The Australian Dream – Australia’s property frenzy

If you come from a central European country, you might notice the many real estate agents like RayWhite, The Professionals, LJHooker etc. that can be found on almost every corner in Australia. Furthermore, the topic of home ownership and property prices is in the Australian media almost daily.

Australians love to talk about property, whether it’s at a family barbecue, school pick-up or in the office kitchen. A 2019 study by HSBC Bank found that Australians spend more hours talking about the property market than they do at the gym or talking to their parents.

Your own house – The Australian Dream

Australia’s founders believed that Australia should be better than the United Kingdom. They wanted a society that was not divided by class. In short, they wanted equality of opportunity for all. They believed that the dividing line where division was most pronounced was property ownership. Therefore, everyone should be able to own the house in which they lived.

In the English cities, land tenure laws and vast church lands prevented many people from ever owning their own property. This was not the case in Sydney and Melbourne. In Melbourne in particular, there was a rapid subdivision of land in the 1850s.

Before universal male suffrage was introduced in South Australia in 1856, land ownership was a way to gain a voice in the political process. This lineage continued even when the colonies stopped applying property requirements for the right to vote.

Australians have taken this to heart to this day, including in cultural classics like “The Castle“. In the film, a homeowner, Darryl Kerrigan, denounces a large corporation that wants to buy his house. In court, he reminds the audience that a house is not just bricks and mortar, but also memories of a life built together. It is, moreover, a place where one can imagine one’s future.

A survey by the Australian National University found that more than three-quarters of Australians still consider home ownership to be part of the Australian lifestyle. Many people here continue to think that owning your own house or flat is what makes you a full citizen.

Housing becomes more and more unaffordable

However, house prices have risen much faster than incomes. A few decades ago, the price of a normal house was only two or three times the average income. Now it has gone up to ten times the average income, at least in Sydney. It’s much harder for young Australians to buy a house these days, and it now takes up to 10 years just to put down a deposit.

A study by a sociologist at La Trobe University in Melbourne is titled “Nobody’s Home”. The name suggests that when the sociologists rang the doorbell to ask about their homes, the home owners were in all likelihood couples working full time (or more) to pay the mortgage on a house they hardly spend any time in. Nevertheless, the Australian dream of home ownership is still a very lively hope in the minds of many people, even people who for the moment find it very hard to see how they are going to attain it.

Urban sprawl

The Australian dream of home ownership combined with a growing population is also leading to rapid urban sprawl. The city fringes are being expanded by the release of affordable land and by large residential districts. When approaching one of Australia’s large megacities by plane, Europeans are surprised at how long it takes to fly over the populated parts of the city before coming in for a landing.

For example, Melbourne is about three times the size of London and yet has only a third of the population. Melbourne does not have a fixed, permanent city boundary. More than 50 suburbs have been bolted on to Melbourne since 2006, with so much to follow. Just 1% of the grasslands that spread across Melbourne to Victoria’s western fringes before European arrival now remain.

Home ownership is the Great Australian Dream. Yet despite its decline consistently making front page news, many still aspire to owning their own land and castle.

Home ownership to accumulate wealth

The 1980s was a time of structural change in Australian home ownership. The financial industry was deregulated. Two-income households were the norm, making mortgages easier to obtain. Rising interest rates were followed by drastically falling interest rates.

The changes in the availability and cost of finance had a major impact on the housing market in particular. Before deregulation, housing was geared towards homeowners. Property investors who took out a bank loan had to pay a significant interest rate premium on their loans.

However, with the equalisation of interest rates, the targets for home ownership shifted. Houses were increasingly bought for their exchange value – they were used as leverage to accumulate wealth. More and more people invested in housing, including their own homes, to accumulate wealth. This continued to increase in the 1990s and 2000s.

Real estate prices among the top in the world

Due to a variety of factors (low interest rates, eager investors, tax breaks and foreign investment, to name a few), Australian real estate has become some of the most valuable in the world. A two-bedroom, two-bathroom flat in Sydney is worth more than a renovated 13th century chateau with nine rooms and 7 500 square metres of parkland in France.

