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  • Writer's pictureRobert Norris

The buyers jumping into Australia’s housing market...

Even with 16 straight months of gains and repeated records for house prices, buyers appear to be willing to take their chances. Why?


Nila Sweeney, June 7, 2024


Like many others, Anabelle Tungol has just bought her first home.

Tungol purchased a two-bedroom apartment in Merrylands, in Sydney’s west, for around $620,000 and she and her two daughters will be moving in within the next few months.

“I’m a single mum and I have two daughters, so I thought I wouldn’t be able to buy anything because house prices were too expensive,” she says.

“But then my rent started going up quickly in the past two years, So I looked at how much I’d need to pay the mortgage, and found that the difference was not that big, so I decided to buy.”


Tungol is a new entrant into Australia’s booming housing market, which has hit fresh records every month since November. Figures released this week by Corelogic showed that, in May, prices rose 0.8 per cent for the 16th monthly gain in a row and the largest monthly increase since October.

In some ways, it’s the worst time to buy a house. Interest rates are high, inflation is elevated and sticky, and consumers are caught in a spending crunch, as shown in this week’s GDP figures. Homeowners now need to allocate 48.9 per cent of their household income to service a new loan on a median priced home nationally, a record high for the series.

But buyers appear undeterred and are continuing to choose to participate in the market where they can.

On one hand, this is perfectly rational behaviour where demand is high and supply is low. But it’s just as easy to argue that this market is warped by a damaged supply side and buyers are taking what would previously have been seen as economically irrational decisions. What is clear is that this is uncharted territory.


Fear of missing out

One of the big motivating factors for buyers appears to be a fear of missing out.

“Fear of missing out used to be a multi-month phenomenon that peaks around the spring selling season, but now it’s a multi-year event, that’s why I called it FOMO on steroids,” says Warren Hogan, chief economic adviser at Judo Bank.

“The perception that there is a massive shortage of homes motivates people to do whatever they can to get in [to the housing market], no matter how ridiculously expensive houses are.

“People have the view that the shortage is going to last for a long time and that will mean prices will just continue to rise. And it’s not just fear of prices going up by 3 per cent in the next three weeks, it’s the expectation that prices will go up by 20 per cent in the next two to three years.”

Hogan says the record population growth in the past year exacerbated a pandemic-fuelled undersupply, which he expects to increase to around 300,000 homes in the next 18 months.

“Even assuming there’s a pick-up in building activity, we’ll still be more than a year’s supply short, which means the undersupply is not a passing fad, it’s here to stay for some time,” he says.

“Australia has never had a severe shortage like this in recent history, so this is a major market failure. If there’s something broken in our housing market, it’s the fact that we’ve got a shortage. It has an actual and a perceived impact.”

The number of homes approved for construction rose by just 0.3 per cent in April to 13,078, which is close to a 12-year low.


Population surge

The weakness in building approvals is particularly stark when compared to the rapidly rising population, which increased by 2.5 per cent, or 659,800 people, over the year to September, according to the Australian Bureau of Statistics.


Since the borders reopened, a surge in people coming to Australia – net overseas migration is at about 750,000 since June 2022 – has inevitably increased the demand for housing.

“I suspect if we were not seeing this sort of population growth, we would almost certainly be having a much weaker property market at this point,” says Shane Oliver, AMP’s chief economist.

“Population is a major factor in keeping the economy relatively resilient which underpins the property market, but also a factor leading to the supply imbalance,” Oliver adds.

The sharp rebound in migration combined with record low rental vacancies, weak dwelling investment and strong income growth has fuelled a more than 30 per cent increase in rents since 2019.

While rental increases have slowed from 9.3 per cent annual growth recorded two years ago, rents are still rising by 8.5 per cent year-on-year, according to CoreLogic.

Perhaps it is not surprising, then, that first-home buyer activity has been ramping up in the past 12 months, with new loans to this cohort increasing by 18.6 per cent according to the ABS. In April alone, lending to first-home buyers increased by 3.4 per cent.

Investors have also returned in droves, borrowing $10.9 billion to buy investment property, up by 5.6 per cent over the month and 36.1 per cent over the year.

“The reality is that there is price tension in the housing market because rents are going up, because of the shortage of rental property, which is underpinning demand from first-home buyers and investors,” Hogan says.

“But we’re also going through this demographic shift where we’re seeing intergenerational wealth transfer for those lucky enough to have assets that they can pass on to the next generation.


“It’s not just the bank of mum and dad, it’s also the bank of grandparents, or the bank of aunties and uncles. This is playing a much bigger role than it ever has before.”


