By: Samarveer Singh; Edited by: Shagun Khetan
As the world grips over the fear of a global recession, countries are experiencing inflation and slow economic growth. Australia, the world’s thirteenth largest economy which is also a top work destination for many Chinese and Indian immigrants, has also been going through a rough patch. Over the past few decades, Australia has seen one of the greatest housing booms in the world. The prices of houses in Australia have increased drastically. Now it has come to bite the Australians who are looking to rent or buy a house. Housing prices have increased in all of Australia’s key cities over the past decade with Sydney being the second most unaffordable city in the world. Let’s understand how Australia ended up here!
Firstly, Australia has been witnessing a rise in housing and rental prices whereas the average wages and salary have not been keeping up with this price rise due to low investment in R&D and low productivity resulting in a housing and rental crisis.
Plus, Australia experienced record immigration with the nation welcoming more than 700,000 immigrants in a single year which is the highest it has experienced in modern Australia. The impact of this is simple, the number of buyers of homes in Australia went up leading to more demand with fixed supply pushing up prices.
With the rise in demand for new houses, the Real estate sector has also not been able to keep up with the demand and has rather fallen short. Looking at this year for example, only about 170,000 homes were constructed in Australia which is the lowest number recorded in a decade.
Amid all these challenges, the inflation in Australia has also remained high adding on to the problems of an average Australian and being a key factor in contributing to the cost of living crisis.
Housing Crisis:
Australia has been a key attraction to people to settle abroad given its world-class beaches and a healthy infrastructure, however it is easier said than done. Recently the country has become a nightmare for people who want to own a house or even rent it. Access to good quality housing is fundamental to the wellbeing of the people however it’s becoming difficult to make ends meet for Australians as they struggle with low wages and high house prices.
Housing Affordability in Australia’s biggest cities
House prices in Australia’s major cities have increased over the past few years with even small cities like Adelaide, Perth and Brisbane documenting a massive jump of 50% in housing prices. These increases in housing prices are evident by the house prices in Sydney where the median sale price stands at $1.36 million (AUD). The Australian Bureau of Statistics (ABS) has revealed that the cost of living has surged by 9.6% this year marking it as the highest annual increase since 1999. This has significantly impacted the working class population who have also not witnessed an increase in their wages and salary simultaneously as the inflation has increased, due to increase in demand. This is the perfect nightmare for any salaried person when wages do not increase as prices bite your purses.
If you are thinking that rather than buying a house, the working class in Australia can rent a place at a reasonable rate, you are wrong! The median weekly rents in Australia have skyrocketed over the past decade, since 2020 annual rent rates have increased by over 8% per year. This is not just it, even as the weekly rents go up, hundreds of people are applying for apartments leaving people with a lot of competition and creating more problems.
Are Immigrants to blame?
The increase in the number of applicants for an average place to rent in Australia arises from the immense number of migrant families Australia is welcoming each year. Australia has seen a large influx of immigrants predominantly arriving on student and work visas. According to the Australia Bureau of Statistics (ABS), Australia’s population has grown by about 2.5% in between 2022 and 2023, creating additional demand for not only goods and services but also in the housing market.
According to ABS, since 2022–23 Australia experienced record immigration with the nation welcoming more than 700 thousand immigrants in a single year. This increase in migrants is directly correlated with the increase in housing prices as the increase in demand for places to rent has led to skyrocketing increase in housing prices. The net overseas migration has seen a record increase in comparison to the past 10 years making immigrants a significant issue for the Australian economy. However, the argument of wholly blaming the immigrants for the increase in rental prices in Australia holds little water as the problem in the economy is not with the increase in demand but the shortage of supply. The Australian economy has significantly benefited from record immigration as well due to the influx of skilled workers.
Real Estate faces a crunch
Not building enough homes in Australia is to blame for the housing crisis and not the increase in demand. Currently, the real estate sector in Australia faces an investment crunch leading to fewer homes being built on an average than being demanded by Australians each year. According to the Guardian, new dwelling approvals in Australia have touched their lowest number in a decade with only 170,000 homes being constructed in the past year. This is 8.5% lower than the past year. One of the key reasons the developers have sighted behind this is the rise in labour costs and interest making it costly to construct more homes and thus less attractive option.
Another reason why there is a supply problem for houses in Australia is the extended amount of time it takes for dwellings to be approved by the Government. It takes long periods of time for a dwelling unit to be approved in Australia. For instance, for a house in New South Wales (state in Australia) it takes about 111 days for approval for construction. In Liverpool, the number jumps to a mind boggling period of 288 days. When compared to western cities, the numbers are scary as it takes only 7 days for a house to be approved in Texas. This delay in housing approvals has created a long shortage of homes in Australia over the years. This housing crisis has particularly impacted the younger population in Australia with homeownership of young people dropping by 25% as compared to the general population which has fallen by only 8%.
Low productivity and growth
Productivity is the rate at which goods and services are produced in an economy through the use of inputs like labour. For the past 20 years, productivity has experienced stagnant growth. In 2022, the productivity growth in Australia fell by 3.7%.
This low productivity in Australia has also been one of the key reasons behind low wages. Australia has not experienced a real increase in wages in the past decade making it difficult for an average Australian to make a living with prices in the economy rising at a faster pace than the wages. A lot of the low growth in productivity rates in Australia can also be attributed to low investment in R&D, which has been decreasing in recent years due to a number of factors. Differing budget priorities for governments has been one of the key reasons for low investment in R&D. With inflation biting Australian consumers and wage stagnation affecting the people, the government has directed significant sources towards social welfare and subsidies to ease the financial burden on households. As for the private sector, compared to OECD countries, Australia’s manufacturing sector has a bias toward low and medium R&D intensive industries. As of 2022, Australia only spends about 1.7% share of the GDP in R&D which is significantly lower than the OECD average of 2.4%.
As a result of low investment in R&D in Australia, there has been almost negligible growth in Nominal and Real GDP per capita in the past 10 years posing a significant challenge to its economy. Due to low R&D investments it is leading to lower productivity resulting in lower wages thus making it difficult for Australians to buy or even rent a house. Majority of Australia’s government revenue is extracted from corporate and income tax and the corporate tax in Australia stands 6.3% higher than the OECD average. However, Australia taxes their real estate sector far less than the corporate and personal income. Seems unfair doesn't it?
How can Australia come out of this?
In order for Australians to evade this cost of living crisis, it needs to overhaul its economic system through some major policy changes. First of all, Australia needs to reduce the burden on their working class by lowering income tax, lowering corporate taxes to encourage investments in R&D to boost productivity, expedite housing approvals, investing in better social housing and making houses affordable to rent for an average Australian.
Conclusion
Therefore the cost of living crisis in Australia sheds light on their fragile economic system with a number of loopholes. Soaring house prices, high rents and stagnant wages have strained many Australians particularly the working class. While increased immigration has led to higher demand, the core issue remains the lack of housing supply and low productivity. By tackling these systemic challenges, Australia can avert a major crisis in its economy and ensure a better quality of life for its residents.
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