Why Living In Australia Has Been Impossible?

Why Living In Australia Has Been Impossible?

2023, for only the third time in 40 years, Australia entered a per capita recession. The result? Australian wages declined to levels not seen since June 2011. Even with devastating bush-fires, the COVID-19 pandemic and lock-down. When polled, one thing that affected Australians more than anything else was the cost of living. Over the last few decades, Australia has experienced one of the greatest housing booms the world has ever seen which makes living in Australia impossible.

In this article we will dive into this topic: why the price of houses in Australia has increased and made living in Australia impossible? Does living in Australia become a dream in the future?

House Prices

Since 1973, prices of living in Australia have increased by 36 times across the capital cities and Sydney is now the second most unaffordable place to live in the world. How and why did we end up here? This is the dark side of Australia.

Australia

Australia is one of the most beautiful places in the entire world, surrounded by oceans filled with world-class beaches, cities, and parks. The country looks like a Paradise, but if you want to live here, it's easier said than done.

This article is about the reasons behind high prices of living in Australia. Stay with us.

To buy the median home in Melbourne, a family needs to earn at least $170,000 per year. In Sydney, that number balloons to $260,000 per year.

Compare this to the median household income in both cities of $100,000, and it becomes clear that home ownership is far out of reach for most Australians.

Now, some might argue that this is only a Sydney or Melbourne issue, but that's just not the case.

Since 2020, House prices in Brisbane, Adelaide and Perth have increased by over 50%, while wages only grew 12%.

Home ownership is becoming less and less attainable for many Australians, especially young Australians. Oh it's rough, rough yea we can't find anything. Young people have not had the luxury to benefit from skyrocketing home values and are constantly playing catch up. The result?

Home ownership rates for people under 34 are, nearly 25%.

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The craziest example of living in Australia crisis was this home in Sydney. It was sold without a toilet, without power, and without a kitchen. But that didn't stop a bidding war and someone paying $3.5 million. But what if you just want to rent? Surely you can find a decent place to rent. Sadly, no.

• Median rents in Sydney exceed $3,000 per month
• while Brisbane is not too far behind at $2,500.
• Historically, Australian rental rates increased at a reasonable amount per year.
• However, since 2020, annual rental rates have skyrocketed by over 8% per year.

If you want to know more about living in Australia, you can read This.

People are caught between a rock and a hard place trying to pay 2024 rental prices with 2011 wages, and this would all be fine and dandy if people could find a place to live. But the demand for rental units is insatiable. Every rental unit application is met with dozens, if not hundreds of competing applications. Viewings have lines wrapped around blocks and at the end of the day. Renters aren't fighting for anything beyond a place to live, a place to sleep, and a place to call home.

Here is an interview with 100 other people applied for my apartment and like did the interviews. It was really difficult. We were on Facebook groups for a while. There's just so much competition. The dream of working hard to afford a comfortable life is slowly fading.

And hard-working, honest Australians are left feeling hopeless. All of this begs this question:

Why is real estate out of control?

immigration

The first culprit that many point to is immigration. Well, this week the government says the migration system is broken and needs a massive overhaul from 2022 to 23 Australia welcomed nearly 740,000 people to put things into perspective. That's more immigrants than any year in modern Australian history and 200,000 more than pre-COVID levels. The impact of this huge spike in immigration is simple.

More demand with the same housing supply equals higher prices for living in Australia.

Specifically, economists and analysts believe that immigration has primarily impacted rental housing for living in Australia. The bulk of immigrants to Australia are temporary visa holders, and 70% of them are renters. The impact hits hard in migrant-heavy suburbs, for example, Melbourne's southeast or Sydney's inner southwest, saw 18% jumps in rents in the last year. In addition, immigrants are often willing to split their units with more people to stretch their dollars. Out-competing locals. This has led to an increased yield on rental rates on real estate that had not been seen in Australia for decades.

But what about housing for living in Australia?

The argument that immigrants are a primary contributor to the increase in housing prices is quite weak.

This video is about comparing the house price of living in Australia and UK:

Australia's migration rate has decreased over the last decade and is in line with historical averages. However, over the preceding years and decades, there is one big difference. While immigration has continued to grow with the population, housing starts have declined. The construction industry is facing a catch-22, with the cost of building a new home rising again in 2023, 170,000 dwellings were completed, the lowest amount in a decade. At the same time, Australia saw the biggest spikes in immigration in a generation. So what gives?

Since 1966, the number of homes being built relative to the population of Australia has been declining. Specifically, in the year 2000, building rates fell off a cliff, creating a significant supply shortage whose impact can still be felt today.

culture

One of the main culprits for Australia's decline in housing starts Is culture. Australia is a very suburban environment where communities and citizens have opted for urban sprawl over densification. For example, Sydney and Melbourne have about 2000 people per square kilometer. Compare this to 6000 in London, 4400 in Munich, and 3600 in Amsterdam.

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It is a shocking difference when compared to other major Western cities. Australian cities are some of the least densely populated in the world. Many Australians believe that a suburban environment is ideal for raising families and safe communities. Thankfully, Australia has a ton of land that is mostly unpopulated.

Theoretically, they can continue to build outward and maintain sprawl. Sydney alone could add 280,000 homes in its greenfield growth areas, but sadly this would work in theory. But Australia has a major NIMBY problem. Even though Australia is going through an extreme housing crisis, March 2024 saw the lowest number of detached home approvals since 2012.

These aren't high-rise condos. These are detached, single-family suburban homes. Strong community advocacy and government red tape lead to extremely long approval times for housing developments. For example, to receive approval for a single home development in New South Wales takes 111 days on average.

