What Drives Australian Property Price Growth

*Australia Property Playbook, by Sam*

Weak economic conditions and high interest rates have dominated the headlines, and it remains too early to say whether Australia’s rate-hike cycle has ended. Yet the Reserve Bank of Australia (RBA) has never been shy about raising rates. So why did the property market keep climbing rather than falling after those hikes? What is driving prices higher, and will these forces continue to support the market?

Analysis from the Parliament of Australia and HomeLoan Expert shows that more than a dozen underlying factors shape property prices. This article looks at three of the more macro-level drivers: (1) economic growth, (2) demographic change, and (3) the vacancy rate.

• Take a three-bedroom detached house in Melbourne as an example: the asking price was only AUD 40,000 in November 2014, rising to AUD 1.085 million by November 2023 — a 71% increase, according to a November 2023 report from SQM Research.
• Over a ten-year horizon, the market has climbed steadily.

Economic Growth

Economic growth and property prices generally move in a positive correlation: when the economy is strong, the property market tends to do well; when the economy weakens, prices tend to fall quickly.

In the post-COVID period, cities everywhere have worked to rebuild their economies. World Bank data shows Australia’s Gross Domestic Product (GDP) has maintained steady long-term growth. Even through the pandemic, Australia’s GDP did not turn negative. This stable economic performance is a primary reason property prices kept rising after the rate hikes.

• Even during the 2009 financial crisis and the 2019 pandemic period, Australia’s GDP did not turn negative — evidence of the economy’s stability, based on World Bank data covering 2003–2023.

Demographic Change

Demographic change directly increases housing demand — in short, it adds to inelastic demand. Over the past decade, Australia’s population grew by 12%, and is expected to pass 30 million by 2029.

On the migration policy side, the Australian government has introduced a number of initiatives to attract people from overseas. For example, the length of the post-study (graduate) visa was extended from two years to between three and five years (the Hong Kong Stream is a uniform five years, and graduates of some designated courses can receive up to six years). For UK nationals, Australia recently raised the age cap for the Work and Holiday visa to 35, and now allows a third such visa (ordinarily, Australia’s working holiday visa can only be taken out twice, but UK citizens can now apply for a third). The government has also announced that holders of the 482 visa may have an opportunity to apply for permanent residency through the 186 visa. Policy changes* along these lines have helped grow Australia’s working population. A continuing rise in population supports market demand and helps stabilize the property market — another reason prices kept climbing after the rate hikes.

*For details of these visa arrangements, consult a qualified professional.

• Australia’s population grew 12% over ten years.
• Population is projected to pass 30 million by 2029, based on Australian Bureau of Statistics data and projections.

Vacancy Rate

Australia’s vacancy rate keeps hitting new lows, reflecting intense demand for housing. In October 2023, Australia’s major cities recorded a vacancy rate of just 1%. Brisbane, Adelaide and Perth all recorded rates below 1%. Anyone with a friend who has recently arrived in Australia has likely heard the same complaint: “It’s so hard to find a rental here!”

For landlords, the lower the vacancy rate, the better — even an unreasonably high asking rent will still draw a queue of applicants willing to attend an inspection and submit an application (commonly called “putting in an offer”). From July 2023, most schools began requiring international students to attend in-person classes rather than allowing online study, which made the rental market especially active. A friend of the author’s in Australia shared that his rent, originally AUD 460 a week, was due to rise to AUD 550–580 a week (roughly a 20% increase) once his lease ended at the end of 2023 — and the landlord clearly wasn’t worried about losing him, since demand was strong enough that a new tenant would always be found even at the higher rent.

• Since the border reopened, Australia’s rental market has been highly active, with 30–40 groups of prospective tenants commonly competing for a single listing.
• The author photographed an inspection in September that year and counted more than 20 groups of prospective tenants attending, requiring four separate lift trips to bring everyone up to the unit.

Property search and analysis platform SuburbsFinder notes that a vacancy rate of around 3% represents a healthy market — one that is performing well while still meeting the public’s rental needs. Historically, Australia’s vacancy rate ran between 2% and 4% (excluding the pandemic period). Now that borders have reopened, rental demand has surged, but construction has not kept pace, and the housing crisis is unlikely to resolve in the near term. This is one reason the market was expected to keep rising over the following few years, and it also explains why capital cities across the board performed strongly in 2023.

• The national vacancy rate was reported at just 1%, hitting a new low every month, according to SQM Research.

These three macro factors supported rising prices mainly because demand kept increasing while supply failed to keep pace, leaving price adjustment as the market’s way of balancing supply and demand. This also explains why the market turned downward after the rate hikes that began in May 2022, and why prices and rents both rose against that trend once borders fully reopened in July 2023. With 2024 approaching, some analysts noted that high interest rates were eating into rental returns, prompting a wave of investment properties to come onto the market. Whether that would push the market down again, or underlying demand would keep it rising, was something to watch closely.

If you have questions about the Australian property market, ask Zagdim.

Sam Chan, Market Development Manager (Hong Kong), MAC Builders

Sam holds a Bachelor’s degree in International Studies and a Master’s degree in Construction and Real Estate from City University of Hong Kong and The Hong Kong Polytechnic University. He previously worked at Ray White, Australia’s largest real estate agency, in the Capital Markets & Investment division of Colliers International, and at the investment publication *Asian Private Banker*. He is now based in Australia, where he tracks local property and housing demand first-hand to support partners on the ground.

MAC Builders is one of Melbourne’s fastest-growing builders and one of the few with Hong Kong-background management, offering considerate and flexible products. Internal data shows MAC Builders has become one of the most-used builders among Hong Kong clients.

For any questions, ask Zagdim and a specialist will help.

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