Are Australia’s Housing Prices Redefining Affordability?

By: Derek Zhou

Posted: 29th September 2021

As Australia undergoes successive lockdowns over the new delta variant of COVID-19, the counterintuitive movement of house prices has defied experts’ opinions through its insane growth. With the latest data displaying house prices skyrocketing faster than ever before, the head of the Reserve Bank has placed the blame squarely in the hands of the federal and state governments. 

Just in case you needed more evidence that Australia’s housing market is detached from reality, the latest figures from the bureau of statistics show that if you were living in Sydney and had just gotten pregnant last September, by the time you gave birth the median price of a house in Sydney had risen by almost $240,000. 

In Sydney and Canberra, property prices rose 19% in the past year. In Melbourne, they rose 15%, and even in Darwin, which has the slowest growth, they still increased an incredible 13%:

Sydney Residential Price Growth

Yet when you realise that the average wage is merely at 1.4% annual growth, it’s clear the market is completely disconnected from the harsh reality of household income. As such, the natural questions of unaffordability and unsustainability are magnified, especially within the millennial generation. The following graph illustrates the increasing barrier into the Australian property market. 

Housing Price vs Wage Growth

According to dominant narratives, population growth has driven demand for residential property whereby prices are simply the by-product of supply and demand. Last year, we saw how simplistic these claims are. The number of new migrants and returnees to Australia fell by 244,000 people as a result of COVID-19. However, prices not only continued to rise but the rate of growth increased too. 

So why is the Australian property market showing such remarkable resilience?

One of the main contributors to the bullish growth is the current cash rate of 0.10%, making money cheap to borrow and leverage easier to access. With the assistance of COVID-19, Australian families have been able to save significantly as their spending options have been severely restricted. By extension, domestic savings have reached a record high of $230 billion, as negative sentiment around job security and businesses linger. Additionally, the outsized stimulus last year was about 5 times larger in magnitude than the post-GFC stimulus in terms of cash payments to households. Hence, the market reflects buyers competing at an exaggerated price with full knowledge that they can borrow at low-interest rates. 

Secondly, the capital gains tax (CGT) concession which offers a 50 percent CGT discount on gains generated for investment properties has been silently but surely pushing the prices higher. Moreover, the tax benefits inexplicitly encourage short-term real estate investors to “flip” these financial assets rather than seek rental yield. As Australian properties are deemed to be stable, investors find short-term selling for the equity hike to be extremely attractive. As a result, this investment strategy inevitably increases property prices while also squeezing first-home buyers out of the market. 

If it’s Not Bricks and Mortar – How Can We Invest?

An alternative way to gain exposure into the Australian property market is through Real Estate Investment Trusts (RIET’s). This form of investment can potentially provide greater diversification, higher total returns, and lower overall risk within an investor’s portfolio. 

Real estate investment trusts own and/or manage income-producing commercial real estate, whether it’s the properties themselves or the mortgages on those properties. You can invest in the companies individually, through an exchange-traded fund or with a mutual fund.

The main advantage of REITs is that they are by law required to pay out 90% of taxable income to shareholders and thus, REIT dividends are often much higher than the average share on the ASX 200.

Another benefit is portfolio diversification. REITs provide investors with the opportunity to gain exposure to commercial real estate, generating potentially higher passive income than residential real estate. It must be noted that REITs are financial assets that are much more liquid than the traditional old mortar and stones of real estate. 

However, most REITs dividends don’t meet the IRS definition of “qualified dividends” which results in a higher tax rate. And above all, REITs don’t allow the investor to leverage their real estate equity for other investments which may impede investment performance. 

Nevertheless, it is naive to think that REITs can completely replace a residential home or an investment property. Rather it should be used as an investment vehicle that ultimately delivers affordable real estate exposure within the current market. House prices may not always go up, but the past year and further, the real estate market post-GFC, shows that governments will do all they can to ensure the housing market does not crash. That evidence makes properties seem like a safe investment and one that fosters ever higher prices as the government pumps the demand side of the market with grants and tax breaks.

Of course, all markets can fall despite the government’s best wishes. But, for now, the only signs are of greater prices.