Once again the annual International Demographia Housing Survey ranked Australia one of the most unaffordable places on earth.
Sydney has been ranked the third most unaffordable major property market and Melbourne took sixth spot on the unaffordability index.
In fact for more than a decade now international market analysts have been waiting for Australia’s so called ‘property bubble’ to burst.
But the thing many economists from abroad don’t quite grasp is, compared to our overseas counterparts, just how different Australia’s relationship with housing is.
Why do we have higher property prices?
Clearly Australian property prices won’t always trend upwards, indeed there’s been numerous cyclical ups and downs throughout recent history.
However most local economists are pretty confident that our housing markets are sheltered from any major overseas style collapse.
In fact one of this country’s most respected economists, Saul Eslake, senior Australian Economist for Bank of America Merrill Lynch, authored a report explaining why our house prices are at such relatively high levels.
And he provides 7 good reasons why this trend will continue into the foreseeable future:
1. We like city living
Most foreigners have the misguided notion that ours is a country of ‘sweeping plains’, where we all get around with pet kangaroos grazing on the front lawn.
However while our land mass might be expansive, the way we live is far more compact, with the majority of us crammed into a few big capital cities dotting the edges of our vast continent.
We are one of the most urbanized countries in the world, with almost 60 per cent of us inhabiting one of our six major capital city centres, which boast populations in excess of one million residents each (Hobart being the only exception).
It might surprise you to learn that the only countries with more urbanised populations are Japan, Hong Kong and Singapore.
Research around urban geography and how it relates to house prices suggests that cities with more than one million residents tend to have more expensive property markets.
2. Our cities are more spacious and convenient
When you consider landmass in relation to ‘people mass’, Australian cities are comparably larger than those in other developed countries.
But the problem, according to Eslake, is that the further out into the ‘burbs’ you go, the more inefficient public transport and road infrastructure becomes at ferrying commuters into our CBD’s.
Yet it’s within and directly around these CBD’s where the majority of employment, economic and lifestyle opportunities are found.
As a result, Eslake says another reason for higher house prices across our cities is that a greater number of homebuyers who are prepared to pay more to get closer to the ‘action’, so they have to spend less time travelling each day.
These eager homebuyers drive up inner city residential real estate values as they compete for prime property positions.
In fact I recently wrote a blog explaining that not all land is created equal and why it’s important to buy in the inner and middle ring suburbs.
3. It won’t change any time soon
Some might argue that works to increase major arterials and public transport networks throughout our cities’ urban growth boundaries will encourage buyers who have found themselves priced out of these inner city sanctums to move further afield.
But the reality, as many commuters will tell you, is that building a few more lanes does little to ease the congestion of peak hour traffic or increase the appeal of commuting.
It’s unlikely that a few newly constructed expressways will threaten the strength of our consistently higher inner city house values any time soon.
4. Our houses are bigger and better
If you’ve done much overseas travel, or even watched a bit of television from the US, Europe and the UK, you’ll know that our homes tend to be larger than those in other countries.
Three quarters of us live in detached accommodation, as opposed to the more popular high-rise and townhouse options of other wealthy nations, and our dwellings are usually constructed with better quality materials.
If it’s built bigger and better, naturally you would expect to pay more for local housing than our international neighbours.
5. We’re rich!
Okay, obviously not all of us are rich!
But Eslake says that thanks to our prolonged resources boom and two decades without a serious recession (even as the rest of the world reeled under the G.F.C.), we have collectively become a wealthier nation than most.
In other words, we not only can afford to pay higher prices for that bigger and better property, because we love all things real estate, we’re prepared to do so.
6. We don’t have enough to go ‘round
Although there’s a lot of vacant land around of Australia, much of it is either undersupplied in terms of essential amenity, or simply not developable for various geographic and or town planning reasons.
Add to this the fact that the outward expansion of our most popular inner cities is restricted by harbours, bays and beaches; this leaves us with a large number of buyers competing for a much small number of dwellings.
Interestingly, since the turn of the century our population has grown at the relatively fast pace of 1.4 per cent per annum (60 per cent of which is attributable to immigration).
But while this represents twice the annual rate of population expansion since the 1990’s, the number of new dwellings we’re building each year has only grown by 5,000 to 150,000 per annum from 145,000.
Supply just doesn’t seem to be keeping up with demand in the more prized locations, partly due to excessive red tape and costs imposed by local and state planning authorities.
7. It pays to own property
Finally, says Eslake, the tax incentives offered to Australians who invest in residential real estate are just too good to pass up.
Specifically, he cites negative gearing legislation as an unusual quirk that makes local housing a very attractive and reliable investment vehicle.
This additional demand on an already tightly held supply would be fine if it meant the construction of new accommodation for investment purposes.
But, other than in the middle of our CBD’s where there is an oversupply, the lack of construction of appropriate accommodation means the majority of property investors are, more often than not, vying with homebuyers for established stock.
While it’s always interesting to hear what world economists think of Australian house prices, ours is a very different market and seemingly quite misunderstood by analysts who are essentially comparing apples with oranges.
By all means, read the reports and keep up with international opinion.
But formulating your property investment plans on the basis of the overseas doomsayers who lack an intimate understanding of our very different market dynamics is really a fool’s game.
Want to learn a few more lessons?
I’ll be explaining what I’m doing to take advantage of the property markets and even more importantly, what I’m not doing at our upcoming Property & Economic Market Update one-day training seminars that I will be holding around Australia in March and April.
You can find out all about this only round of national seminars I’ll be conducting by clicking here. Reserve your place now.
What are you going to be doing in 2015?
Are you going to take advantage of the property markets in 2015 or are you going to get caught by the traps ahead?
If so and you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level. Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.