed price cap evaporated, but also the short term demand pushed up prices of properties above the price cap because other buyers who would otherwise buy cheaper properties couldn’t find any.
    Did it solve the housing affordability problem? NO, but it helped to win the election.  Also, affordability is relative. You can see here how many properties Australian politicians own and even how some can “live off” rental income without even owning a property.
  2. Poorly designed tax incentives, especially negative gearing and, to some extent capital gains tax (CGT discounts and exemptions). As negative gearing is the process by which housing investors can deduct housing investment losses from their gross income such as their high salary, it makes sense that the top earners choose to leverage this tax minimization technique.
    This simply means ordinary taxpayers and prospective first home buyers are double-disadvantaged due to both the escalating pressure on housing affordability we are facing now, and the resulting low tax paid by the highest income earners to the tax coffers.
    It has been discussed widely both in the academia and government and it is well known that negative gearing is. bad policy. Negative gearing has turned Australian housing market into a competitive business market where hopeful owner occupiers must compete with investors. However, this is a difficult issue involving politicians’ own interests, the lobby groups, donation money, existing investors etc. It is hard that either side of the politics will move on this unless the public pressure tells them.
  3. Bad monetary policy by the Reserve Bank of Australia (RBA) should also be given the due credit here. In a country obsessed with bricks and mortar,  RBA governor Philip Lowe knows well how a wrongly configured stimulative monetary policy and turning on the money printer would translate into an uncontrollable housing boom due to other existing bad policy settings including negative gearing which provide major tax advantages for investment property. Well, at least the Reserve Bank’s legislated role requires him to conduct monetary policy to achieve its goals of price stability and “the economic prosperity and welfare of the people of Australia” but for most everyday Australians that can be narrowed down to one issue – house prices. Instead, the RBA claims high house prices is not their problems.
  4. Housing supply has been the primary solution floated around by the government as a lever to reduce the price pressure as it is a politically easy avenue. Yes it is true and obvious that more demand, prices tend to rise,  more supply, they tend to fall. The federal and state governments have offered numerous incentives for new home builders and first-time buyers, including the HomeBuilder grant.
    However, there are other factors in play here and this solution is unlikely to be effective.
    First, hardly any of the new homes are affordable. And it would be naive to think that new homes will stabilise prices.
    Second, as long as housing is an investment asset, increasing supply won’t be effective in reducing price or meeting the demand. For example, the current monetary and fiscal settings such as negative gearing defy the traditional economics of business and profit. For an high income earner it still makes sense to buy expensive and rent cheaper to make a loss because a property is seen as investment with strong potential for capital gain in the backdrop of net overseas migration. Low interest rates coupled with the bad tax incentives are a recipe for the disaster and the housing supply growth alone can not improve affordability.
    Third, increasing housing stock is a slow process and historically, it has fallen behind the demand rather than exceed it. Current government grants and incentives are also demand-based, and such new homes won’t hit the market. So, such programs can not be seen as a government action to materially improve housing affordability.

In the highly competitive seller market, auctions also negatively affect those who want to buy their first home buyers.

With more and more Australians finding it difficult to break into home ownership amid frenetic home price speculation, many desperately turn up to snap up a bargain at an auction.

You can read more here why you shouldn’t buy your home at auction.

So, looking at the current market trend and price-driving factors above, it is very likely that property prices will stabilise and have a slight correction in the coming months. However, the underlying problems artificially inflating prices will unlikely to disappear in the current political environment and the world’s most sparsely populated nation will continue to have the most expensive housing on the planet.

More on this topic:
How many properties do Australian politicians own?
Aussie politicians who “live off” rental income without owning property