Boom time

Instead of property prices falling off a cliff last year, Australia’s housing market is in the midst of a boom. Is this a sustainable rise or an artificial bubble that will inevitably burst?

Author

Nicholas Ward – HIA Senior Economist 

In 2020, Australia experienced its slowest population growth in more than 25 years. With a slowing in population growth we would expect to see a fall in demand for new homes and a fall in house prices. Instead, we have seen rapid house price growth and strong demand for new homes.

Exceptionally low interest rates, which lower costs to service mortgages, are one driver for this seemingly counterintuitive outcome. House price rises are another driver that also reflect changes in Australian preferences that developed in the COVID-19 pandemic. In particular, many Australians relocated to areas where there is lower capacity to house them, pushing up prices.

Australia’s population growth has averaged 1.5 per cent for the past 20 years. With the borders closing to migration in 2020, growth fell to a rate which we expect to be around 1.0 per cent. 

But there are two significant demographic changes that offset the impact of this population slow-down on house prices. 

Firstly, prolonged COVID-19 lockdowns in cities, workers’ new ability to work remotely, and retirees deciding to change their lifestyle, has driven Australians to move away from city living, and towards country living. There was also a shift away from the two most populous states towards smaller states. The sharpest change occurred in Melbourne: the number of people who left Melbourne to live in other parts of the country (including country Victoria or other states) outstripped people who moved to Melbourne by 18,000 people in 2020. This compares to a net loss of only 500 people in 2019.

 

On the other hand, Adelaide, Perth and Darwin received a small net inflow of residents in 2020. This sits in stark contrast to 2019, when these cities experienced net population loss of around 6000 people. This sudden growth in population wasn’t limited to the cities. The net inflow of people moving to regional areas in Queensland, South Australia and Western Australia in 2020, in net terms, was higher by ten-fold, compared with 2019. 

Overall, this shift in population saw people move away from areas where available dwellings are relatively plentiful, to areas where they are less plentiful. There were around about 14,500 rental vacancies in Melbourne in December 2019, but only 8500 rental vacancies in Adelaide, Perth and Darwin in December 2019. While this is typical for these cities, the speed and volume of new arrivals from Melbourne overwhelmed their markets. 

When new residents arrive in areas where dwellings to house them are limited, significant price increases result. From December 2019 to January 2021, dwelling prices increased by seven per cent on average in Adelaide, Perth and Darwin, and by five per cent on average in regional Queensland, South Australia and WA. In contrast, dwelling prices fell by 1 per cent in Melbourne. Adding all these price changes up, dwelling prices increased by four per cent on average for Australia as a whole. This is not a particularly remarkable house price growth for Australia.

Secondly, COVID-19 restrictions and new working arrangements have caused a change in preferences away from living in confined apartments and units and towards living in more spacious detached houses. This is facilitated by the shift to the regions, where detached living remains far more prevalent. 

From December 2019 to January 2021, the price of detached houses rose by five per cent, whereas apartment/unit prices have risen by only one per cent. In Melbourne and Sydney, which are the largest markets for units and apartments, prices are flat, while in Adelaide and regional areas, they are up five per cent and above.

There have been other demographic changes that reduce demand for apartment living and improve demand for detached houses. In the 12 months to February 2021, there were almost 500,000 fewer tourists, students and business travellers visiting Australia than in the previous year. These visa holders would typically occupy short-term accommodation, such as hotels and apartments. They are unlikely to occupy detached housing. On the other hand, up to 300,000 Australian citizens and permanent visa holders are returning to Australia. These households are more likely to seek a detached home. 

 

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