Dramatic rises in house prices in Australia

Lalaine C. Delmendo | August 02, 2021

Australia’s housing market is surging, thanks to record-low interest rates.

House prices in the country’s eight major cities soared 13.4% during the year to Q2 2021 (9.2% inflation-adjusted), to an average of AU$ 727,427 (US$537,983), according to CoreLogic Australia, up from the previous year’s 8.7% y-o-y increase and the highest growth recorded since Q2 2010. It was the seventh consecutive quarter of y-o-y house price growth.

Australia annual house prices

Quarter-on-quarter, house prices in the eight major Australian cities rose by 4.8% (4.1% inflation-adjusted) in Q2 2021.

Darwin saw the biggest annual growth, with the median dwelling price rising by 21% (16.7% inflation-adjusted) during the year to Q2 2021, followed by Hobart (19.6%), Canberra (18.1%) and Sydney (15%). Strong house price increases were also registered in Adelaide (13.9%), Brisbane (13.2%), Perth (9.8%) and Melbourne (7.7%).

The median price of residential dwellings in Australia was AU$645,454 (US$477,358) in Q2 2021, up 16.4% (12.1% inflation-adjusted) from a year earlier, according to CoreLogic.

“This is the highest annual rate of growth seen across the Australian residential property market since April 2004, when the early 2000’s housing boom was winding down after a period of exceptional growth. However, there are some markets where performance is starting to ease more notably,” said CoreLogic Head of Research for Australia, Eliza Owen.

New South Wales, especially Sydney, has the most expensive housing in the country, with the mean house price currently at AU$ 1,011,100 (US$746,788), according the Australian Bureau of Statistics (ABS). It was almost 30% above the national mean price and the first time that prices in any territory has breached the AU$ 1 million mark.

In contrast, the Northern Territory has the cheapest housing in Australia, at a mean price of AU$480,400 (US$354,819).

Demand is rising strongly again. During the year to June 2021, sales transactions reached about 582,900 units – the highest annual sales volume since February 2004, according to CoreLogic. All greater capital cities, except Hobart, saw strong growth in annual sales volume over the same period.

“Strong demand for housing was supported by record low interest rates, government initiatives, and rising consumer confidence,” said Michelle Marquardt of Australian Bureau of Statistics.

Australia house price index

Residential construction activity continues to rise. Dwelling approvals surged by almost 37% to 98,789 units in the first five months of 2021 compared to a year ago, following an annual increase of 5.6% in 2020, according to ABS.

House prices in Australia surged 52.3% (35.6% inflation-adjusted) from 2011 to 2017. To cool the market and address risks caused by high household debt, the government tightened lending restrictions and imposed higher taxes on housing purchases by foreigners. These measures resulted in a 9% (-11.2% inflation-adjusted) decline in house prices from Q4 2017 to Q2 2019.

The economy grew by 1.1% in Q1 2021 from a year earlier, an improvement from y-o-y declines of 1% in Q4 2020, 3.7% in Q3 and 6.2% in Q2, reflecting the continued easing of coronavirus-related restrictions and the recovery in the labour market, according to the ABS.

Recently, the International Monetary Fund (IMF) revised upwards its 2021 economic growth forecast for Australia to 5.3%, its second upgrade from its initial projection of 3.5%. The economy contracted by 2.4% last year due to the pandemic.

Rental yields falling, residential rents continue to rise

Rental yields in Australia are now falling, as dwelling prices outperform rental growth. In Q2 2021, the nationwide gross rental yields stood at 3.41%, down from 3.55% in the previous quarter and 3.73% a year earlier, according to CoreLogic. Yields were lower across all capital cities over the quarter.

Darwin has the highest rental yield across the country in Q2 2021, at 5.58% for houses and 6.94% for apartment units.

In Sydney, yields reached a record low of 2.56% in Q2 2021, down from 2.96% in the previous year.

In Q2 2021, national rents rose by 6.6% over the year – the highest annual growth since January 2009, according to CoreLogic. In fact, regional rents surged 11.3% in Q2 2021 from a year ago, the biggest y-o-y rise ever recorded.

“Following subdued rental performance through much of the 2010s, the Australian rental market has seen an increase in values due to many of the same factors that have led to the current housing price upswing,” said CoreLogic’s Head of Research Australia, Eliza Owen. “These factors include increased government stimulus through COVID-19, accumulated household savings through lockdown periods, the swift economic recovery seen as restrictions eased, and a lack of rental supply in some markets have also exacerbated rental price increases, particularly in major centres of regional Australia.”

Canberra is the most expensive rental market in the country, with a median rent of AU$620 (US$456) per week in Q2 2021, up 7.3% over the past year. It was followed by Sydney, with a median weekly rent of AU$582 (US$428), up 3.2% from a year earlier.

Housing affordability remains a major problem

Australia, specially its five major metropolitan areas, remains “severely unaffordable” in 2020, according to the 2021 Demographia International Housing Affordability report. The Demographia survey uses the Median Multiple to assess housing affordability in 92 metropolitan markets in Australia, Canada, China (Hong Kong), Ireland, Singapore, New Zealand, the United Kingdom, and the United States. Sydney was Australia’s least affordable housing market in 2020 and ranked third worst overall, with a Median Multiple of 11.8, followed by Melbourne (9.7), Adelaide (7.7), Brisbane (6.6), and Perth (6.0). Housing affordability in Sydney has deteriorated by about 70% over the past 15 years.

