Sydney and Melbourne: why Australian housing costs so much

Australian cities sit consistently at the top of world housing unaffordability rankings: the ratio of house price to household income here is among the highest in the developed world. That is not an anomaly of recent years but a durable construction, and it is made of several independent causes.

The cities are pressed against the coast

Australia is enormous but settled in a narrow coastal strip. Expansion of the largest cities runs into the ocean on one side and into commuting distance on the other: a suburb two hours away does not solve a housing problem, it creates a transport one. The shortage is therefore not of housing in general but of housing within reasonable reach of jobs.

Low-density development

Historically the Australian city is detached houses on plots. Dense apartment development meets resistance at local council and zoning level, and approvals are slow. Supply answers a rise in demand with a lag of years.

Migration as a demand driver

Population growth in Australia is substantially driven by migration and concentrates in two or three cities. Demand to rent and to buy grows in exactly the places where supply grows slowest.

A tax structure that rewards owning

• The ability to deduct a loss on a rental investment against general income makes buying a second and third property attractive to a high-income taxpayer.
• The capital gains discount for long holding shifts interest towards price growth rather than rental income.
• A main residence is exempt from capital gains tax — which strengthens the motive to put as much as possible into your own house.

Each of these mechanisms has been debated in the country for decades, and attempts to change them are politically expensive — which is precisely why the construction is durable.

What matters for a foreign buyer

• An expensive market with restricted access. A foreigner is mainly permitted to buy new housing, and that is the most competitively priced segment: the developer's margin is already in the price.
• State surcharges and federal fees are added to an already high base.
• The vacancy fee makes a "buy and hold empty" strategy directly loss-making — which was its purpose.
• Currency risk. The Australian dollar moves, and for a buyer counting in another currency it can wipe out the entire effect of price growth.