Right now, there’s a fair bit of conjecture as to where we sit in the residential property cycle. Sydney’s probably peaked and is in decline while Melbourne is about to peak and follow Sydney down the dale. Whatever your take it has been an extraordinary 20 years of growth. So how did we get here?

1. Low rates/strong growth

Thanks to Australia’s strong economic growth over the last 20 years, real household income has increased by over 60%. The richer households got, the more money they had to put in to put in to bigger, better homes. Then as interest rates fell, Australian households could afford to borrow more to pay more for housing. With the average monthly mortgage repayment able to support a loan of twice the size (a topical but questionable practice given the Banking Royal Commission), the market did what the market does and bid up houses prices.

2. Migration drove demand

Strong natural growth and migration has fuelled housing demand and driven up prices. Australia grew by 3.8m between 2006 and 2016, mostly in Sydney and Melbourne. Net overseas migration has averaged 200k people p.a. since 2005 – the previous decade it was 100k. This is predicted to increase to 250k p.a. by 2019-20. Most migrants who drove our mid-2000s population boom were young and moved to the inner-cities, resulting in significant price growth.

3. People love Melbourne and Sydney

Australia’s transition into a services and knowledge-based economy is concentrating jobs in the inner suburbs of Melbourne and Sydney. Half of all jobs growth happened there between 2006 and 2011 (see below table). Having so many new jobs being created close to these large city centres has driven up the cost of nearby housing.

While the above represents the headline reasons for house price growth there are many others we could touch on if we had the room e.g. the capital gains tax discount, negative gearing, first-home buyers grants and overseas investors responding to global economic conditions are but a few.

As this graph shows, most jobs growth between 2006 and 2011 happened in city centres.

Chart source: Grattan Institute

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