“The last year has involved material setbacks, mostly due to the impact of the pandemic, which has led to a home buying boom in some areas while suppressing incomes,” said the Demographia report.

Australia mean house prices

The country’s severe housing unaffordability, especially in Sydney, is partly due to urban consolidation policies which severely limit or even prohibit new housing construction on or beyond the urban fringe.

Demand is surging

Demand is rising strongly despite the pandemic. During the year to June 2021, sales transactions reached about 582,900 units – the highest annual sales volume since February 2004, according to CoreLogic. Every greater capital city and the rest of state region saw double-digit growth in annual sales volumes, except Hobart (where sales fell slightly by 0.6%) and Tasmania (where sales grew by 8.6% over the year).

Australia dwelling purchases

In the first five months of 2021, according to the ABS:

  • Secondary market: the number of loans for the purchase of existing dwellings surged 45% y-o-y to 133,330 and the value increased 56.3% to AU$73.07 billion (US$53.7 billion)
  • Primary market: loans for the purchase of new dwellings by owner-occupiers rose by 34.4% y-o-y to 13,344 while the value of housing finance increased 41.5% to AU$6.97 billion (US$5.12 billion)

Foreign real estate investment continues to rise

The value of residential real estate investment by foreigners in Australia increased 15.5% y-o-y to AU$ 17.1 billion (US$12.6  billion) last year, following an 18.4% rise in 2019, according to the Foreign Investment Review Board (FIRB). However it remains far below the record AU$ 72.4 billion (US$ 53.5 billion) seen in 2016.

“Australia’s foreign investment policy encourages investment in the residential real estate sector, which is expected to help build a new supply of houses,” said FIRB.

Australia foreign investment

Victoria accounted from the biggest share, attracting more than 20% of the total value of residential real estate investment by foreigners, followed by New South Wales (9.9% share), and Queensland (8.2% share).

In terms of country of origin, the United States accounted for the biggest share, accounting for about 23.4% of the total foreign real estate investment in Australia, followed by Singapore (17.1%), China (12.7%), Germany (6.6%) and Canada (5.9%).

Australia established house transfers

Acquisition of residential real estate by foreign nationals and corporations is subject to FIRB approval. Foreigners are not allowed to buy an established (previously occupied) house. They may buy an unoccupied new dwelling, but only if the FIRB feels that the purchase will not add to the shortage of properties available to native Australians.

HomeBuilder grant program buoys housing market

In June 2020, the Australian government introduced the HomeBuilder stimulus program, offering AU$25,000 (US$ 18,426) grant to eligible owner-occupiers (including first home buyers) who entered a contract to build a new home, to substantially renovate an existing home, or to buy an off the plan home/new home from June 4, 2020 to December 31, 2020.

Australia building approvals

Then in November 2020, the government decided to extend the program until March 31, 2021, with a number of changes to the grant amount and eligibility criteria. Accordingly, individuals who meet the criteria will be eligible to receive AU$15,000 (US$ 11,056) grant.

HomeBuilder is part of the government’s initiatives to maintain confidence in the residential construction sector and encourage homebuyers to proceed with purchases or renovations that may have been postponed due to the pandemic.

Residential construction activity rising strongly

Dwelling approvals surged by almost 37% to 98,789 units in the first five months of 2021 compared to a year ago, following an annual increase of 5.6% in 2020, according to ABS.

Western Australia registered the biggest increase in dwelling approvals of more than 125% y-o-y in the first five months of this year, followed by Northern Territory (79.4%), Queensland (54.9%), South Australia (50.9%), Tasmania (46.2%), New South Wales (32.8%), and Victoria (10.7%). In Australian Capital Territory, dwelling approvals were almost unchanged from a year earlier. 

Australia dwelling approvals

Victoria, New South Wales and Queensland account for about 75% of all dwelling approvals in the country in Jan-May 2021.

The number of residential dwellings in Australia stood at almost 10.65 million in Q1 2021, up by 1.6% from a year earlier. New South Wales accounted for 31% of the dwelling stock, followed by Victoria (26.1%), Queensland (20%), and Western Australia (10.6%).

Affordable housing shortage still a major concern

Despite the recent rebound in construction activity, the affordable housing shortage continues to worsen due to strong population growth and demand for new housing.

To address the problem, the government plans to add AU$124.7 million (US$91.8 million) to the National Housing and Homelessness Agreement over two years. However, some argue that it falls short of the needed spending.

Australia residential  dwellings stock

“This new money is not a lot in the grand scheme of things,” said Felicity Emmett, senior economist at ANZ. “It’s probably not going to shift the dial a lot.”

