Australia's Housing Crisis is Insane.

So we open the bidding, ladies and gentlemen, at 1,100,000. I've never seen a situation in housing like we're seeing today. Australia's housing crisis will likely get worse before it gets better. A system where it's arguably easier to buy your second house than your first one. You've put in 30 applications: decline, decline, decline. Most people don't realize that they're only two or three mortgage payments away from where I am at the moment.

As you've probably seen on news sites, TV, or social media, Australia is currently going through a severe housing crisis. De a ted tow, houses are selling for millions. Prospective renters are lining up in their hundreds to attend open homes, and there's a major shortage of inventory in the country's major cities. A new report shows Australians now need to earn over $300,000 per year to comfortably afford their own home—a tall order considering Australia's median weekly income in August 2023 was $1,300, or $67,500 per year.

So what's going on down under that's causing such an economic problem? And is this crisis likely to abate anytime soon? Affordability is at its worst in 30 years. It's also taking longer for Australians to save for a deposit. A median income earner right now could only afford around 133% of the property sold in the past year. They're looking at an average lending rate close to [Music] 7%.

When looking at housing affordability, you need to consider two metrics. The first is how much houses are selling for, and then the other is wages, aka a price-to-earnings ratio—a house price to individual income ratio. For example, in the United States, in large metropolitan areas, the average housing price to income ratio is 4.3. This means a family has to invest just over four times their annual income for the purchase of their home. In places like Detroit or Cleveland, it's less, and in California or New York, it's much more, but the average is 4.3.

Now, in Australia, we have just five major cities: Sydney, Melbourne, Brisbane, Perth, and Adelaide, with Sydney and Melbourne being home to 40% of the country's population. Now look at the world's top cities ranked by housing median multiple. At number 14, people in Adelaide are paying 8.2 times their income for a house. Coming in ninth is Melbourne, where people are paying 9.9 times their income to buy a home, and second on the list of global cities is Sydney at 13.3 times.

So, 40% of the population of Australia is exposed to housing market conditions where they need to invest at least 10 times their income just to buy a home. This is why you see crazy news stories like this one where an uninhabitable terrace in Sydney sold for 1.9 million—half a million above the reserve. For context, this house last sold in 1988 for $150,000.

We can also look at housing affordability through another lens: the household debt to income ratio. Australia's housing sector is burdened by some of the highest debt levels in the world, with a household debt to income ratio of 211%—more than double the 101% in the US and far higher than the UK's 148% and Japan's 115%. Australians are committing themselves to some of the highest debt levels in the world just to get into their own homes. This will be an important thing to remember later in the video.

But before we talk about how this all ends up, we have to ask: how has it happened? How have home prices risen to such unaffordable levels? Tonight, Australia simply isn't building enough homes. The first thing you've got to do is build more houses, build more dwellings, particularly in Sydney and Melbourne. A lot of it's coming down to that inequality between supply and demand. What we're also seeing is those migration surges coming in, particularly into Sydney, Melbourne, and Brisbane, is really starting to take its toll.

Australia's housing prices are a result of a multitude of factors, but these factors all work around a simple supply-demand equation. Their effect is increasing demand, and their effect is reducing supply. In this video, we're going to focus on three main points.

The first is interest rates in Australia. This is a similar story to a lot of countries around the world. Since 2011, the Reserve Bank of Australia—that is, Australia's Central Bank—slowly but surely lowered their cash rate, with rates declining from 4.75% in 2011 down to 0.75% at the end of 2019. Then COVID hit, and like many economies around the world, Australia too decided to lower their interest rates to effectively zero in order to stimulate its wounded economy. Rates then stayed at zero until April of 2022 when monetary policy flipped to respond to inflation—much the same story as what's happening in the US.

But of course, having interest rates slowly declined from a moderate level to a very low level over the course of a decade fueled a lot of very cheap borrowing, which meant more people buying homes and more demand in the market led to significant price rises. The total debt of Australian households was $1.84 trillion at the end of 2013, equivalent to $78,900 per person living in Australia at that time. The vast majority of that debt, as you might be able to guess, was housing debt.

