Australia’s property market, once considered a relatively accessible path to home ownership, has transformed into one of the most expensive in the world. For many, the dream of owning a home remains strong, but rising prices have made it more challenging than ever to achieve. To understand why, we need to explore the historical forces that have shaped the market, the factors driving prices today, and what the future might hold for Australian property.

A post-war housing boom to today’s challenges

The history of Australia’s property market reveals a series of key shifts that helped fuel today’s high prices.

After World War II, housing was initially affordable, with price caps on house prices and rents introduced to help stabilise the economy. But when these caps were lifted in 1949, prices quickly skyrocketed. Sydney, for instance, saw a 77% rise in home prices in the year leading up to the cap removal, followed by a 25% dip in 1950. This rollercoaster wasn’t enough to halt the longer-term trend of rising prices, as demand remained strong and economic stability gradually returned.

During the 1960s and early 1970s, Australia experienced resource and financial booms that spurred rapid economic growth. This, coupled with population growth and increased urbanisation, meant demand for property surged, particularly in the major cities. From 1970 to 1976, the median house price in Sydney nearly doubled, jumping from $18,700 to $36,800. Interestingly, this rapid growth happened despite rising interest rates , which climbed from 5.88% in 1970 to over 10% by 1975.

By the late 1970s, housing prices continued to increase at a breakneck pace. Although interest rates eased slightly during this period, they remained high, underscoring the increasing value placed on property ownership despite the cost of borrowing.

The 1980s brought both opportunity and challenge. As the financial sector deregulated, access to credit grew significantly, allowing more Australians to borrow larger sums to purchase homes. Although interest rates spiked to a record 17.5% in 1990, property values in Sydney almost tripled during the decade, rising from $68,850 in 1980 to $194,000 by 1990. Access to credit, combined with the nation’s rising affluence, turned property into one of Australia’s most valuable assets.

The 1990s, however, introduced a sobering reality. Economic conditions deteriorated during what is often called "the recession we had to have." Although GDP declined and unemployment surged to 10.8%, the property market proved resilient. Median house prices in Sydney fell slightly in 1991 but recovered quickly, rebounding to an average high of $196,000 by 1995. The decade ended on a strong note, with prices continuing to climb and reaching $287,000 in Sydney by the year 2000.

While inflation rose considerably throughout this period, accounting for inflation alone doesn’t fully explain the sharp increase in property prices. Over the 55 years from 1950 to 2000, property values saw a substantial increase in real terms.

For additional context, in 1984, the average Australian could purchase a home priced at about 3.3 times their annual income, making homeownership relatively achievable within a few years of diligent saving. By 2023, however, that figure jumped to roughly 10 times the average annual income, making property far less affordable and reflecting a significant shift in the accessibility of homeownership over recent decades.

A perfect storm of factors pushing prices up

While the historical context sets the stage, several factors have combined in recent decades to create the expensive property market we see today.

1. Supply issues: there’s just not enough housing

A major driver of rising house prices is the imbalance between housing supply and demand, particularly in Australia’s major cities. Population growth, driven by both natural increases and immigration, has consistently outpaced the construction of new homes.

The issue is particularly pronounced in capitals like Sydney and Melbourne, where land is limited, and planning restrictions make it difficult to build new homes quickly. Urban planning regulations, restrictive zoning laws, and environmental protections often slow the rate of new developments.

On top of that, local opposition to high-density housing (known as NIMBYism – Not In My Backyard) can further delay or limit the construction of much-needed housing in desirable areas.

2. Low interest rates: borrowing power increases

Low interest rates have played a significant role in driving up house prices over the past few decades. When the Reserve Bank of Australia (RBA) sets low rates, the cost of borrowing decreases, which means homebuyers can take out larger loans. As people have more money to spend, competition for homes can increase, pushing up prices.

The deregulation of Australia’s banking sector in the 1980s also made credit more widely available. By the 1990s, more Australians could borrow larger sums, contributing to demand in the property market.

3. Government policies: unintended consequences

Government policies designed to stimulate investment and housing supply have had unintended consequences in driving up prices. Negative gearing , which allows investors to deduct losses on investment properties from their taxable income, has made property an attractive investment. Capital gains tax discounts on property sales further encourage real estate investment, creating more demand, particularly from investors.

These incentives have fuelled competition in the market, making it harder for first home buyers to compete with seasoned investors. While some government grants and incentives, such as the First Home Owner Grant, have aimed to help first-time buyers, they often contribute to demand without addressing the root causes of the supply shortage.

4. Foreign buyers: a small but impactful influence

Foreign investment from overseas buyers, has also played a role in pushing up house prices, particularly in cities like Sydney and Melbourne. Although regulations limit foreign ownership to newly built properties, international buyers still target luxury and high-end homes, driving up prices in these segments of the market.

While foreign investment accounts for a relatively small proportion of total demand, its impact on certain areas has created ripple effects, contributing to price increases in broader property markets. It's important to note, however, that the effects of foreign buyers has been massively exaggerated by some media outlets.

5. Property as a national wealth-building strategy

Australia’s cultural affinity for property ownership has also played a significant role in shaping the market. For many Australians, real estate is viewed as a reliable and tangible way to build wealth – potentially more stable than investing in shares or other asset classes. This belief has been reinforced by the media, which often highlights stories of property success and capital growth.

Additionally, Australia’s superannuation system has encouraged long-term financial planning, with some Australians viewing investment properties as a supplementary retirement strategy. This cultural focus on property has further propelled demand, as people see real estate as a cornerstone of their wealth-building plans.

The future of Australia’s property market: what happens next?

As property prices continue to rise, the question of where the market goes from here looms large. What are governments doing to address the issue, and what might the future hold for Australia’s housing market?

1. Government intervention

The Australian government has introduced several measures to address housing affordability, but their effectiveness remains debated. Programs such as the First Home Guarantee and the expansion of the First Home Super Saver (FHSS) scheme have been designed to help first-time buyers get into the market. Critics of these schemes argue that these measures can increase demand without addressing the fundamental supply issues.

There has been ongoing discussion around the reform of tax policies like negative gearing and capital gains tax discounts, which could reduce investor demand and slow price growth. However, such reforms are politically sensitive and face opposition from property investors and industry groups.

State and local governments are also exploring ways to increase housing supply by loosening planning restrictions and encouraging higher-density developments in urban areas. These initiatives often face resistance from local communities, though, and take time to make a meaningful impact on the market.

2. Learning from other countries

Australia is not alone in grappling with housing affordability. Countries like New Zealand and Canada have faced similar challenges, and their policy responses may offer valuable insights.

In New Zealand, the government has introduced policies aimed at cooling the market, including restrictions on foreign buyers and taxes on investment properties. These measures have helped slow price growth, but affordability remains a challenge.

Canada has taken similar steps, tightening lending standards and imposing taxes on vacant properties. While these policies have curbed some speculative activity, they haven’t fully resolved the underlying supply-demand imbalance.

Australia may need to consider similar measures to address speculative investment and improve housing affordability. However, finding the right balance between supporting first-time buyers and maintaining stability in the property market will be key.

Balancing dreams and realities

The rise in Australia’s property prices is the result of a complex interplay of factors, including supply constraints, low interest rates, government policies, and cultural attitudes toward property ownership. While the government has taken steps to improve affordability, the underlying challenges remain.

Looking ahead, Australia faces difficult choices. Meaningful reforms to taxation policies and an increase in housing supply are likely needed to bring prices under control. Without significant changes, the dream of home ownership may remain out of reach for many Australians. But with the right policies, there is hope for a more balanced and accessible housing market in the future.

Until then, happy investing!