Another year rolls by with the Australian property market notching up hearty gains, sustaining its record-setting trajectory. As home values sail ahead of global peers, what hidden forces propel this bull run leaving other regions in the dust?
In this comprehensive analysis, we unravel the underlying factors, trends and conditions converging into a perfect storm elevating housing wealth for Australian landowners. Read on to discover what’s driving this runaway market train – and determine how long supple conditions will stay on track.
Australian Property Market Growth in Review
Over the past half-century, Australian real estate consistently outperformed nearly all other asset classes. An oft-cited rule of thumb suggests the median dwelling price doubles every 10 to 12 years.
Looking back, major booms emerged in the early 1970s, again through the late 80s, and over the bubble era spanning 1996 to 2003. The global financial crisis triggered a blip before the raging bull awakened for its present record-smashing romp.
So what’s powering this perpetual escalator ratcheting home values ever upwards? We dive into the key ingredients below fuelling Australian property’s non-stop rise.
#1: Voracious Investor Appetite
Behind every surging market sits strong demand from buyers hungry for a slice of the action. In Australia, the property enjoys immense investor interest, spearheaded by mum-and-dad savers plus institutional capital channelling cash into the sector.
Two tax policies hold particular responsibility incentivising the appeal for property investing:
- Negative Gearing – losses arising from costs outstripping rental income offer lucrative deductions reducing taxable income from other sources. abolished briefly in the 1980s before being promptly reinstated following fierce political pressure.
- Capital Gains Tax Discount – halving income tax owed on investment property sales held longer than 12 months motivates pursuing buy-and-hold strategies allowing asset base accumulation over long horizons.
Beyond tax allure, since 1970 property values demonstrated long-term growth vastly eclipsing other markets. Such consistent performance concentrates investor attention, creating self-perpetuating demand and chasing further gains.
#2: Restricted Land Supply
Scarce inventory and barriers constraining the free flow of housing development also apply upward pressure on prices when buyer competition exceeds housing availability.
Despite Australia’s expansive land size, the population clusters predominantly along the eastern seaboard. Stringent development approval processes also throttle the release of new housing lots. Together, limited desirable land in areas fuelling buyer demand intensifies property prices.
Complicating matters further, zoning policies concentrate high-density living into urban boundaries. Yet aspirational families seek detached houses with backyards. This mismatch between supply versus preferred demand adds to the simmering pressure-cooker atmosphere as home seekers bid up any suitable listing.
#3: Strong Rental Demand Support
Healthy investor activity connects tightly to another core pillar propping up Australian housing – thriving rental tenant demand translating directly into positive cash flow.
Around 30% of Australians rent rather than own their home. A substantial social housing policy sees government support assisting those struggling to afford uncontrolled private rents.
With high migration intake further elevating rental demand, investors enjoy strong assurances about securing tenants. This provides steady recurring income cushions plus the confidence to stretch budgets at higher purchase prices on the expectation of rental cover servicing mortgages.
#4: Low Interest Rates Turbocharging Mortgage Capacity
Interest rates hold a heavy influence over buyer purchasing power by setting mortgage affordability and the size of potential loans.
In Australia, the Reserve Bank cash rate guides broader credit markets. Sitting at just 1.5% as of November 2022, the historic low rate environment allows borrowing at levels unthinkable for previous generations.
With more funds accessible at cheaper relative costs, buyers stretch borrowing power to lodge elevated offers – further buoying bullish price momentum.
Of course, rising rates present headwinds to moderately cool demand and pricing pace. But small incremental hikes still pale against the 1970s and 80s figures near 18%. Modern settings remain stimulatory despite normalising curves.
Key Risks Threatening to Derail the Australian Property Market
No boom lasts indefinitely. While recent history suggests the good times roll on, storm clouds gathering on the horizon could imperil Australia’s property party. We highlight the foremost risks below:
Interest Rate Spike Beyond Comfort Levels
If the RBA lifts rates too sharply aiming to rein in inflation, mortgage stress could trigger forced selling flooding supply. Such dynamics crashed markets in Ireland, Spain and the US leading to the GFC. Australian banks appear determined to avoid such scenarios – but global forces could yet test local resilience.
Soaring Construction Costs Throttling New Supply
While demand stays robust, expanding housing stock relies on developers turning profits. As land, materials and labour inflate expenses, supply pipelines face profitability hurdles stifling market balancing forces. Cancelled projects further reduce inventories.
Investor Strike Crimping Rental Liquidity
Investment capital follows positive trajectories. While property plateaus or even declines, assets boasting larger nominal returns could tempt migration and derail self-fulfilling cycles. The music may keep playing for a while – but chairs scramble once the tune turns.
Rethinking the Australian Property Market Investment in Light of Risks
Australia’s property juggernaut proved its resilience repeatedly over the past decades. But prudent strategy prepares for uncertainties balancing long-term holdings with flexibility in reacting to changing conditions contexts.
Property forms just one asset class within diversified portfolios. Maintaining balanced perspectives allows grasping gains while insulating overall exposures if storms destabilise.
Appreciating Property’s Place in Building Wealth
The data speaks clearly – Australian housing consistently builds wealth across decades despite disruptions along the way. But savvy investors appreciate risks demanding balanced mitigation.
By appreciating how Australia’s property market drivers evolved this perfect storm, players make informed decisions navigating courses likely sustaining positive momentum. But staying vigilant and proactive insulates against surprises knocking even resilient markets off kilter.
The forecast looks favourable for Australian property crossing near-term event horizons. But by understanding what makes this sector tick, investors maximise opportunities while safeguarding longer-term interests. The time to take positive control is now before potential storms sweep willing the unwilling overboard.
