There has been a residential property price boom across Australia over the last 12 to 18 months. According to the latest figures from the Australian Bureau of Statistics, Australian property prices grew by a whopping 23.7% in 2021.
This is the third-largest annual increase on record. The highest was in 1950 when prices doubled after World War II price restrictions were lifted, followed by 1989 when prices increased by 29%.
History tells us that such large property price increases so quickly have a range of implications.
Short-term implications
The immediate short-term implications of such high property prices are:
- – reduced housing affordability,
- – rising household debt levels as buyers have to borrow more, and
- – higher mortgage repayments for borrowers repaying higher levels of debt.
Let’s look at each one in turn.
Reduced housing affordability
Higher property prices mean that it’s harder for first home buyers (and others) to be able to afford a home. It takes longer to save for a deposit. The table below shows the median house prices in States and Territories across Australia.
| Location | Median price |
| New South Wales | $1,207,000 |
| Australian Capital Territory | $979,000 |
| Victoria | $956,000 |
| Queensland | $749,000 |
| Tasmania | $649,000 |
| South Australia | $614,000 |
| Western Australia | $614,000 |
| Northern Territory | $489,000 |
Lower housing affordability is more likely to result in:
- – More demands for wage increases.
- – An increase in people renting rather than buying a home. Currently, 1 in 3 Australians rent their accommodation.
- – An increase in demand for cheaper home options (for example, apartments instead of free-standing houses with a yard). According to the latest figures from CoreLogic, the gap between house and apartment prices in Australia is now the largest that it has ever been.
- – Increased buyer migration to cheaper locations (for example, regional areas or cheaper capital cities).
Rising household debt levels
Rising property prices mean buyers have to borrow more to buy a house. The latest ABS figures reveal that the average Australian mortgage is now just under $600,000, the highest it has ever been.
Higher mortgages leave borrowers vulnerable to interest rate rises. Even a 1% increase in a standard $600,000, a 30-year mortgage will increase monthly repayments by $322 per month.
Many analysts are tipping that interest rates will rise soon as the Reserve Bank attempts to keep rising inflation under control.
Higher mortgage repayments
Even without interest rates rising, higher property prices and loans mean higher repayments for borrowers. This places pressure on household budgets and wages. Australia has had very slow wages growth in recent years.
If wages don’t keep pace with rising inflation levels, then borrowers will find it harder to afford their mortgage repayments, especially if interest rates rise.
Future house prices in Australia
Many analysts are tipping that prices in the Australian housing market will either stabilise or fall in the short to medium term. This is especially likely to happen if interest rates rise.
However, residential property price trends in Australia show a long-term growth pattern, despite there being periods of short-term price corrections where market prices fall.
Is it a buyer’s or seller’s market?
While you may have heard that the current conditions make it the perfect time to sell property, there are factors that also make it a great time to buy.
Low interest rates
Interest rates are at record lows. While there is talk that rates will begin to rise soon, fixing your interest rate guarantees that your rate will remain the same for the agreed term.
Extremely high demand for rentals
While the pandemic saw the demand for commercial property slightly decrease, the demand for residential rentals has gone largely unmet. When supply can’t keep up with demand, the price naturally increases. But no matter how high the price for rentals gets, people still need somewhere to live.
These economic conditions have meant that the cost of rent has skyrocketed across Australia. While it’s not great for the renter, it brings in a great return for the property owner — pair the great return with the low cost of borrowing, and you’ve got a recipe for a lucrative investment!
To learn more about investing in a property inside your SMSF, please get in touch.
