As Australia’s economy leaves the pandemic behind, how has the housing market been impacted by the change in urbanisation, the RBA, and financial stability of consumers? Will homeowners see similar growth, or will the construction industry be able to keep up with demand?

[Matt Perryman is a fourth year Engineering and Commerce student with a specific interest in how statistics can be combined with economics. Outside of studying he enjoys skiing, surfing and motorcycling.]

Special thanks to Raymond Wong for editing and providing insights into the structuring of this article

Having not experienced an accepted recession since 1991, Australia’s economy saw sustained and predictable growth for over twenty-five years [1]. Stability from offshore market environments, especially through the Global Financial Crisis, allowed the economy to flourish. This outcome was due to the strong demand for natural resources from key trading partner China and their growing economy. Further, the lack of subprime mortgage lending offered by the Australian banking system [2] played a part in Australia’s housing market stability. This is shown particularly in the ABS' analysis of the Australian Economy in 2008-09, with decreases in the value of output from manufacturing (-6.2%), but increased value of agriculture and mining demands, (16.2% and 2.2% respectively) [3]. Further, commercial investment remained steady at around 10% during the early 21st century. It is easy to see then, that coupling a continuously decreasing unemployment rate [4] and expanding population led to not only continued increase in consumer spending, but also investment. Safe to say, Australia was well-off in the early 00's.

This prosperity certainly trickled into Australia’s housing market. Its cultural significance encouraged consumers to own their home – almost always via mortgage repayments. Between  2005 to 2006, the ABS noted that of those households with debt, roughly 45% was owner-occupied [5]. As the population continued to increase, housing was also viewed as the principal investment by urban workers, storing a large portion of capital in residential property. We see that before the pandemic, this combination led to asset appreciation in housing - particularly in the capital cities. Most notably, we see a peak of the median house pricing in Sydney at $1.05 million in June 2017,  with Melbourne reaching $750,000 in the same quarter [6]. For reference, in the early 2000s, these prices were $365,000 and $241,000 respectively[6]. With this kind of appreciation experienced by almost all home investors, the housing market was viewed not only as a place to live, but also an investment.

With skyrocketing property prices in urban areas, coupled with record low cash rates of 0.5% at the end of 2019 [7], homeowners were reaping the rewards of choosing to own both investment and owner-occupied properties. At the same time, Australia was experiencing an increase in urban population [8] and the decreased number of total dwellings completed [9]. Both asset appreciation and the lack of relative supply resulted in younger couples, immigrants, and lower socio-economic households struggling to face the increase in gross income spent on rentals or owner-occupied properties.

Keeping this in mind, we can see how the impact of the pandemic - and the rise of remote work – encouraged individuals and couples who did not yet own homes to move away from the urban environment. At the beginning of 2020 few expected the extended quarantine scheme chosen by state politicians. With the dramatic reduction of occupancy rates in commercial property in major cities [9], there was a lack of necessity for corporate workers to live near the city. This was most notably seen with Melbourne and Sydney. Experiencing ranges of 45% to 4% occupancy between July 2020 and March 2021 [8], workers that lived in the urban sprawl no longer had to - this is demonstrated with deficits of internal migration of 26,212 in Melbourne, and 51,738 in Sydney.

Further, net overseas migration dropped dramatically in this period, with a net positive of roughly 247,000 migrants in the year ending December 2019, to a net loss of -94,000 in March 2021 [12]. Seeing there were fewer total residents requiring homes to live, we can understand why the median price of house transfers dropped over this period - especially in Sydney and Melbourne. Less demand for houses by consumers forced homeowners and developers to not charge a premium for their scarce resource. This is shown with the fall of pre-existing median housing prices to $945,000 in Sydney and $710,000 in Melbourne [13].

However, this drop was only for a short period. With office workers starting to come back into the city,  the beginning of 2022 saw rapid growth in property valuations of all capital cities. Sydney is the prime example, where the median house price rose to $1.36 million in June 2022. Scott, [14], notes that due to the slowing supply of labour and material resources, Australia faced 'a significant damper on the construction industry'. The drop in migration and skilled labour, combined with elevated interest rates, hampered construction firms’ ability to create new homes. This lack of supply of housing can be seen with pre-existing dwellings increasing rapidly over such a short period. In the short run, if fewer homes are being created, those that still wish to purchase residential property will be forced to compete for pre-existing homes, driving prices higher for the near future.

With the pandemic-era of Australia drawing to its close, how has the property market recovered and what lies ahead for its future? Since 2021, both capital cities and regional house prices have steadily increased at similar rates [13]. Most notable is the Victorian regional market. Prices have risen nearly 50% since December 2019 - from $390,000 to $570,000 as of December 2023 [13]. On the supply-side, property developers still struggle to meet demand across the country. The issue has been exacerbated by skills shortages in the construction industry. Labelled by the ABC as the "single biggest pressure" [14], the lack of skilled workers ultimately impedes the ability for firms to provide homes, driving costs up for property developers further. In addition, impact of profit incentives via the RBA's increase in cash rate from 0.1% in March 2022, to 4.35% today [7] has hindered firms’ ability to invest and continue production.

