In Australia, as In most places, waterfront real estate is expensive. But to see the full effects of expensive Australian housing, you need to look beyond the trophy homes of Sydney Harbor and the beachside spots of Bondi. Tents and other makeshift shelters are springing up along the water in cities across the country. They are the dark side of a housing market that has held steady despite rising interest rates. For households of all incomes, the share of affordable housing is at its lowest level in thirty years.
Australians are not alone. House prices are high relative to incomes in the rich world, and defied expectations last year by rebounding after only a short-lived recovery. The rental markets are also hot. In many wealthy countries, vacancy rates are at or near historic lows, while rents are rising rapidly. In previous decades, economist Peter Tulip notes, rising housing costs were offset by cheaper loans. Now mortgage rates have also risen, meaning potential buyers can afford to borrow less.
What’s behind the unexpected resilience of prices? It partly has to do with global trends, such as people working from home more and therefore attaching more value to their living space. But Australian policymakers are also increasingly turning their attention to three domestic factors.
The first is that overseas demand for Australian housing is higher than ever. Net immigration was 500,000 in the year to June, more than double the inflow in 2019. At the same time, some 650,000 international students call Australia home, and they all need a place to stay. And even foreigners who don’t live in Australia full-time appear interested in the housing market, with such buyers accounting for 10% of new-build homes sold in the third quarter of 2023.
The second factor is the material costs. The producer price index for the construction sector has increased by 30% since the beginning of 2021. This has not only meant that homes have become more expensive to build, but also that there are fewer builders in Australia. Over the year to June, more than 1,500 construction companies went bankrupt, mainly due to cost overruns. The result is a smaller supply of new homes and even greater upward pressure on prices.
But the biggest brake on housing construction, says Tulip – and the third factor driving up house prices – are the planning rules of local councils. A good example is Sydney, where large numbers of homes face development restrictions. Meanwhile, zoning regulations raise home prices well above their combined underlying costs. Mr Tulip’s research shows that this increase, again in Sydney, is no less than 73%.
Could the government ease the pressure? It has promised to reduce immigration, triple the fees paid by foreign buyers of existing homes and increase taxes on vacant properties. The national target to build 1 million homes over the next five years has been increased to 1.2 million. And there are some signs that planning restrictions are being eased. The New South Wales state government is rewriting its zoning rules to force local councils to accept higher density housing. Such attempts will inevitably raise strong objections. But they won’t come from the growing number of Australians spending the night in a tent by the water. ■
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