House prices doubled 7 times in 60 years amid various rate hikes

A whitepaper published by PEXA and LongView revealed that over the past 60 years, house prices doubled seven times, even through multiple periods of rising interest rates.

The whitepaper, titled What Drives Australian House Prices Over The Long Term? showed that from 1960 to 2021, house prices followed a constant upward trajectory, even as interest rates rose simultaneously. 

It shone a light on the historical and current state of Australia’s housing market, highlighting that there are multiple factors at play on home values and interest rates are only a small part of a bigger picture.

In the 28 year period from 1960 to 1988, home values doubled a whopping four times and amazingly, these periods of immense growth were experienced at the same time as rising interest rates, with rate increases of 2-3 percent.

Afterwards, from 1988 to 2021 when interest rates started to fall, home values continued to increase, doubling another three times with an annual growth rate of 7 percent.

The graph showed home values appreciating regardless of what interest rates were doing.

It suggests that if there is a correlation between interest rates and housing prices, it’s a weak one.

House prices have risen considerably since the 1960’s, while wages have grown at a much slower rate. Rents have also risen considerably, and we Australians now find ourselves facing a housing crisis. But interest rates aren’t responsible. 

Interest rates aren’t the problem

The paper provides an insight into the short-lived effects of interest rates on the house market, iterating the resilience of Australian residential property. 

Notably, any decline in home values triggered by rising interest rates has been temporary, never lasting longer than a year at most.

With any effect of interest rates proving to be subtle over the long term, the paper attempts to unveil the real issues driving Australia’s housing crisis.

It puts it down to multiple factors, but one overarching contributor – high rates of population growth.

According to the whitepaper, Australia’s population growth rate is one of the highest in the world. And especially the developed world. 

“High population growth, driven by migration, has been the norm in Australia for many decades. 

“Indeed, for much of Australia’s history, migrants have made up a greater proportion of annual population change than natural increase,” read the paper.

That is, Australia’s population growth is predominantly driven by migrants, rather than babies born.

Which means a unique demand for housing, as the median age of a migrant in Australia is 44 (according to the paper) – an age where home ownership is likely desired and possible due to income levels.

Pair that with the current trend towards less people living in each dwelling (an emergence from the pandemic), and it’s no surprise our housing stocks aren’t sufficiently keeping pace with demand.

While exceedingly high levels of population growth have played out, zoning laws have prevented dwellings from being built. 

These factors, combined with unique population concentrations, have culminated into a housing crisis that we should have seen coming.

Zoning regulations increase house prices

A 2018 paper by Peter Tulip and Ross Kendall, published by the RBA, suggested that house prices were affected more so by zoning, rather than the physical scarcity of land. 

The strict government policies around land zoning has placed high values on the right to build residential structures on a block of land, and Mr Tulip and Mr Ross quantified the effects.

“Excluding the effect of zoning, the marginal Sydney house buyer could have been supplied with an average house for $671,000 – it would have cost $395,000 to build the structure and landowners (existing or potential) would have been prepared to forego the land for $277,000. 

“Instead, buyers needed to pay $1.16 million. The extra $489,000 reflects administrative restrictions. That is, zoning restrictions raised prices 73 percent above the cost of supply,” read the paper.

In Australia, residential land makes up a huge proportion of our national assets, and the figure has grown substantially over the past decade.

“We estimate that 48 percent of Australia’s total national assets currently consists of just residential land, compared to 34 percent in 2012,” read the PEXA/LongView white paper.

“Critically, residential land eclipses all other Australian asset classes in scale, including physical residential structures, commercial real estate, bonds, and equities.”

Land is an appreciating asset as it’s a natural one, and scarcity will only continue to grow.

But even more scarce is desirable land, especially in Australia, where 51 percent of our population live in Sydney, Melbourne or Brisbane, in an extremely concentrated settlement pattern.

Australians are struggling to secure affordable housing

Australia’s house market has become a source of great frustration for young aspiring homeowners, with many becoming locked out of the market due to skyrocketing house prices that require large deposits. Mortgage serviceability and borrowing capacity is also a barrier. 

Falling homeownership among young people means 11 percent less millennials will achieve home ownership than baby boomers did at the same age.

Renters are also feeling the pain, with vacancy rates sitting at record lows and capital city rents clocking a 25.7 percent increase since the beginning of the pandemic in 2020.

It’s an overwhelming affordability crisis targeting the young, the middle class and the lower class.

And the answer is obvious – we need to build more houses.

But housing supply is historically slow to respond to demand. That solution isn’t a quick fix, so the crisis looks set to stay until we can get more homes on the ground. 

As the PEXA/LongView paper suggests, “solutions will have to swim with the tide of the economics.”