In Liverpool, that jumps to 288 days. Compare this to Texas, where it generally takes less than a week. These long wait times have made it impossible for the government to achieve home-building targets specifically. Australia is on track to build 40% fewer homes than needed to meet the government's affordable housing targets.

The low rate of housing

The low rate of housing approvals has created an artificial land scarcity, which in turn has driven up the price of land. Since 2020, home values have risen at three times the rate of apartments. With land becoming such a scarce resource. It further challenges developments as it becomes increasingly expensive to acquire and develop land economically. But this is almost entirely by design. A scarce land benefits homeowners. This has had a tremendous impact on young people in particular.

Remember, home ownership rates for young people have dropped by 25% compared to only 8% for the general population.

Okay, we can all agree that immigration and low development rates are worsening Australia's housing crisis. But there is another critical factor at play.

Tax incentives

During the 1930s, Australia had a major housing shortage and wanted to encourage investment in rental properties. To encourage this, the country introduced negative gearing. Negative gearing allows an investor to offset the losses on a rental property against their income. For example, if you make $100,000 per year and lose $10,000 on your rental property, you can deduct the $10,000 from your income tax.

This idea is pretty novel. In fact, out of the entire OECD, only New Zealand and Japan have these policies. During the 1980s, the government tried to change negative gearing rules, imposing restrictions on deductions that can be claimed. Similar to the United Kingdom. But this was met with significant backlash and negative gearing was returned to its original form.

As the adage goes, you can give, but you can never take. At the same time, in the 1980s, the government removed interest rate controls, which made it meaningfully cheaper for Australians to use debt to buy homes. This made negative gearing even more attractive and allowed people to leverage debt to execute the strategy.

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Now, this alone isn't enough to put Australia over the edge. Not only can you leverage negative gearing, but you can also hold real estate investments in your retirement account, known as a super. For those who don't know, a super is similar to an IRA like an IRA. A super has meaningful tax benefits and when buying real estate rental income taxes are reduced to 15% instead of your marginal rate. Unlike the US, where buying real estate through an IRA is a huge pain and costly, in Australia, it's extremely easy and often encouraged.

But that isn't all. There's more. In 1999, the Australian government reduced capital gains on real estate sales by 50%. And if you are holding your property in a super, you're effectively only paying a 10% tax. There is almost no country on earth that has such a favorable tax regime for property investors. Australia is truly the exception. This tax regime has been criticized heavily. The argument against it is that it materially benefits land owners and older Australians.

And frankly, the argument is quite sound. These tax policies have encouraged speculation in real estate and are costing taxpayers nearly $8 billion per year. Some might argue that this is overblown, but when 50 to 80% of all investment properties are negatively geared, there is a problem.

A system that encourages speculation on income-losing properties is highly flawed and very unique. But this has created another challenge. Australia has made it so good to invest in nonproductive assets like real estate, that no one bothers to invest in anything else.

Australia's productivity growth has been slowing over the last few decades.

The average annual labor productivity growth between 2010 and 2020 was only 1.1%, significantly lower than previous decades. A lot of this is due to the lack of innovation and growth in non-service and non-mining sectors in Australia. The best way to put in perspective how little Australia innovates is to look at its R&D spend as a percentage of GDP.

In 2022, Australia spent 1.7% of GDP on R&D.

When compared to other major nations, that is terrible. The OECD average is 2.4% and major countries like the US, Germany, and the United Kingdom are all far better than Australia. As a result, nominal GDP per capita and real GDP per capita have not increased over the last ten years. Wages and job prospects are eroding while the cost of living continues to rise.

The loser? Hard-working Australians. Even when you compare business and income tax, it's clear that Australia has decided that land ownership is the most important investment activity. Average income taxes charged in Australia are higher than all but three OECD countries, and corporate taxes are no different.

Australia's corporate tax rate is 6.3% higher than the OECD average. And when comparing Australia's small business tax to even Canada's, Australia's is 2.5 times higher. Currently, Australia collects a disproportionate amount of government revenue from income taxes and corporate taxes, and a disproportionately low amount from real estate.

As Charlie Munger famously said, show me the incentives and I'll show you the outcome. Here you have it a government that has incentivized speculation on housing while incentivizing working hard and building productive businesses.

The incentive to hoard land is the outcome of an unfair economic system. I can already imagine the comments on this video blaming political parties for the issues at hand, and that might be easy to blame any single government for the housing crisis in Australia. But in reality, this problem has persisted for decades.

The Labor Party of Paul Keating saw a modest rise in housing prices, while concurrently seeing a rapid modernization and growth of the overall Australian economy. Overall, his tenure was mostly balanced, but then John Howard came in and saw the greatest rise in housing prices in modern Australian history. Under his tenure, housing more than doubled. Then the Labor Party got three chances, but housing continued to grow, only slowing down because of the financial crisis. Following this was the coalition government.

Tony Abbott. Strike. Malcolm Turnbull strike. Scott Morrison’s strike and housing are still out of control. Now, with Anthony Albanese at the helm, we finish the decade with a massive increase in housing prices. If you bought a home in 1992 for half $1 million today, it would be worth $2.4 million. And if you were born after 1992, you probably don't own a home and might never. The conclusion is simple. This is beyond political parties. Australia's housing crisis runs deep.

It is something that cannot be solved by jumping from one bandwagon to the next. What will it require? Incentivizing business investment. Lowering income taxes for hardworking Australians. Abolishing negative gearing. Lowering capital gains incentives. Removing red tape to encourage development and educated Australians who can keep politicians honest. You are the solution and your tool is policy.

This article was about living in Australia and the reasons behind the high price of living in Australia. If you have any comments about the other factors affecting the prices of living in Australia, tell us in the comments.