Australian television changed forever in 2003 when the first episode of a new program titled The Block beamed into living rooms across the country.
The fly-on-the-wall journey of four couples renovating run-down apartments in Bondi didn’t just grab the attention of millions of TV viewers- it turbo-charged the desire for what’s still considered the ultimate prize in Australia: home ownership.
“There were seven prime-time television programs on how to get rich in property,” Ian Macfarlane, the Reserve Bank of Australia governor at the time, later quipped.
But when the 15th season of the show begins later this year, things will be different.
“They’ve never faced a falling market, the question is whether the new contestants will actually be rewarded for their effort,” says The Block creator, Julian Cress.
Although the market started to sputter not long after the show first aired, it was nothing compared to the slump now hitting the Sydney and Melbourne property markets.
If the bubble hasn’t officially burst it has definitely deflated, triggering fears from the Reserve, homeowners, economists and federal politicians about the effect on households and the wider economy.
What does this latest downturn in a long history of booms and busts actually mean? How did we get here?
BOOM AND BUST, IT WAS EVER THUS
The family home is, for most Australians, their single largest investment. It has been since the early days of white settlement.
NSW governor Lachlan Macquarie introduced the first anti-land speculation measure in 1812 because of the rampant sale and resale of land grants that were supposed to develop the colony’s nascent farm sector.
University of Sydney senior lecturer of urbanism Dallas Rogers says since then, price booms and busts have been the defining characteristic of the nation’s property markets.
“What you get are people in the boom thinking it can never end,” he says. “And then the boom busts and people try to get out, fearing they will never be able to sell their property.
“Boom and bust feels different at the time for those in it, but they are really part of the property market in this country, and always have been.”
But the early settlers didn’t have the Reserve Bank of Australia, or its critical setting of interest rates. Neither could they ever have foreseen the heights to which property prices would ascend.
Median house prices in Sydney peaked at $498,000 in 2004 before edging down. It was replaced by a surge in prices on the other side of the continent. Perth’s median house price ended 2003 at $205,000. By 2007 it had eclipsed Sydney, with a median price at $500,000.
The global financial crisis, starting in the second half of 2008, ended the Perth surge as prices across the rest of the country stumbled. Official interest rates were slashed to 3 per cent at the depth of the crisis before the RBA pushed them back to 4.75 per cent in late 2010.
Prices were relatively stable before the central bank started to take rates down the following year over concerns about the global economy, a soft jobs market and stagnant inflation.
In May of 2012, the Reserve sliced official interest rates by half a percentage point. Another three quarter-percentage-point cuts followed before the end of the year. And the property market responded.
In May 2013 the bank took an important step, moving below the “emergency low” it set during the global financial crisis. Rates were cut to 2.75 per cent, with then bank governor Glenn Stevens making an oblique reference to what the lower cash rate may mean. “Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased,” he said.
One of those assets was property.
OUT OF REACH?
Australian cities remained among the least affordable in the world and that hasn’t changed in each of the past 15 years, according to US-based property data firm Demographia, which compares the affordability of international cities.
In other words, at least 70 per cent of Australia’s 25 million residents live in an urban area ranked among the most expensive on the globe.
“Sydney had the second-highest price ratio to income in the world and Melbourne had the fourth, ahead of London, New York, San Francisco,” says University of New South Wales economist Richard Holden.
“Sydney is a great place to live, but I think that is an indicator that we got a bit carried away.”
And yet, demand continued to rise as rates fell.
Following the May 2015 RBA decision, which took the cash rate to down 2 per cent, Stevens suggested that although the Sydney property market was strong the market was uneven elsewhere.
There were concerns inside the organisation about what the rate cut might mean.
Then Treasury secretary and RBA board member John Fraser told a parliamentary committee what he thought about the Sydney market, where prices had climbed 40 per cent over the previous three years.
“When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney,” he said.
Fraser noted the bubble had grown so much that a taxi driver who had just sold a property in Sydney’s western suburbs asked him for advice on whether he should buy three or even four more investment properties.