On the demand side, prices have continued to increase across the board and interest rates have continued to place a bigger burden on resident's total share of income assigned to paying mortgages or rent.

The Albanese Government has begun to acknowledge this sentiment from Australian citizens, citing that the new strategy used will provide "sustainable levels" and give "new pathways to attract more high-skilled permanent migrants". Cited as potentially having "major implications for the next federal election" [16], it appears this issue will continue to arise both in Government, and the property market for the near future.

[1] G. O’Brien, “27 years and counting since Australia’s last recession” aph.gov.au. Accessed: Apr. 17, 2024. [Online]. Available: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook46p/LastRecession

[2] J.G. Hill, “Why Did Australia Fare So Well in the Global Financial Crisis?,” The Regulatory Aftermath of the Global Financial Crisis , [Online]. Available: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2063267

[3] Australian Bureau of Statistics, “5204.0 – Australian System of National Accounts, 2008-09”. Abs.gov.au. Accessed: Apr. 17, 2024. [Online]. Available: https://www.abs.gov.au/AUSSTATS/[email protected]/7d12b0f6763c78caca257061001cc588/f8a9a19e875cc0eaca2577ca00139812!OpenDocument

[4] M. Plumb, M. Baker, G. Spence. “The Labour Market during the 2008-2009 Downturn” rba.gov.au. Accessed: Apr. 17, 2024. [Online]. Available: https://www.rba.gov.au/publications/bulletin/2010/mar/1.html

[5] Australian Bureau of Statistics, “4102.0 – Australian Social Trends, March 2009”. Abs.gov.au. Accessed: Apr. 19, 2024. [Online]. Available: https://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/4102.0Main+Features60March%202009

[6] Australian Bureau of Statistics. “Medan price (unstratified) and number of transfers (capital city and rest of state). 4,5. Sept. 2019. Accessed: Apr. 19, 2024. [Online]. Available: https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/residential-property-price-indexes-eight-capital-cities/sep-2019

[7] Reserve Bank of Australia. “Cash Rate Target”. Rba.gov.au. Accessed Apr. 19, 2024. [Online]. Available: https://www.rba.gov.au/statistics/cash-rate/

[8] C. Leishman, W. Liang and N. Sim. “The impact of urban population on housing cost: the case of Australia”. Npj Urban Sustainability, vol. 3, no. 57., Dec. 2023. Doi: 10.1038/s42949-023-00136-7.

[9] Australian Bureau of Statistics, “Building Activity, Australia”. Abs.gov.au. Accessed: Apr. 20, 2024. [Online]. Available: https://www.abs.gov.au/statistics/industry/building-and-construction/building-activity-australia/latest-release

[10] Property Australia, “Latest office occupancy data is in”. propertycouncil.com.au. Accessed: Apr. 23, 2024. [Online]. Available: https://www.propertycouncil.com.au/property-australia/latest-office-occupancy-data-is-in

[11] Australian Bureau of Statistics, “Regional population”. Abs.gov.au. Accessed: Apr. 23, 2024. [Online]. Available: https://www.abs.gov.au/statistics/people/population/regional-population/2021-22

[12] Australian Bureau of Statistics, “Overseas Migration”. Abs.gov.au. Accessed: Apr. 23, 2024. [Online]. Available: https://www.abs.gov.au/statistics/people/population/overseas-migration/2022-23-financial-year

[13] Australian Bureau of Statistics, “Total Value of Dwellings”. Abs.gov.au. Accessed: Apr. 27, 2024. [Online]. Available: https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/total-value-dwellings/latest-release

[14] M. Scott, “Labor shortage construction sector’s biggest pressure for 2023”. Realcommercial.com.au. Accessed: Apr. 27, 2024. [Online]. Available: https://www.realcommercial.com.au/news/labour-shortage-construction-sectors-biggest-pressure-for-2023

[15] D. Speers, “New migration strategy aims to reduce Australian arrivals to ‘sustainable level’”. Abc.net.au. Accessed: Apr. 27, 2024. [Online]. Available: https://www.abc.net.au/news/2023-12-10/migration-strategy-anthony-albanese-martin-parkinson-intake/103210216

[16] P. Karvelas, “Australia's housing crisis has become a fierce political battle that could have major implications for the next federal election”. Abs.net.au. Accessed: Apr. 27, 2024. [Online]. Available: https://www.abc.net.au/news/2024-03-25/australia-housing-crisis-political-battle-federal-election-issue/103625554