Australian housing market: everything you need to know

Residential property holds a special place in the Australian economy. From the booms to the declines, understanding the Australian housing market is crucial to understanding the nation’s past, present and future prosperity.

Sydney house prices Source: Bloomberg

Australian housing market history

The value of Australian residential property has climbed considerably in the past quarter century. According to CoreLogic analysis conducted in 2018, the median value of Australian houses increased by 412% in the 25 years since 1993.

The growth in property values has also been well-spread throughout the country. Measured by the annual percentage in change in house values, the major Eastern capital cities, Sydney and Melbourne, lead the nation at 7.6% and 8.1%, respectively. However, the smaller cities of Adelaide and Brisbane, which saw the weakest growth across the country’s capitals relatively speaking, still experienced respectable growth in their residential property markets of 5.9%.

Benefitting from rising terms of trade, supportive monetary policy, attractive fiscal conditions, foreign investment, and carefully managed immigration policy, property has proven a powerful means of growing the wealth of the nation, along with that of individual households. It’s been the successful transfer of wealth from the mining boom, through the financial system to the household sector, that has driven this process and turned Australian’s into a nation of hopeful homeowners.

The Australian economy’s ability to go over 27 years without recession has relied heavily on residential property. It’s future prosperity hinges in a meaningful way on the continued good fortune of the sector.

What is a housing bubble?

A housing bubble is a rapid rise in residential property prices, followed by a precipitous fall. It is characterised by a period of speculative euphoria that bids the market higher and higher before fundamentals instigate a correction in prices to a level closer to what could be considered 'fair value'. Often, this speculative euphoria is fuelled by lax or too loose credit conditions, which encourages investors and home owners to take-on mortgages, and financial risks beyond that which they cannot afford.

When market fundamentals reassert themselves, falling in line with principles of supply and demand, the subsequent tumble in prices sparks a cascade effect, whereby investors rush to liquidate their investment to protect their capital. In severe instances, the fall in the asset’s value results in a significant number of mortgages going 'underwater' – that is, the debt owed becomes greater than the value of the asset it’s tied to – causing widespread defaults and further declines in property prices.

Why is the housing market important to the economy?

For many, owning a house is the most important investment they will make in their lives. It is often the cornerstone for financial wealth, and a supportive factor in ensuring long-term personal health, wellbeing and security. Furthermore, the housing market is a key pillar holding up a national economy, with household and business sector behaviour depending in a large way on its condition.

So almost all members of society have a stake in the housing market. In the aggregate, growth in the value of residential property contributes to consumer confidence and the 'wealth effect'. When households feel wealthier and more confident, they are more likely to spend, supporting consumption within the economy and helping to fill the government’s coffer through higher tax revenue.

Business activity also depends heavily on strength in the property market. A greater demand for housing leads to increased construction activity, benefiting businesses involved in the construction industry, along with those which exist within that industry’s supply chain. Moreover, the requirement to furnish new housing leads to a demand for a variety of retail products, again supporting consumption.

What affects the housing market?

The factors that affect house prices are numerous and can be idiosyncratic to the specific market in question. However, there are a handful of parameters that are universal in determining the value of a housing market. The shifting balance between variables such as interest rates, economic growth, mortgage availability (or credit growth), and supply and demand are all relevant to the health of the Australian housing market.

Interest rates

Adjusting interest rates is the Reserve Bank of Australia’s (RBA's) favoured tool to stimulate or restrain the country’s economic growth. Lower interest rates encourage borrowing, meaning taking on debt to invest in a property becomes more attractive. Moreover, lower interest rates make existing debt less expensive, helping those with existing mortgages spend more.

Economic growth

As the cliché goes, a rising tide lifts all ships. When economic growth is strong, the increased demand for labour lowers the unemployment rate, eventually (in principle) leading to higher wages, increased consumption or greater savings, and a general lift in confidence. As consumers become better off, they are more able and inclined to purchase a house.

Mortgage availability

Mortgage availability describes the ability to acquire credit from lenders – in Australia, most often banks. Credit conditions are determined by several global financial, regulatory and commercial factors. But fundamentally, when banks (or other financial institutions) are willing to extend credit, it is easier for individuals to borrow the funds necessary to buy a house.


In Australia, supply can be one of the more contentious issues in housing policy. Because of different planning regulations, and the separation of duties between federal, state, and local government, ensuring construction and adequate supply. Fundamentally, when supply is limited, prices will rise; when supply is too great, prices will fall.

Why is the Australian property market slowing down?

Following a multi-year boom, the Australian housing market has entered a period of weakness. As of the end of the 2018, the total value of Australian residential property in capital cities has fallen 7% from their highs. To be fair, the lion’s share of the losses has come from the Sydney and Melbourne markets, which are down 11% and 7% respectively. Moreover, the Perth and Darwin markets have been in a state of malaise since the middle of 2014, when the mining investment boom began to wind down.

Nevertheless, the slowdown in the housing markets of the nation’s two biggest cities is of concern and will have consequence for the entire Australian economy. The reasons for the drop-off is multi-faceted and can in some way be attributed to the 'herd-mentality' of rampant speculation and concurrent 'fear of missing out'. But for years, special tax concessions like negative gearing, along with loose monetary policy, has incentivised investment in the Australian property market, from both domestic and international investors.

In 2017, acknowledging the potential risks of a bubbly housing market, policymakers at Australian Prudential Regulation Authority (APRA) introduced new regulations to discourage investor lending, by capping the amount of investor only loans bank could extend. At around the same time, the federal government brought in a new tax on foreign investors to curb foreign demand for Australian property, to extract revenue from the steady flow of capital entering the economy from these investors. The policies worked effectively and precipitated the slow-down being experienced by the Australian housing market.

Australian housing market forecast for 2019

One of the big barbecue-stoppers for Australians is what will happen to the property market in 2019. In 2018, the question turned from one of ‘Is Australia in a housing bubble?’ to ‘Is the Australian housing market going to crash?’ A 'housing crash' is difficult to define and is often diagnosed well after the fact. However, the leading voices in Australian economics are forecasting that further price declines are in store in the year ahead.

At its most extreme, some high-profile members of the punditry, such as the reputable Dr Shane Oliver of AMP Capital, believe that for the Melbourne and Sydney markets, the fall in house prices in 2018 may only be halfway to the eventual bottom. In a report released in January 2019, economists at AMP Capital suggested that property values could extend losses by another 5%-10% before eventually beginning a recovering.

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