Now in 2022, the national total of household debt had jumped to a whopping $2.66 trillion, equivalent to now over $100,000 of debt per person. So, as interest rates lowered, people were able to borrow more money to buy houses. The demand went up, and prices exploded. The average house price in Australia in 2012 was around $500,000, and in the third quarter of 2023, it was almost doubled that at $925,000.

So that's factor number one: low interest rates over the last decade leading to a massive increase in demand for houses. But beyond that decade of cheap money, Australia has also been facing a boom in population, which also increases the demand for housing in Australia. This is particularly thanks to immigration. Australia is often regarded as the most successful multicultural country on Earth, with over 30% of Australians actually born overseas. From July 2022 to June 2023, Australia welcomed 737,000 migrants for a net gain of 518,000 people, up from 473,000 the year before. This equates to roughly 19 people per 1,000 population.

Compare this to the US at just 2.7 per 1,000, and you can understand that while the total number of migrants is far less, the economic impacts of immigration are far greater. And while Australia's multiculturalism is most certainly one of the country's great assets, there's no doubt that immigration also increases the demand pool for people looking to buy homes.

According to the New South Wales government, the population of Greater Sydney is expected to grow to approximately 6.1 million by 2041—over a million more people than currently live in the region. In Melbourne, it's even worse, with the city actually predicted to overtake the population of Sydney in the early 2030s. The vast majority of this growth will come from immigration. So, population growth fueled by immigration is certainly another factor currently boosting the demand for homes and driving up prices.

But it's certainly not just immigration that's causing the great Australian housing crisis. This is where we start to look at the other side of the equation in supply. Yes, another major factor at play in the Australian housing affordability crisis is the supply of new homes simply not keeping up. While there have been record levels of housing approvals, the commencement and completion of these approved projects lag considerably behind. Between June 2020 and 2021, for example, while 221,000 dwellings were approved, only 136,000 commenced construction, and a year later, only 133,000 had been completed.

Why? Well, according to a recent housing report from the National Housing Finance and Investment Corporation, a combination of weather events, COVID lockdowns, and the subsequent increase in inflation, interest rates, and thus construction costs, have led to many real estate developments being put on hold. Because almost all of Australia's homes are built by the private sector, projects simply won't be built unless they look healthily profitable on paper. But now, with construction costs rising and project financing being more expensive thanks to higher interest rates, it makes logical sense that fewer projects will actually go ahead.

The profitability of development looks a lot different in an inflationary environment with the cash rate at 4.35% than it did in 2019 when inflation was non-existent and interest rates were at 1.5%. The tough thing that Aussies are currently grappling with is that the worst might be yet to come. Research by the Institute of Public Affairs found that over the six years to 2028, Australia is set to face a net housing supply shortfall of 252,528 units.

So, not only is this a problem right now, but Australia's housing supply crisis doesn't look like it's going away anytime soon. So when we go back to that supply-demand equation, you can see that there are a number of specific factors on both sides, all contributing to the affordability crisis. But the real stinger, trumping even all of that, is the much broader issue of how Australia itself has developed over time.

As I said earlier, Australia, despite being almost as large as the United States in terms of surface area, has just five truly major cities: Sydney, Melbourne, Brisbane, Perth, and Adelaide. In between, I can tell you from personal experience, there's not much going on. In fact, 80% of the value of all goods and services produced in Australia is generated on just 0.2% of the land. Economic activity is heavily concentrated in CBDs, with those of Sydney and Melbourne accounting for 10% of all economic activity in Australia.

Now, what this means is that naturally, because 80% of the business resides in just 0.2% of the land, most of the jobs do too. It means that most Australians essentially have to live in or very close to these five major cities. While the housing is far cheaper in more rural areas, realistically, people simply can't live there. Going to live in Dubbo and then commuting to Sydney for work might look like a solution when you just look at this map, but the reality is that's a 5-hour journey each way.

That is the curse that Australia has always faced, thanks to its immense size. Alongside the more acute issues around supply and demand, this broader problem of a massive country with only five or six major employment hubs is definitely a massive underlying force increasing the demand for metropolitan real estate. The cost of renting is rising faster than wage growth in almost every capital city. We have millions of renters facing some of the worst rental stress they've seen in their lives. Rent at the moment is through the roof, and it's pushing millions to the financial brink.

