House prices in many of Australia’s biggest cities have risen dramatically in recent years. In Sydney, they’ve risen 73% over five years, ranking it second only to Hong Kong as the world’s least affordable housing market, according to Demographia.

As in other global cities, such as London and Vancouver, rising property prices are preventing average wage earners from achieving homeownership. In Australia, residential property accounts for 40% to 60% of loans by the major banks, making house prices not just a matter of political discussion, but of financial stability as well.  

What factors have contributed to the boom?

In terms of economics, Australia has undoubtedly been lucky. Our nation notched its 25th consecutive year of economic growth after avoiding significant fallout during the global financial crisis, thanks in part to China’s demand for Aussie minerals.

Also, Australia’s immigration system favours working-age skilled migrants who’ve brought in wealth from offshore sources. When current record low interest rates are factored in, it’s easy to understand why there’s such a strong appetite for property, particularly in the southeastern capitals.

While there’s clearly a strong demand for Aussie property from Asia-Pacific investors, their overall market impact probably isn’t as extreme as some pundits attest. While there are no hard statistics, the ATO has concluded that only a small proportion of housing price growth is attributable to foreign demand.

On the domestic front, the demand for housing is on the upswing because the average number of people living in each household has dropped. Property has also become a popular and more accessible asset class, with baby boomers and other affluent investors snapping up buy-to-let properties, encouraged by negative gearing.

How have regulators responded?  

The Australian Prudential Regulation Authority (APRA) has capped annual growth of lending to investors at 10%, threatening banks with higher capital requirements if they breach this limit. In a separate move, the major banks have nearly stopped lending to borrowers dependent on offshore income.

Banks have also reduced the amount of high loan-to-value lending and mortgages requiring less strict documentation.   

The country has a two-speed property market

On one end, Sydney and Melbourne have experienced virtually non-stop price growth for nearly five years. On the other end, prices are flat or falling in Perth and Queensland, and mortgage arrears are picking up.

Meanwhile, in inner-city Melbourne, Brisbane, and Adelaide, there’s been a rush to build high-rise apartments, prompting the Reserve Bank to warn of the risks associated with localised oversupply. Such risks have intensified amid Beijing’s clampdown on money exiting China, raising concerns that some deals for properties awaiting construction might collapse.