Like several other developed nations, Australia is currently going through a crisis – a crisis that the mainstream media is trying their best to sweep under the rug. But the reality is there’s no hiding it from the people on the street as they can feel it in their bones.
I wanted to write a news article for a long time on the inflationary pressure the country is facing right now, but then decided to be more specific and cover a niche area.
So today I thought, how about I write a news article on the current housing crisis. I call it a crisis because property investment is becoming a distant dream for many Australians.
Rest assured it won’t simply be a news article; it will contain a lot of “how-to” type insights to guide you to take the right steps amidst this crisis.
How this Crisis Started
The most simplistic version is there were pent up demands when lockdowns ended, causing a spike in consumer inflation. The Fed responded by raising effective funds rates. Other banks – including the reserve bank of Australia – had to be in lockstep; so they followed suit. Between April 22 and November 2023, RBA increased the cash rate by over four percent. That’s a whopping increase. Below is the graphical representation of this increase:
A high interest rate is disadvantageous for all kinds of mortgage buyers. But when coupled with high inflation, it could be absolutely disastrous for a certain group of homebuyers – those who took mortgage loans at variable rates. Below is a chart showing the correlation between Australia’s home interest loan rate and the rate of inflation since 1959:
As seen in the correlation chart above, inflation went up 2020 onwards. Variable rate caught up in 2022, freshly after the Reserve Bank began to raise cash rates.
The next chart (from the same online source) is even more interesting. It shows a divergence between variable mortgage rate and 3-year fixed rate starting from the year 1995.
We can see two successive divergences here. When the 3-year fixed rate increased from July 2021 to March 2022, the variable rate was stagnant. Then as soon as the cash rate started shooting up, the variable rate went from 5.28% to 8.52%. The spike happened between April, 2022 and May, 2023. The fixed rate, however, underwent a minor increase within this period. The average variable rate, at this moment, is 6.72%, which is well above the relief level.
It might appear the housing crisis was caused partly by inflation and partly by the rising cash rate. But that’s not true. Owner occupied new dwellings never saw a dip in demand despite surging inflation. Their demand was very high during the inflationary timeline. Take a look at the chart below that verifies it.
So, what’s really going on here? Is the soaring cash rate the only culprit? And more importantly, what’s the role of inflation in all these?
Inflation and Housing Crisis
To understand how inflation exacerbated the housing problem in Australia that has been brewing for several years, we need to categorize the post-pandemic timeline into three phases. These phases are,
- The low-rate environment (from November, 2020 – April, 2022)
- The inflationary phase (May, 2021 – present)
- The rate hike phase (May, 2022 – present)
The overlaps between these phases are due to the low-rate environment coexisting with the inflationary pressure for almost a year, and the battle against inflation not being won yet.
Property developers took advantage of low-rates and built plenty of homes. The extent of their building activities during the time when rates were low, and inflation wasn’t a nationwide concern, could be fathomed by looking at the dwelling unit approval graph below:
As you can see, there were huge demands for owner-occupied new dwellings between Jun, 2020 and April, 2021.
Wondering why?
Well, two things happened shortly after the pandemic; first, the Australian government set up the HomeBuilder Program to help eligible owner occupiers with $25000 AUD, and second, retail spending almost stopped due to the strict lockdown, leaving people with spare money which they could invest elsewhere.
Interestingly enough, the new dwelling approval rate reached its peak in April, 2021 and started climbing down from there. The drop coincided with the beginning of the inflationary phase, which, as stated above, started in May, 2021.
So, the dwelling unit approval rate dropped, and inflation rose. Are these two events separate from one another? No. They are actually connected. Building materials and labour costs went up due to inflation. Because of this, the construction of new housing units became more expensive for property developers. And the cost of other things also increased; even home improvement became expensive. People became more frugal with their money. So, demand and supply both got hit, and as a result, the dwelling unit approval rate sharply declined.
The Current Situation
The CPI report shows inflation is gradually decreasing. That’s good news, right? Well, not really. At least, not for homeowners and renters. The costs of labour and building materials are still quite high. What seems to be slowing down, at snail’ pace of course, is the rate at which prices were increasing only a few months ago.
With inflation persisting longer than expected, and new building rate dwindling, the market is apparently hit by an undersupply. What it means is housing units will continue to be unaffordable for quite some time. The situation is especially bad for renters. The latest Rental Affordability Index shows rent is becoming unaffordable for the majority of Australians all over the country.