ANOTHER REASON FOR HIGH PRICES
But the central bank continued to cut rates, arguing the end of the mining boom had left a hole in the economy.
That hole was being plugged by residential construction. In May 2013, there were 1997 units approved across NSW for construction. By July 2016, this had climbed to 4333. In Victoria, unit approvals bottomed out at 1231 in December 2011. They peaked at 3554 in November 2017.
Those units were needed for one of the other key reasons behind the surge in prices: population growth.
The GFC resulted in a record number of expatriate Australians returning to the relative economic security of home in the second half of 2009. As global conditions recovered, population growth slowed, but it is still around 390,000 a year.
RBA assistant governor Luci Ellis recently noted that population growth had contributed to the lift in prices.
“No matter what you do with rezoning and other regulation, you will always have a situation where, if you double the rate of population growth, you will, for a time, see higher housing prices,” she said.
Between 2012 and 2017, the greater Melbourne area added 500,000 residents, taking its total population to 4.8 million. That included areas such as the new western suburb of Truganina. At the 2001 census it was home to fewer than 400 residents. More than 28,000 people live there now.
It’s a similar story for Sydney. The greater city area is now home to 5.1 million residents, up 400,000 since 2012. Much of the growth has been in the north-western fringe around the Hills Shire. Kellyville recorded 13,398 residents in 2001. Fifteen years later, its population had doubled to 27,971.
Investor Nathan Birch is among them. He says he now owns 187 properties, most of them bottom-of-the-market homes in the outer suburbs of Sydney, Melbourne, Adelaide and Brisbane.
“In 15 years of buying property I have seen all these different cycles – where people have lost their shirts,” he says. “I made my first million pre-GFC in Sydney. That is very similar to what we are seeing now.”
As Melbourne replaced Sydney as the nation’s property hot spot, the Reserve kept cutting official interest rates which, along with tax policies that encouraged investors into the market, fed into higher prices.
In 2016 the RBA plumbed new depths, taking the cash rate to 1.5 per cent. It was the lowest interest rate set by the central bank since Elvis was discharged from the US Army in 1960.
Stevens’ successor Philip Lowe sought to quieten concerns about what ultra-low interest rates may do to the property market. He said the chance of “lower interest rates exacerbating risks in the housing market has diminished”, putting his faith in the caution of lenders, a strong supply of apartments and the action of regulators.
Those regulators were moving to ensure there was no repeat of the US experience of price boom and bust. At the end of 2014, the Australian Prudential Regulation Authority introduced its “investor lending benchmark”, effectively a warning to banks that investor credit growth of more than 10 per cent a year would attract its attention.
Five months later, an APRA study concluded lending standards had weakened as banks vied for cashed-up property buyers.
The Australian Securities and Investments Commission soon after reported it had found banks were failing to meet responsible lending obligations, with cases of lenders assuming borrowers had more time to repay the principal on a loan than they actually did.
Around this time, banks started to vary the interest rates they charged investors compared to owner-occupiers. This would continue until early 2017, when APRA introduced even more stringent borrowing directions for lenders that tightened access to credit in the shadow of the royal commission into banking.
‘A ROOF OVER THEIR HEADS’
This included a 30 per cent limit on the amount of new mortgage lending that could go towards interest-only loans, an approach favoured by investors.
While all the changes were aimed at reducing the exposure of banks to potentially volatile property lending, the Australian Competition and Consumer Commission found they had also given the major banks a leg-up. It estimated that as a result of interest rates being lifted for existing interest-only mortgages, the big four banks made a windfall of $1.1 billion.
Finally, the market slowed and then started to edge down.
In Sydney, this moment came in July of 2017. Three months later, Melbourne prices would start to decline. The median house price in Sydney peaked at more than $1 million. It has since fallen more than $140,000.
Melbourne’s median house price would peak at $830,000. It now sits at $729,000 and could fall further.