So there are all the root causes of the Australian housing affordability crisis. But the one thing I haven't mentioned yet is the flow-on effect into the rental market. On top of Australian property being extremely pricey, Australian rent is also really expensive. The median rent in Australia is now $580 a week for houses and units, a rise of 99.1% for houses and 13.1% for units across 2023. But the problem is this now represents 44% of the median Australian's weekly earnings.

So why is rent going up? Well, again, it's flowing from the points we discussed earlier. Rising interest rates have made mortgages more expensive for landlords, and thus they have been increasing rent in an attempt to maintain the profitability of their investments. But beyond this factor, another primary force behind an increase in rental cost is simply the reduction in supply. Rental vacancy rates were at just 1.3% in December, or 397,974 per rate seen prior to the pandemic.

The result looks something like this: almost 100 people queuing for open inspections for apartments in places like Sydney. Not only are Australians struggling to get into the property market, they're also struggling to get into the rental market, and that's why so many are describing this as a real housing crisis. People are running out of options, and they simply don't know where to turn.

Australians with a mortgage coped another crippling cost of living hit—the 13th interest rate rise in 18 months. It's definitely been difficult and stressful trying to figure out whether we will be able to afford the mortgage repayments if interest rates go up. As more people come off fixed loans, the family home will be next.

So, this video has been pretty doom and gloom up until this point, but I also wanted to finish by maybe looking at some potential positives. Is there any saving grace for housing affordability in Australia? Well, maybe, but I wouldn't get too excited just yet. There is one factor that some economists have honed in on over the past year, and that is the idea of the Australian mortgage cliff.

You see, in Australia, we don't have long-term fixed mortgages like what exists in the United States. In the States, you can fix your interest rate for 30 years, but in Australia, you just can't. In fact, most fixed-rate periods are 2, 3, or 5 years, after which time your interest rate reverts to the going variable rate. Now, at the start of 2023, Australia's central bank noted that there would be about 800,000 to 900,000 fixed-rate loans rolling off in 2023, which would have meant 800,000 to 900,000 homes being repaid at roughly 2% to now around 6.5%.

So, the theory was with people committing to big mortgages back in 2020 that they could only afford thanks to the low interest rates, when they come off them a few years later, they would face a repayment crunch, wouldn't be able to service the loan, and then they would have to sell. Then all these mortgage holders would get caught out. They would flood the market with inventory, which would put downward pressure on property prices, solving the housing crisis once and for all.

Yeah, now Australia is most of the way through its so-called mortgage cliff, with an expected 450,000 loans left to roll off at higher rates in 2024. And it's true that the average Australian mortgage holder has proven more resilient than expected. But there is still some hope that property prices may soften in the future, as it might take some time for the full impacts to be felt. While higher mortgage rates might very well be too much for some Australians to handle, it may also take some time before these people have wed away their savings enough that they now need to face the music and sell.

There is a slight trend in that direction. CoreLogic noted in December that loss-making short-term resales—that is, properties sold at a loss held for three years or less—did hit a decade high of 6.6% in Q3 of 2023. That's up from just 3.6% 12 months prior. This is a really strong indicator of mortgage stress because obviously, no one sells a property at a loss in the short term unless they're running away from an asset they simply can't afford to keep.

CoreLogic's head of research, Eliza Owen, also noted the possibility that higher interest rates may very well take a toll on the labor market, and should unemployment rise over the next 12 months or so, this may also increase the number of Australians forced to run away from their mortgages. Unfortunately for prospective buyers, though, Owen also notes that this is ultimately a small share of mortgage orders. So, the portion of short-term resales is not expected to grow substantially from where it is now.

Ongoing increases in home values nationally should contain the rate of loss-making short-term resales, though capital growth conditions were looking weaker across Sydney and Melbourne to the end of this year. But with that said, that is the Australian housing crisis in. If you enjoyed this video, I would really appreciate it if you hit the like button. This video took a long time to research and put together, so if you enjoyed it, I would really appreciate it if you want to support my efforts here on YouTube even further.

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