Equity playing a big role

The bank of mum and dad, by some estimates, is now the fifth-largest source of funding for home buyers where Baby Boomers are giving their kids access to equity built up over the years.

CoreLogic calculates there’s about $8.4 trillion worth of equity available in the market, based on a total dwelling value estimate of $10.7 trillion and outstanding credit debt of $2.3 trillion.

“Buyers are going in with higher deposits on average, so they’re less debt reliant, which helps resilience [in the market] despite higher interest rates,” says Eliza Owen, CoreLogic head of research.

“There’s so much home equity gain over the past few years that is helping to sustain purchasing power, with values increasing by about 35 per cent nationally since the start of the pandemic.

“For those who can get help from the bank of mum and dad, for example, that’s another aspect that sustains demand even when economic conditions are weak and interest rates are high.”

A recent survey by AMP found that three out of four Australians aged 65 and above believe it is important to pass wealth onto their children.


But even a lack of family support has not deterred home buyers like Didith Gabrillo, a single mum who migrated to Australia from the Philippines more than 10 years ago.

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Gabrillo is a neat illustration of the other FOMO psychology that helps keep a booming market climbing when all other conditions suggest it should not – the fear of paying rent in retirement.

To save enough for a deposit and be able to repay the mortgage, she is working two extra jobs on top of her full-time work as an accountant.

“It’s tough to break into the housing market at these prices, but I think it’s important to put down our roots in this country,” she says. “Owning my own home ensures that I won’t go homeless in my old age and also have something to pass on to my two kids.

“Working three jobs is taxing. Sometimes I don’t finish until 11pm and also have to work some weekends, but I think the sacrifice is worth it. I believe property is a good way for me to save money and invest in my future.”


‘A sense of ownership in the nation’

Independent economist Cameron Murray says that a home is the best asset to have for retirement.

“It offers the most tangible income. Not spending on rent is equivalent to getting the income. It protects you from sudden changes to rent, and it’s not means tested for pension,” he says.

Louis Christopher, SQM Research’s managing director, says property is particularly useful for those who are starting their own business.

“I used property to build my SQM Research business. Often, you’ll find that if you want to start a business, you would need a property to use as a collateral for a loan,” he says.

“Banks will rarely provide unsecured loans to startup businesses nowadays. So property is a good security to get a business going. Of course, that contains risks and if your business doesn’t work out that can really impact your finances, but as it is, property is a good storage of wealth.”


The benefits of homeownership go beyond the financial windfall in retirement, says demographer Mark McCrindle.

“I think it’s good for the financial capital of the individual, the social capital of the nation, and for that matter, the political longevity and stability of our democracy as well,” he says.

“Homeownership gives people a sense of ownership in the nation. They’ve got a stake in the future, and they want to see it improve and that obviously creates a more stable electorate that leads to more sensible policies, rather than populism.”


Stretched affordability

Still, measures of housing affordability are clearly worsening across most markets, with the national dwelling value to income ratio rising to 7.7 in March. Meanwhile, the time it takes to save for a 20 per cent deposit rising to 10.3 years, assuming households can save 15 per cent of their gross income.


And CoreLogic calculates that it would cost $1142 more each month to pay a mortgage, than to pay rent based on the national median dwelling value, asking rents, and a mortgage rate of 6.28 per cent on a 20 per cent deposit.

To cover the cost of an average mortgage, a property has to increase by 2.3 per cent each year over 30 years. So far in the past three decades, home values across the capital cities have gained 5.9 per cent a year according to CoreLogic. Those who bought in the past 30 years, have more than recouped their mortgage.

More accessible prices for Millennials, Gen Z and future generations would require a significant decline in home values, which hurts those already invested in housing and has broader negative implications for the economy, says demographer Simon Kuestenmacher.

He says there are better ways to help boost affordability.


“The government can make it easier for Baby Boomers to downsize and optimise the existing stock by removing stamp duty,” he says. “They can replace it with annual land tax, which would be more manageable for most buyers.”

McCrindle says that rather than setting a target to build 1.2 million homes, the government could prioritise building infrastructure that connects cheaper regional areas to capital cities.

“Even though more people have moved to the regions since the pandemic, we still have this psychological need to know we’re within an hour or two of a capital city, so if we can get hopefully a high-speed rail to connect some of our inland areas with Sydney and Melbourne, that would unlock so much land and cheaper homes,” he says.

“People are willing to move further out of the capital city if they know there’s infrastructure available.”

Meanwhile, first time buyer Tungol is convinced she’s made the right decision.

“Being a single parent, it was important to have my own place that I can use when I get old,” she says.


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