Those who invested their money in residential property in the 1990s enjoyed phenomenal returns. In 1993, the average values for houses and flats in Australia were $111,524 and $123,840 respectively. By 2018, houses had seen a 412% increase in value and flats 316%. Assuming the same projected growth rate, a report projects that by 2043, houses in Sydney will be worth more than $6.3 million on average, while properties in Melbourne are not far behind at $5.8 million.

Record low interest rates have pushed Australian property prices up 22 per cent in 2021 – the biggest increase in three decades.

Housing affordability decreases

The increase in property prices has also been accompanied by an increase in debt. This brings with it the risk of financial instability if borrowers are unable to service the debt. At the same time, housing affordability in Australia has largely declined since the early 1980s and has deteriorated more than in other comparable countries. According to a 2021 housing affordability survey, the median house price to annual income ratio in Australia’s major cities is 7.7 times, compared to 4.8 times in the UK and 4.2 times in the US. In Sydney it is 11.8 times and in Melbourne 9.7 times.

The ratio of house prices to incomes and rents is at the upper end of OECD countries compared to long-term averages.
Even though interest rates are at record lows, the rise in prices relative to incomes has meant that the ratio of household debt to income has also almost tripled over the past 30 years. Australia has thus moved from the bottom end of OECD countries to the top end.

This makes it much more difficult for first-time buyers to enter the property market. Deteriorating affordability is also leading to increasing wealth inequality.

And governments’ housing policies reflect the interests of those who already own. And their interest is not that property prices fall …

Real estate industry is “big business” in Australia

To realise the Australian dream or to increase one’s wealth with real estate, one usually needs the services of a real estate agent. In Australia, around 600,000 houses and flats were sold in 2021. In Germany for example, on the other hand, there were around 752,300 sales in 2020 with a population around 3.3 times as large!

Making big money with commissions and fees

With an average of two to three percent of the sales price, the commissions to be earned are a strong incentive to join the business. The two to three per cent commission does not usually include advertising costs either. Depending on the rate and the placement of the advertisements, this can amount to several hundred to thousands of dollars. Especially for more expensive properties, there may also be a sliding scale of commissions. For example, one may receive 2.5% for the first $850,000 and 10% thereafter. This is another incentive for any real estate agent.

Landlords also use real estate agents

And if you can’t afford the Australian dream of owning your own home, you have to rent. For this, too, you usually need the services of a real estate agent (or rental agent). A rental agent usually manages the rental process, i.e. they market the property, show it to tenants and finally fill the vacancy. Once a tenant has signed a lease, the agent’s job is done. After that, one has to deal with the property manager. However, many rental agents also take on property management. Rental agents are typically paid a fee of one month’s rent for finding a tenant. If the agent then continues to manage the property, there is usually a fee of 10 to 15% of the monthly rent.

Tenants are not customers

In this context, the estate agent’s client is not the tenant, but the property owner. At this point, one often becomes aware of just how lowly renters are viewed by the real estate agents who depend on them for income.

Every tenant knows a horror story (so do we) – agents demanding excessive repair and cleaning costs from deposits; surprise evictions; agents ignoring repair requests while a property literally decays around its tenants. But only a fraction of tenants file an application with a court. Such an application takes time and money that most people don’t have. And in a dangerously tight rental market, tenants are afraid to complain. Anyone can be evicted at any time. And when it comes to re-letting, the agent just gets another commission.

Many estate agents just want to sell or let the property as quickly as possible and collect the commission. In doing so, some are merely a salesperson subordinate to the actual real estate agent with less training and qualifications.

According to president of the Real Estate Institute of NSW (REINSW), Leanne Pilkington, a barista selling a $4 coffee often undergoes more training than a real estate agent selling a $4 million home in Sydney. You can get a licence to print money in just three days to work as a real estate agent …