Australian house prices are out-of-reach for millennials, and low and middle-income earners, especially in Sydney and Melbourne.
A recent poll found that young people and middle-income earners in Australia have given up on ever owning their own home. There is a large proportion of young Australians who don’t believe they will ever work their way into owning a home.
The housing market is so high that the only way they can own a home is through inheritance. Sydney’s median house price is over $1.25 million which is well beyond the reach of a single, average income earner.
As a result, young Australians are prioritizing lifestyle choices and overseas holidays over saving for a house deposit. Millennials just don’t believe that it’s worth working and saving for 25 to 30 years to maybe own a home.
One economic report suggests it takes a couple earning the combined Australian median income over 14 years to save a 20% home loan deposit for the average Sydney home. In Melbourne it would take over 11 years and in the relatively cheaper property markets of Brisbane and Adelaide it takes over 10 years.
Home Ownership & Retirement
Economists know that the biggest difference between a secure and an insecure retirement is mostly about owning your own home. In fact, most Accountants and Economists will tell you that you need to own a substantial amount of your home first before you put money into other investments.
If young people can never own a home, how are they ever going to invest for their retirement? If you own your own home, you may be able to live on a pension. However, if you’re still renting at 65, you’re going to have a poor retirement. And most pension schemes don’t anticipate funding for property rent.
Part of the issue is that Australia has not seen a recession for 30 years. People under the age of 50 have grown up in a country of prosperity where there has been a good standard of living. Thirty years ago, houses were smaller and occupied by four people.
Today, the average size of a residential home has doubled, but the average number of occupants has halved, giving higher living standards. And young people are still expecting to have a higher standard of living than their parents.
Australia’s Official Reserve Bank Interest Rate
The Reserve Bank of Australia have increased the official cash rate to an 11-year high of 3.85% to combat inflation that is running at around 7%. The RBA have indicated that the inflation rate should ideally be in a target range around 2% to 3%.
In comparison, other OECD countries already have a higher central bank interest rate to tackle inflation. The USA Federal Reserve rate is 5.25%. New Zealand is also at 5.25%, while the UK and Canada are at 4.5%.
Students of economics will be aware that cost-push inflation is difficult to control. Usually, the economy needs to be pushed into a mild recession to bring down inflation.
The official interest rate usually needs to be increased to near the inflation rate to have the desired effect of reducing inflation.
Maybe Australia needs a higher official interest rate to bring the inflation rate down to the RBA’s target range.
Australian House Prices & Affordability
| 1989 | 2023 | |
| Sydney’s median house price | $170,850 | $1,253,000 |
| 20% home deposit | $34,170 | $250,600 |
| Home loan interest rate | 17% | 5.5% |
| Australia’s average, full-time salary | $26,800 | $94,000 |
| House price to salary | 6.4 | 13.3 |
| Home loan to salary | 5.1 | 10.7 |
Sydney is now rated as the world’s second most unaffordable residential property market, after Hong Kong.
In 2023, new home buyers need to borrow nearly eleven times the amount of their salary giving a dangerously high debt-to-income ratio of 10.7.
Most financial commentors fail to understand that young home buyers do not earn anywhere near the average, full-time salary. This makes saving a $250,000 deposit well beyond a young person’s capacity. A young single person (and most couples) would never be able to borrow enough funds to buy a home in Sydney.
Clearly, living standards in Australia have been eroded over time.
The Best Time to Buy Real Estate
Australian House Prices & Immigration
Australia’s population is increasing every year even though the birth rate is dropping quite significantly.
Australia’s population is increasing by two per cent every year. However, the number of houses is not increasing 2% per year.
The Reserve Bank of Australia have warned that increased immigration would further push up rents and house prices, with 400,000 new arrivals expected this financial year.
The housing markets in Sydney, Melbourne & Brisbane are largely dominated by wealthy immigrants from Asia. When attending open homes and auctions, there are too many prospective buyers and 7 out of 10 prospective buyers are of Asian origin. These buyers bid whatever the price to enter the property market. This is fantastic for greedy real estate agents who make a fortune from sales commissions but bad for local home buyers who are out-bid and out-priced from the market.
Australian House Prices – The Solution
Immigration
Lower the immigration intake for many years until more homes are constructed. There is simply too much demand and too little supply of houses in Australia. There is no point allowing people to settle in Australia when there is nowhere to live.
Wealthy immigrants may be able to afford the high priced real estate.
However, immigrants coming from less privileged backgrounds will find Australia to be a very expensive place to live.
Foreign ownership of residential property
Ban foreign ownership of residential property.
New Zealand, Canada and many other countries do not allow foreign ownership of residential property. These countries don’t want the domestic property market overheated by foreign buyers with money.
Home loan interest rates
Increase home loan interest rates to prevent home buyers borrowing too much money and over committing themselves. This will reduce demand, slow down house price inflation, and balance the supply and demand of homes in the market.
Transfer duty rate
Reduce the transfer duty rate on purchasing residential property. The transfer duty rates have been the same for years. Now houses have increased in price, the transfer duty increases earning state governments more tax.
Real estate selling fees
Real estate agent selling fees are a percentage of the sales price of a home. Now houses have increased in price, real estate agents are making much more sales commission.
The sales commission rate should be reduced to relieve pressure on the real estate market.
Generally, the cost of buying and selling a home in Australia is too high causing many people to hold on to homes longer or never sell their home. This restricts the supply of homes for sale causing further imbalance in the market.
Australian dollar
The Australian dollar was worth more than the US dollar in 2012.
In 2012, AUD 1 = USD 1.10
In 2023, AUD 1 = USD 0.66
The Australian dollar has almost halved in value against the US dollar.
Wealthy immigrants coming to Australia have an unfair advantage over locals when buying real estate. An immigrant’s money is worth a lot more than it used to be making Australia seem like a bargain.
The Australian Government and Reserve Bank need to implement economic policies to increase the value of the Australian dollar. This will make coming to Australia less attractive for wealthy prospective immigrants. And a higher Australian dollar will not impact poorer immigrants as they do not bring money into the country.
Source: ANZ-CoreLogic Housing Affordability report released in May 2023.