Background Notes for Opening Remarks to Inquiry into Housing Affordability in Australia 1. House Prices

Since the mid 1990s, the median house price in Australia has risen by 180 per cent, compared with an increase of a little over 30 per cent in the CPI. This real increase in house prices can be seen in the orange line in Chart 1. You can see that the rise in house prices has been much faster than that in construction costs, so the implication is that most of the increase in house prices has been due to increases in the price of land.

Chart 2 shows that all the major cities in Australia have experienced large increases in house prices, while Chart 3 shows that the increases have been reflected in both cities and country towns. In other words, the increases have been broadly spread across the country.

Chart 4 shows that Australia has not been alone in experiencing this rapid rise in house prices. With very few exceptions, most developed countries have experienced a doubling or trebling of house prices since the mid 1990s.

Two common elements in the countries that experienced rapid house price increases were financial innovation (which greatly increased the access of households to finance) and relatively low interest rates (which reduced the cost of finance). The latter is true not only for the official interest rates set by central banks, but for longer-term rates set in capital markets. While there has been much discussion about the causes of the low long-term interest rates, I think it is fair to say that the majority view is that it has reflected a global excess of desired saving over desired investment – i.e. the so-called savings glut. Put another way: With the amount of money that people wanted to save running ahead of the amount that people wanted to invest in physical assets, there was a strong incentive for the financial sector to find ways to issue more financial claims against the stock of existing investment. That, of course, is a recipe for rising asset prices.

In our view, the widespread nature of the increases in house prices, which, as I have noted, have encompassed most major countries and virtually all parts of Australia, makes it hard to attribute them only to factors which have localised effect – e.g. land usage policies, taxes and transport arrangements. Rather, a big part of the increases over time is due to factors affecting demand and capacity to pay, such as increased household access to finance. Supply considerations are more likely to have affected prices on the edges of urban development. These areas, of course, are important for households at the entry level of the housing market.