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Australia’s housing battle: Interest rates versus supply and demand

It seems all of us have heard comments like “house prices always go up”. Anyone with a basic understanding of maths and economics have told those people they cannot be correct. With that, let’s look at the median house price in Sydney since 2002:

Looking at the chart above it almost does seem like house prices always go up. But wait: what happens when interest rates go up, surely house prices will crash? Let’s zoom into the chart above and look at the effect of recent interest rate rises on the value of homes in Sydney:

Despite interest rates on new home loans more than doubling off their lows, it is clear that house prices have been stunningly resilient, growing once more after marginally decreasing when rates began to increase.

Those concerned about the sustainability of current house prices will correctly point to just how much it costs to own a home. Approximately 75% of home purchases are supported by the use of a mortgage. Obviously, those making the purchase can only do so if they can service the payment on that mortgage. To show this, the chart below looks at the monthly cost of servicing a new mortgage (Loan to Value = 90%) on the median home in Sydney and how it has changed over the same period.

The cost of servicing a mortgage has clearly risen dramatically. A mortgage obtained on the median home in Sydney now costs more than $7,400 per month to service. This has increased by more than 50% since December 2021, less than two years ago. Common sense suggests that this must have a limit. Surely at some point people can’t afford to service their mortgage anymore and surely even the ~25% of people who buy a home with cash won’t have enough cash to buy the home they want. That all has to be true, but house prices prove that at this stage we have not reached that breaking point.

How can we afford this?

Basic economics states that in a market economy, the price of a good or service is a function of its supply and demand. Housing is no different. The demand for housing should be simple to understand. All Australians have demand for a place to live. To support ‘elevated’ house prices and increased mortgage servicing, there has to be a capacity to pay monthly costs. This capacity is most commonly tied to a person’s income. When entering into a 30-year mortgage, someone’s view of their job security is also front of mind. In this context, a chart of long-term and more recent unemployment rates in Australia is presented below:

As can be seen, unemployment rates are at multi-generational lows, serving to add to demand for housing at ever-increasing prices.

Housing demand

In the most basic sense, the quantum of dwellings needed in Australia is related to the amount of people in each dwelling and the population of the country. The Australian Bureau of Statistics (ABS) and Reserve Bank of Australia (RBA) have compiled the nation’s historic average household size and recent trends as shown below:

While perhaps a controversial figure, former RBA Governor Phillip Lowe summed up recent changes astutely, saying:

“During the pandemic, the average number of people living in each household declined. People wanted more space. They were working from home. Rents actually declined for a while. People said, ‘Rather than have a flatmate I will just have an office at home,’ so the average number of people living in each dwelling declined and that increased the demand as a result for the total number of dwellings”.

So, we have less people living in each dwelling and the other component of household requirements, population, is also increasing strongly. Again, the RBA and ABS help by showing both the impact of population growth (in light blue) and change in household size (dark blue) over time in the chart below:

Again, Phillip Lowe sums up the situation:

“The other thing that is now happening is a big increase in population. The population is increasing by two per cent this year. Are there two per cent more houses? No. The rate of addition to the housing stock is very low. We have a lot of people coming into the country.”

This comment touches on the other key element to home prices in Australia. Namely, the supply of new property.

Housing supply

So there clearly is a need to build new houses. Given the voracious demand for residential properties at elevated prices, one would think that residential developers would address this demand and supply the properties the population clearly want. Two major factors are holding back the supply that would otherwise naturally occur.

Firstly, the cost of building new homes is a major factor. A residential property developer will require approximately a 20% profit margin on top of their costs to put new housing supply into the market. The costs of developing that property comprise:

  • the cost of the land on which it is built,
  • the hard costs of the materials used,
  • finance costs,
  • architectural and planning costs and
  • the cost of labour to physically build the property.

