House prices in Australia are rising. This isn’t due to a lack of supply, because the 2016 census showed there were 12% more residential properties than households. Some properties are empty while others are holiday or second homes and the proportion isn’t expected to have changed much since then even though the population has increased by over one million in the last five years.
A shortage of supply would tend to drive up the level of rents as well as house prices and that hasn’t happened. So what’s the reason for increased prices? There appear to be enough properties for people to live in but not enough for them to own, especially in places where they want to live, and there seem to be two main reasons for this.
Although most people buy houses to live in, there’s a growing tendency to buy property as an investment and this has been largely driven by two significant factors:
- A halving of the capital gains tax rate in 1999. This was intended to encourage more investment in innovative companies but has instead led to a surge in property buying. Buyers know that, when they come to sell, they’ll only be charged half the previous rate on any gains they make.
- Annual tax saving, where interest charged on the money borrowed to finance a house purchase, plus other expenses, can be offset against any income. Buyers know that, even if they pay over the odds for a property and the rental income is less than the finance costs, they can reduce their annual tax bill.
They’re big incentives for investors to buy and mean they afford to outbid residential buyers. This is forcing property prices higher and has resulted in the proportion of landlords increasing to one in ten of the population against one in fifteen about twenty years ago. It’s also caused home ownership to drop from 71% of the population in 1966 to around 66% now, and only 63% in the under-forties.
Changing Living Habits
The COVID-19 pandemic forced many people to work from home and this is likely to become a regular way of working even when it’s all over. Some have realised it’s now no longer necessary to live near where they work and so there’s an increased demand for beachside and more rural properties rather than city centre or suburban living.
People moving out of city areas are finding property prices are cheaper and so have money available to buy larger houses or to bid higher for ones they really want. This will drive property prices higher in areas that are increasingly in demand.
The outcome of all this is that, although there is plenty of housing, it’s increasingly available for rent, especially in city areas. Further out, prices are rising as people move to improve their quality of life.