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Why are house prices so high?

July 25, 2022

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Despite the cooling property market, you're not the only one wondering, why are house prices so high?

Along with COVID, we've had two years of skyrocketing prices across Australia. National housing values increased 24.6% between the end of March 2020 and February 2022, according to CoreLogic data.

As well, we had 18 months of extraordinarily low, 0.1% interest rates, lender mortgage buffers and more first-home buyer grants.

But why and how are we in this position?

Here's what the Listing Loop team discovered.

1. How our property prices rank globally

While property prices have finally begun to ease slightly, our prices are still some of the highest in the world.

According to the 2022 Demographia International Housing Affordability report, Sydney is second only to Hong Kong as the least affordable property market across eight nations (Australia, Canada, China, Ireland, New Zealand, Singapore, the United Kingdom and the United States).

And of the 92 major housing markets in these countries that Demographia explored, Melbourne ranked 88th with Perth, Brisbane and Adelaide ranking 73rd, 76th and 79th respectively.

2. Let's start from the very beginning

To understand today's property market, you need to firstly understand that our soaring house prices began long before COVID hit the scene.

We explored the very different property markets of the past four decades recently, especially when it comes to prices, incomes, inflation and interest rates.

Another article we've read suggested going back as far as 1945 when European migrants boosted our population and helped begin a property construction boom.

Backed up by an increase in full-time work and later, double-incomes in most households as more women entered the workforce, ownership rates jumped from about 40% in the mid-1940s to 70% by the time the 1960s rolled around.

Other industry experts suggest going back to the 1990s recession and the global financial crisis (GFC) of the 2000s, to see where the extraordinary market we're experiencing now and recently, first began.

Regardless of where we start, these recessions and the ups and downs of wars and similar crises, ensure what we're experiencing now isn't unusual.

As well, such history helps us to understand what to expect and how best to deal with it, both now and in the future.

Why are house prices so high?
Why are house prices so high? Experts say Australia doesn't have the housing supply to satisfy its high demand.

3. Why are house prices so high?

From our research, Australia doesn't have the housing supply to satisfy its high demand - and this has been the case for decades.

Late last year, AMP Capital chief economist Shane Oliver said this lack of supply was "likely the major factor" in explaining just why Australia's housing was so expensive, especially when compared to many other countries that have low - or even lower - interest rates.

Add a surging population - which has grown by around 150,000 people per annum since the mid-2000s, says Mr Oliver - to Australia's limited supply of liveable land, despite its massive size - and we're left with the situation we're now experiencing.

Our easing market - which saw Sydney prices drop 2.8% in the June 2022 quarter, CoreLogic revealed - barely makes a mark on the flying 24% prices that Australia has experienced since 2020.

Mr Oliver adds that household debt-to-income ratios have risen nearly three-fold in the last 30 years and allowing them to get higher could see Australia run the risk of a very real financial crisis - and this even while most borrowers are still able to service their mortgages.

4. What can be done to curb property prices?

Mr Oliver suggests the answer lies first and foremost with state and federal government changes, starting with tightening macro-prudential controls to slow record levels of housing finance.

He added that he'd also like to see:

  1. An increase in the supply of land via faster approval processes
  2. Migration levels matching housing supplies
  3. Improved and increased infrastructure and housing supplies in fast-growing regional areas; and
  4. The reformation of real estate tax details such as replacing stamp duty with land tax and reducing the capital gains tax discount.
    (NB: NSW has already introduced a land tax, which is due to start in January)

Basically, anything that increases demand and hikes up prices - even popular schemes such as first-home buyer grants - should be reformed or deleted altogether, says Mr Oliver.

We're here to help

As we said, there's no easy answer to why house prices are now so high - or how we now ensure they don't continue to escalate.

The good news is that buying or selling off-market with Listing Loop reduces the risk of missing out on a great home for a great price - or a great sale.

We can also help you navigate this choppy market we're currently experiencing, as well as support you with refinancing.

If you're not a member, sign up for free at Listing Loop or download our app.

Our off-market and pre-market marketplace gives you VIP access to properties so you can get in first.

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