In recent times, all of these costs have been increasing. Materials costs increased significantly with supply chain disruptions during the COVID-affected period and only now is the “rate of growth” slowing. Labour costs are also ever increasing, as even the availability of workers is a significant challenge in many cases (see unemployment rates). Each of these increased costs place downward pressure on the supply of new properties.

The real issue

Arguably the biggest factor limiting new supply however is simply being allowed to build new properties. New building requires a myriad of approvals, principally development approvals, from local councils or state governments. Local constituents tend to be against development in their area, often known as NIMBYs (Not In My Backyard). Local councils and members of parliament are voted in by existing residents of a geographic area and hence are incentivised to block the building of new houses.

To provide one such blatant example, one member of parliament (MP) made the comment: “Housing in Australia is in crisis,” describing the cost of housing forcing “families [to sleep] in their cars”. This same MP has vehemently opposed the development of more than 800 dwellings on an unused site in their electorate. Going further, in an attempt to justify the position, he argued that such development activity “drives up the cost of rent and house prices.” This is demonstrably false and fails to pass even the most basic test of common sense. We are not referencing it to call out an individual, but rather providing an example of just how difficult it is to obtain approval to address the housing supply shortage, even from those aware of the need. To see how dire this supply issue has become, see the chart below, provided by the ABS, showing the trend in approvals for dwelling units despite the obvious need for housing.

What are we doing about it?

Amending the long-held planning practices, incentives of government and fixing global supply chains is above our pay grade. What we can do is observe and acknowledge the situation and make investments that benefit from the realities of housing undersupply. This can be done by investing in companies that either have development approved housing projects, or a history of working with planning authorities to obtain approval, despite all the complexities inherent in residential development.

One such investment in the portfolio is Mirvac Group (MGR). Most of MGR’s development takes place in urban infill locations. These projects often increase density and at times have included iconic projects across Australia. MGR is currently developing the old Channel 9 headquarters in Willoughby in Sydney’s North, which will deliver 417 lots, with a total development value of $800 million. Existing iconic projects completed by MGR include The Melbournian, and The Eastbourne in Melbourne. MGR has also been a pioneer in the embryonic ‘build to rent’ property sector. This involves building large apartment buildings, with all lots held for rent on an ongoing basis as opposed to being sold on completion. Those in Melbourne can inspect LIV Munro, adjacent to Queen Victoria Markets, which was recently completed and has 490 apartments available for rent. In the midst of record low rental vacancy, this business both addresses a need and provides low risk returns to investors.

Another investment in the portfolio is Peet Limited (PPC), which specialises in master planned communities across the country. These tend to be extremely large plots of land on the urban fringe of major cities and will effectively be new suburbs and in some cases almost new cities. PPC’s largest project is Flagstone, located between Brisbane and the Gold Coast in Southeast Queensland. It will take a generation to complete, however once built will house 120,000 people and become Australia’s 20th largest city, a similar scale to Cairns. It will include a 100-hectare town centre, with a regional shopping centre similar in size to Chatswood Chase and will have a bigger town centre than the Brisbane CBD. This project has all relevant approvals. It is projects such as this that will go a small way to addressing Australia’s housing undersupply.

A closing note

The current balance in Australian housing is a bit like an unstoppable force meeting an immovable object. Interest rates are having a meaningful impact on the affordability of housing and clearly are putting downward pressure on housing prices. Fighting against this, ever increasing demand and insufficient supply are supporting home values. Over time, these factors should find an equilibrium. Investing in those who are helping to address this undersupply is prudent both from an investment perspective and for the benefit of the nation.


Stuart Cartledge is Managing Director of Phoenix Portfolios, a boutique investment manager partly owned by staff and partly owned by ASX-listed Cromwell Property Group. Cromwell Funds Management is a sponsor of Firstlinks. This article is not intended to provide investment or financial advice or to act as any sort of offer or disclosure document. It has been prepared without taking into account any investor’s objectives, financial situation or needs. Any potential investor should make their own independent enquiries, and talk to their professional advisers, before making investment decisions.

