Australia's housing market fueling affordability crisis

By Greg Navarro

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A sold sign on a monitor at a real estate agency in the Erskinville suburb of Sydney, Australia, February 23, 2021. /CFP

At the start of the pandemic, many economists predicted that Australia's housing market would experience up to a 30 percent drop in prices in cities including Sydney. But that never happened.

"The market is going in a way that very few people predicted a year ago," said University of New South Wales professor Hal Pawson.

Australia's housing market defies expectations of a COVID-fueled downturn. /CGTN

Instead, the nation's housing market is thriving, fueled by its faster-than-expected economic recovery, government measures aimed at stimulating the economy and record low-interest rates.

"It actually hit a record high value at January 2020, and then over February, it surged a further 2.1 percent, and that is the fastest growth rate we've seen in the home value index since August 2003," said Eliza Owen, head of Australian Research at CoreLogic Australia.

Government tax concessions have led to a housing affordability decline. /CGTN

Government policies, including tax concessions for property investors, have contributed to Australia's nearly 30-year housing affordability decline, considered among the worst in the developed world.

Entering the market is rapidly becoming too expensive for an increasing portion of the population.

"What it is doing is widening the gap, it is supercharging the rising inequality that we've seen quite deeply embedded for the last few decades, and the housing market is the major contributor to that," said Pawson.

"As we start to see more people entering into retirement still in the rental market or they've got a mortgage that still isn't paid off, then that sort of problem is going to become a bigger and bigger problem for a significant portion of the population."

It is also going to mean that there are going to be more public spending consequences as well because people are going to start using their superannuation to pay off their mortgages, he said.

Reserve Bank of Australia. /CGTN

The Reserve Bank of Australia usually has tried to cool an overheated housing market by raising interest rates, but not this time.

"I think it has quite wisely said we are not going to worry about the housing market; we are worried about unemployment in the mid-6 percent. We are worried about inflation which is obviously connected and so we are going to focus on that," said University of New South Wales economist Richard Holden.

If the housing market continues its price surge, the Reserve Bank might have to shift its focus to increasing the nation's cash rate much sooner than it had hoped, the expert said.