The end of the bull run in prices is also evident in building approvals. Local councils across Australia granted an all-time high 243,000 house and unit approvals in the 12 months to the end of August 2016. This had edged down to 211,000 through 2018.
Like Kellyville and Truganina, some areas continue to grow quickly, but in denser, more centrally located areas, approvals have fallen through the floor.
Across the Sydney city council area, approvals dropped by 60 per cent last year. In the Melbourne city council area they fell by 37 per cent. Almost all of these disappearing approvals were for apartments.
Cheaper land and homes in outer suburbs are the growth areas, a trend of which property investor Nathan Birch is keenly aware.
“In a recession everyone needs a roof over their heads,” he says. “A recession-proof property is something that every Aussie would need as basic accommodation. It doesn’t have to be a three-bedroom terrace.”
SHARP CORRECTIONS ARE NOTHING NEW
Between 1977 and 1982, Sydney’s median house price roared up by 103 per cent. Canberra prices jumped by 92 per cent between 1997 and 2003, while in Perth the increase between 2002 and 2007 was 140 per cent.
But, as the saying goes, what goes up must come down. And Australia has seen this before.
The depression that swept most of Australia in the early 1890s started on the back of a collapse in house and land prices in Melbourne which, at the time, was the nation’s largest city. Prices had run up by 32 per cent between 1888 and 1891. That gain was completely eroded by 1896 and prices did not recover until the 1920s.
In real terms, Sydney prices tumbled by 36 per cent between 1933 and 1935, then resumed their fall in 1937 to drop another 32 per cent cent by 1941.
Some of Sydney’s most prized real estate lies in the beachside suburbs of Maroubra and Malabar. Many streets are named after battles, an apt metaphor for Australia’s bruising property market.
Thousands of servicemen and their families were relocated here, to the densest public housing settlements in the country, in the first half of the 20th century.
“In those days it was all sand hills and no one wanted to live out here,” says local Labor MP Matt Thistlethwaite.
Between 2012 and June 2017 prices in Maroubra, Malabar and neighbouring La Perouse grew by between 100 and 120 per cent, the biggest price surges in the country. They are now are facing some of the sharpest drops – down 16 per cent from their peak.
“We’ve had rampant house price growth. There wasn’t a week that went by where someone would not stop me in the street concerned about whether their kids could afford to live in our community,” says Thistlethwaite.
“People were sick and tired of going along to an auction on a weekend and being outbid by someone getting some of the most generous tax concessions in the world to invest in their fifth or sixth investment property.”
IS PROPERTY LESS ATTRACTIVE?
The impact of negative gearing – the ability to write off the losses accrued on an income-generating asset against your total income – and capital gains tax concessions were noted by the RBA at the start of the boom in 2003.
The central bank argued property spruikers were selling the tax advantages of negative gearing for real estate so that “resources and finance are being disproportionately channelled into this area”.
Investors were encouraged to invest in property because of the tax advantages, driving up prices, perks that Labor has pledged to abolish if it wins the upcoming federal election.
The Coalition has claimed that such a shift will “smash” house prices.
In a recent speech, Lowe outlined four reasons why prices are now falling.
First, he cited the increase in prices over recent years had got to the point where property was both “very expensive and less attractive as an investment”.
Secondly, developers had responded to the lift in prices and the increase in population by bringing more properties on to the market.
Third, demand for Australian property by overseas investors has softened. And finally, lending standards have tightened, restricting just how much money buyers could bid up the price of a property.
The RBA has been at pains to note that, unlike past declines in prices, the current correction in Sydney and Melbourne has not been associated with a recession or rising unemployment.
More bluntly, Lowe has said that his biggest concern is around income growth rather than a correction in house prices. “This adjustment in the housing market is not expected to derail the economy,” he said.
Not everyone is convinced, especially with falls now at double-digit levels.
Cress isn’t fazed by the prospect of a fall in house prices hitting The Block’s ratings. “We won’t be making any secret of that this year,” he says. “It will be a soft landing but in the meantime everyone is going to run around like chickens with their heads off.”