For more articles and papers from Cromwell, please click here.


November 17, 2023

Australia is on track for net migration of more than 300,000 people this year, more than 25% higher than Treasury forecasts, due to a surge in arrivals, according to a former top immigration official. This statement was 9 months ago.

13 000 dwelling units approved (not built) in the last year according to the graph above.

I think my 6-year-old can understand the real problem.

peter m kane
November 13, 2023

In older areas, including bondi, there are many home units where the building is “past” its economic “use by date”. Including for example the older “three story walk-up”.

A “win win” situation exists, should a modern buildings design redevelopment be applied to eliminates wasteful and under-utilised old existing building spaces.

Community, council and owners stand to benefit from the modern redevelopment.

Furthermore, additional basic home unit(s) council approval could help ease our economic supply shortage and contribute to the cost of new modern building design construction.

All of this could possibly be done without increasing the existing building’s footprint and including in some cases without increasing the building’s existing height. Thank you.

peter one plan

November 13, 2023

The chart showing house prices v interest rate should be over a far longer period. There are many people who fixed a low interest rate on their house loans for a few years. Wait and see what house prices do when the full impact of the rapidly increasing interest rates is impacting on their incomes.

peter taylor
November 13, 2023

Ian I think the fixed rate cliff is in hand. For every mortgagee that fails the goverment has at least two cashed up immigrants ready to step in and buy

Peter Care
November 12, 2023

We do not have a housing supply shortage, there are many empty properties not being rented. What we have is too much demand.
We need policies which will reduce demand whilst making better use of the properties we have.
For example, reduce net immigration to about 80,000 per year, will drastically reduce demand. Tax empty properties $2,000 per month (CPI increased annually) for each month they are empty, (can be verified with water usage), and use this tax to build social housing. Scrap the 50% discount on capital gain only held for 12 months, but reintroduce averaging if assets held for 5 years. Allow people to rent out one room of their main residence without affecting the main residence CGT exemption, although they will still have to declare the income and limit any expenses to the level of this income. There are many other things we can do to limit demand, whilst making better use of the properties we do have.
These and other solutions will reduce demand whilst freeing up rooms we already have and help solve our homeless issue.
We need to thing differently on this.

November 12, 2023

So people would be taxed while they go on holidays, or while selling a property? What if the property needs substantial repairs before rental or the owner needs to look after sick family elsewhere? Leaving a property empty is a decision for the owner not greedy governments!

November 14, 2023

Peter, good someone else think to - let room may help fix some demand within existing resources. UK scheme since 1992 see, Tax relief 100% on £7500 p.a., loss unclaimable. No CGT on homes re scheme. HM Treasury reveiwed 2017, report recommended continuance so we're 30 odd years behind. Report said of small sample of responses, 69% wouldn't let room if no tax relief. Not suggest they get all right but mabe they have this. Less land available to them but a tax carrot same anywhere.

November 14, 2023

Apartments do not usually have individual water meters so your proposed method immediately fails. Even though they often have metered hot water - that's a fundamentally different measurement - lots of people do their clothes washing with cold water, and even shower in cold water for perceived health reasons. Tricky to measure - and does "the government" even know how many people live in a property? And should they? None of their business, really. So that's a pretty tricky calculation you're talking about.

it's no big deal to visit your vacant property to turn on a tap for a day or two to circumvent your proposed $24,000 a year in fines - and let's be clear, it's not a tax you're proposing, it's a fine. Utility data is only collected quarterly so it wouldn't need to be done very often. And within 6 months, timers would appear on the market to allow this to be done automatically because #capitalism. What a waste of resources.

Also, data relating to water usage at an individual lot level, is a matter for the supplier and the lot owner - if the answer to various societal problems is just to take over people's private data and use it for purposes for which it wasn't originally intended, then who knows what the next data appropriation will be, and where it will lead?

