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Four Years After Pandemic: The extent of the increase in Australian home prices.

Despite initial concerns of significant drops during the pandemic and further predictions of sharp declines as interest rates rose rapidly, home prices have surprisingly soared by 39.9% across the nation. Over these four years, various elements have played a role in changing housing trends, with the market experiencing different cycles due to the broad economic and social effects of the pandemic.

Since March 2020, factors such as property availability, population increases, construction activities, rental market trends, interest rates, and migration patterns have all influenced the rise and geographic distribution of home prices in Australia. Concurrently, these elements have been interwoven with economic strategies, shifts in consumer habits, and wider social adjustments due to the pandemic.

Over the last year, capital city housing markets have seen higher growth compared to regional areas (7.64% versus 4.67%). However, looking at the period since the start of the pandemic, regional home prices have generally increased more than those in capital cities across all states except Western Australia and the Northern Territory.

The rise in remote work, greater affordability, and changing preferences have fueled significant population increases and housing demand in coastal and regional locations, primarily detracting from Sydney and Melbourne.

Affordability has influenced these trends, with less expensive areas experiencing more robust growth over the last four years. Notably, Brisbane, Perth, Adelaide, and regions in Queensland and South Australia have shown significant growth after the pandemic. Perth, Adelaide, and regional South Australia also managed to evade the price downturn in 2022.

Australia has faced high inflation, prompting the Reserve Bank of Australia to start hiking interest rates in May 2022, since the pandemic. This rapid increase in interest rates led to a sharp decline in home prices across many areas, with a national decrease of 3.84% and a more significant drop of 7.02% in Sydney. The significant rise in interest rates since May 2022 has sharply escalated borrowing costs, substantially reducing people's borrowing power and increasing the proportion of disposable income needed for mortgage payments. Despite these challenges, the housing market has begun a new cycle, with home prices recovering and reaching new highs in several markets by March 2024, even amidst the prevailing high interest rates.

Existing homeowners have seen their home values rise over the years, accruing equity gains that shield them from the impact of higher interest rates, with many opting to upgrade using these gains. Their purchasing activity has contributed to the continued strength in homebuying demand, despite worsening affordability. Additionally, robust population growth, limited rental options, a pandemic-driven preference for smaller households, and strong job market conditions are all factors boosting housing demand.

Following the reopening of international borders, Australia has experienced record-high net migration, alongside limited housing supply and strong demand. This combination has helped mitigate the impact of rising interest rates and declining affordability. Increased migration has led to higher rental demand, reduced vacancy rates, and increased rental prices, creating challenging conditions for renters. This has prompted some first-time buyers to purchase homes sooner and attracted investors back into the market due to the potential for high returns.

Rising costs, labor shortages, and industry challenges have hindered new housing projects, exacerbating the shortage of homes. Renters struggle to find rentals, and buyers face high prices, showing we need more homes. Thankfully, governments are working on solutions to tackle the housing shortage.

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