The crisis has spread to regional areas from the cities, albeit it’s not as bad in the regional areas as in major cities. In August of this year, rental vacancy rates fell to 1.10%, which is lowest in recent times. And the share of rental properties in the market right now is over 50% lower than the pre-pandemic level.
Undersupply – the Boogeyman
Is undersupply the key reason behind Australia’s housing crisis? Well, that’s the narrative that the mainstream media wants you to believe. The reality is there are plenty of vacant homes in Australia. The 2021 census data revealed the number of empty housing units to be more than a million.
Shocked? Well, you should be. After this news was out, mainstream media tried their best to persuade people into believing these vacant homes were not in conditions suitable for living, or hilariously enough, they were sold out the next morning the census report was released.
But as I wrote in the beginning, all these are efforts to sweep the problem under the rug. When they write a news article, they do their best to hide all the unsavoury details. I am not saying that the cash rate going up and the persistent inflation are not reasons behind the housing crisis. This is how the crisis started. But the crisis is deepening with time as there are much bigger problems, hidden under the guise of undersupply.
Housing – A Speculative Asset
Between the 80s and now, the median salary in Australia has increased only 4 times, whereas the average cost of a private housing unit increased almost 14 times. Guess why? It’s because nobody invests in salaries, but housing draws a lot of investment – both from domestic and from overseas investors.
The most common type of investors are real estate investment trusts or REITs. They have turned housing into a speculative asset. The current market cap of REITs in Australia is $144 billion AUD, a bit low since the pre-pandemic high, but the shares of A-listed REITs are mostly trading high because of their portfolio and credibility. Among the ones that are publicly traded, almost everyone pays dividends to their shareholders. It helps them keeping their goodwill intact, and brings them more investors.
Because REITs have vested interest, they would never want housing prices to become affordable as that’d hurt their business. In fact, they’d aggravate the crisis by trying to monetize existing housing assets in new ways. One of them is short-term rentals. Businesses that are into short-term rental want vacant houses that they could quickly rent to tourists and visitors. Working with them is more profitable for individual property owners than having long-term renters as renting short-term makes the most financial sense.
The Flood of Immigration
Australia is among the most preferred destinations for international students. Each year, tens of thousands of students migrate to Australia to receive better quality education. While it’s a good thing for revenue generation (courses are pretty expensive), it’s also one of the reasons aggravating the housing problem.
Students who cannot find on-campus accommodation, are being forced to live in private rentals. Australians, therefore, are having to compete with immigrants to find rental accommodation. Fresh off the boat immigrants don’t even mind sharing their living space with other immigrants.
House owners treat them as cash cows, and take advantage of the predicaments they face. Here’s an example, imagine the rent of an apartment is $1000 AUD. Houseowners know they can’t charge Australian families more than $1000 AUD. But they can house six or seven immigrants, who they know couldn’t afford $1000 AUD each, but could pay $300 AUD, implying more profit for the houseowner as the cumulative rent would be way more – almost double – than what the houseowner would have gotten had he let an Australian family rent the house.
It’s an ugly truth, and the mainstream media keeps tight-lipped around it, but in places like New South Wales, Victoria and Queensland, immigrants are almost everywhere, and the rent problem has gotten too big to ignore. Unless the government addresses this problem, and does something to handle it, such as building affordable homes for international students, capping the number of immigrants that could come here every year, the problem will continue to worsen.
What You Should Do
There is some good news here and there, like national home prices declining over 4% from the peak of 2022, the $10 billion Housing Australia Future Fund, which is expected to build 30,000 affordable homes, etc. But you, an average citizen, can’t really rely on promises and speculations. Not anymore.
So, here are some tips for you to survive this crisis.
First, go for shared housing if you can’t afford rent. I agree that it’s a stop-gap solution, but it’s better than homelessness, right? Next, if your company allows work-from-home, consider moving to a rural area. Sure, you’d have to travel a lot, but fuel prices in Australia are cheap right now. Take advantage of that. Also, if possible, avoid living in areas where there’s a high concentration of immigrants. Lastly, be frugal and curtail entertainment and leisure expenses, so that you could afford rent.
For wannabe homebuyers, wait for prices to decline further. Many economists are expecting housing prices to fall in the near future. Keep an eye on the cash rate. It’s expected to remain stable for some time, and then go down. That might be the time to take a home loan, not now.