The answer, if there is one, is more in incentives than punishments.

November 12, 2023

Why is the immigration rate so high? Where's the need for it?

Decades ago, it was cynically argued we needed to import cheap "factory fodder", aka poor Europeans, to keep our manufacturing sector viable. Well, how did that work out?

Rehoming refugees - not in "detention centres" (or concentration camps, more like)! - is a laudable humanitarian aim, that Australia is arguably rich enough to help with. But since "charity begins at home", why not focus our efforts and resources on giving every Aussie a chance to have a place to call home? No, not a palace, a place. One with all the basic amenities, soundly built, but no frills. All our governments have an appalling record in the provision of "social housing". And "Must try harder"!

November 13, 2023

Changing the demographic pyramid early to address expected rapid and terminal population decline in the future. Affects all western countries - demography is destiny.

November 11, 2023

Here's suggestion that could legislate quickly: add further discount to CGT backdated or remove totally from owner- occupied homes that have been used to let a room or attached grannyflat long-term over years and proof not done via short-term letting platform which inflates and reduces availability. CGT huge even with 50% discount if done for years preventing older such owners not considering downsize due to CGT liability. Rental income already been taxed as ordinary income and possibly part of pension foregone which would continue. If eligible some pension hardly likely owner rolling in it. It's an existing, ready-made instant fix to shortage of dire need affordable cheap accommodation to counterbalance huge rent increases of investment properties and instant market leveller. It could bring homes to market for younger generation where hesitation to sell by older if GST hundreds of thousands if been honest to declare low rent receipt so ATO knows. Older folk may like the contact, someone coming and going to feel safer at home and benefit from the odd chat if ships in the night. Unseen benefit of better mental health of oldies in combatting lonliness, more income to afford frequent outing for meal or coffee which supports local businesses and benefit to health system if fewer trips to Dr and PBS scripts if depressed. What's not to like?
So obvious, government hasn't thought of it as 1 solution to assist housing crisis. Needs someone to pick up and get it lobbied.

Peter taylor
November 10, 2023

The fruits that flow from endless development are too sweet for some to even consider reducing immigration and have house prices slow. The ex attorney General christen porter had 1 million deposited into his blind trust account is indicative of the scale and height of influence on the goverment

November 09, 2023

Overheard, "I'm paying too much tax, going to have to buy another house. Don't want to do it". There you have it. Phase out negative gearing. Housing will be about housing, not investment, not tax minimization. Demand will come down. Prices will come down. Empty and under-utilized houses will return to circulation. Wherefore the willful blindness?

November 09, 2023

Agree, it's such an easy fix. Except for the enormous vested interests that will never let it happen.

November 10, 2023

Governments can't take away benefits and can't refrain from bribing voters and out bidding each other with largesse. Time for an independent tax authority like the independent Reserve Bank. Policy decided on its merits not on votes

November 13, 2023

That’s crazy. A business can deduct expenses in the generation of income, including debt servicing. Why single out housing for different treatment?

You think you have a rental property problem now (too little supply and rapidly rising rents). Just make it unfair on a minority of society. Govt has excited social housing by and large decades ago.

If you think anti landlord policies are the go. Just look at Victoria. They are voting with their feet and it’s getting even harder to rent than it was before. Agents confirm way more landlords are exiting rather than joining the market.

The hypocrisy of that MP says it all. Red tape, compliance, approvals add massive costs. The government needs to interfere less, not more

November 09, 2023

The construction industry is flat out building houses and infrastructure. Population growth is far ahead of the ability of the industry to keep up. The obvious solution is to slash migration until the infrastructure and housing base has caught up to the population we already have.

November 12, 2023

There is a party called "Sustainable Australia Party" whose name aptly describes its objective but struggles to gain traction. We vote instead for parties whose mantra is growth. While the business lobby benefits from growth as our population keeps rising, our lifestyles keep declining. As they say, we get the governments we deserve.


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