Australia has been under-building residential dwellings, for several reasons:

  • Stringent urban planning policies and land use restrictions (called ‘smart growth’, ‘urban containment’, etc.). “An increase in state government zoning regulations is a significant factor driving up the cost of housing,” said Reserve Bank of Australia ex-Governor Glenn Stevens.
  • Tax burdens on builders and developers. In New South Wales, government taxes and other charges are estimated to account for about 30% of the price of new houses.
  • Due to the extended impact of the global credit crunch, coupled with the economic repercussions brought by the COVID-19 pandemic, some developers continue to struggle to secure finance.

Interest rates continue to fall

The Reserve Bank of Australia (RBA) kept the official cash rate unchanged at a record low of 0.1% in June 2021, after cutting it by 50 basis points in March 2020 and by another 15 basis points in November 2020.

Australia interest rates

As a result, interest rates for housing loans have been falling:

  • The average standard variable interest rate was 4.52% in June 2021, unchanged from a year ago but down from 5.15% two years earlier.
  • The average discounted variable interest rate for housing loans stood at 3.59% in June 2021, down from 3.65% in June 2020 and 4.46% in June 2019.
  • The three-year fixed interest rate for housing loans was 2.19%, down from 2.39% a year earlier and 3.88% two years ago.

Mortgage market continues to expand

The Australian mortgage market has grown from around 15% of GDP in the 1970s to 95.5% in 2020, thanks to low interest rates.

Australia house loans

In May 2021, housing loans for owner-occupiers, which represents real demand, rose by 7% y-o-y to AU$1.26 trillion (US$924.9 billion), according to the RBA. On the other hand, housing loans for investors increased slightly by 1.1% to AU$669.8 billion (US$492.4 billion) over the same period.

Tighter lending rules looming

In July 2019, Australian Prudential Regulation Authority (APRA) scrapped its 7% interest rate floor for mortgage serviceability assessments and allowed authorized deposit-taking institutions (ADI) to set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5% over the loan’s interest rate.

However, with the recent pick-up in home lending, the return of property investors, as well as the high levels of household debt, the Council of Financial Regulators, which consists of the RBA, APRA, and the Australian Securities and Investments Commission and Treasury, is now closely monitoring the market and is ready to impose stricter lending criteria to address those risks.

“We’re not at the point where we’re actively considering implementing any initiatives in this area, but we’re doing the preparation for what might happen, what we might do if credit growth was accelerating,” said RBA governor Philip Lowe. “I don’t think it’s in the country’s interests to have an extended period where credit growth is running way ahead of growth in our incomes, particularly given the high levels of debt.”

RBA governor Lowe said future potential macroprudential policy options that APRA was considering included restrictions on debt-to-income ratios and loan-to-value ratios, and stricter rules for interest-only and investor lending similar to those imposed between 2014 and 2018.

“All boards should be closely monitoring their lending standards, comfortable with their risk appetite and testing whether serviceability policies used to assess borrowers remain prudent in an environment of extremely low interest rates,” said APRA deputy chairman John Lonsdale.

Earlier, the 30% cap on interest-only residential mortgage lending by ADIs was also removed, effective January 1, 2019. The supervisory benchmark was put in place in March 2017, in an effort to cool surging property prices.

In April 2018, the 10% temporary cap on investor credit growth, introduced in December 2014, was also scrapped.

Improving economy; high trade surplus

On an annual basis, Australia’s economy grew by 1.1% in Q1 2021, an improvement from y-o-y declines of 1% in Q4 2020, 3.7% in Q3 and 6.2% in Q2, reflecting the continued easing of coronavirus-related restrictions and the recovery in the labour market, according to the ABS.

Australia gdp inflation

Recently, the International Monetary Fund (IMF) revised upwards its 2021 economic growth forecast for Australia to 5.3%, its second upgrade from its initial projection of 3.5%. The economy contracted by 2.4% last year due to the pandemic.

The Australian dollar (AUD) appreciated rapidly in the past 15 months, gaining 21.7% against the US dollar to reach an average exchange rate of AUD 1 = USD 0.7518 in June 2021 from AUD 1 = USD 0.6175 in March 2020 during the onset of the pandemic. Previously the Australian dollar had been falling, depreciating by almost 22% against the US dollar from January 2018 to March 2020.

Australia exchange rate

The recent strength of the Australian dollar is partly attributed to upbeat trade balance figures. Australia registered a trade surplus of AU$9.7 billion (US$7.1 billion) in May 2021, up by 20.5% from a year earlier, according to figures from the ABS. Total exports rose 6% to AU$ 42.23 billion (US$31 billion) while imports increased 3% to AU$ 32.55 billion (US$23.9 billion), as both domestic and foreign demand strengthened following an easing of coronavirus-related restrictions.

The seasonally-adjusted unemployment rate fell to 4.9% in Q2 2021, down from 5.3% in Q1 2021 and the lowest level recorded sine Q4 2010, according to ABS. The number of unemployed people fell to 679,000 in Q2 2021, about 325,000 people below the peak of 1 million unemployed in July 2020.

Participation rate remains high at 66.2% in June 2021 – close to its historic high of 66.3% in March 2021.

Consumer prices are rising rapidly. In Q2 2021, the nationwide inflation rate jumped to 3.8%, sharply up from 1.1% in the previous quarter and -0.3% a year earlier. In fact, it was the highest reading since Q3 2008.


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