A number of factors influence how an economy and property market responds, from natural disasters to financial misconduct to political turmoil. When an event is large enough, tremendous implications can be felt across the globe.
Each century has faced unique economic challenges. The first two decades of the 21st century have not been different.
Australia has seen several housing market crashes since 1891, including the Great Depression of the 1930s, when house prices fell by around 60%. In the late 1970s, house prices fell by approximately 24%. In the late 1980s, Australia’s housing market crashed due to a sharp decline in investment lending. The most recent crash occurred in 2008 when the global financial crisis caused house prices to drop by 10-15%.
Housing Market Crashes From 1891
Australia experienced a property crash in 1891 caused by a speculative boom in the 1870s and 1880s, fueled by imported capital and overdevelopment. The crash led to a banking panic and severe depression that lasted until the late 1890s. Land prices in some suburbs of Melbourne and Sydney fell by more than 50% from their peak levels.
The boom that preceded the bust began in the 1850s and 1860s with the gold rush, and it continued into the 1880s giving birth to large corporations such as BHP and Rio Tinto.
The mining upturn was accompanied by a flourishing agricultural sector, especially the rapid growth of the wool sector.
Australia’s population grew 8x between 1851 and 1890, or 7.5% per year, due to the economic boom.
During this time, housing demand soared, and prices began to rise dramatically. In the following years, house construction and lending boomed. However, the housing market began to falter by 1885, when a housing surplus arose. In 1889, construction resumed before falling, and prices reached their peak.
The 1870s and 1880s also saw the rise of non-bank lenders, such as building societies, which did not shy away from lending freely to property developers.
Due to a crisis at Barings Bank in London in 1890, Australian investments were reassessed and funds withdrawn. This, and the property crash, caused a banking crisis. In 1891, the Bank of Van Diemen’s Land became the first large bank to fail, and 13 more followed. As a consequence, the eastern colonies suffered a severe economic downturn in the years 1890-1891.
World War One
It was a milder and shorter property downturn following World War One. In real terms, prices fell somewhat, but not significantly. World War One affected both the supply and demand of housing. Soldiers going off to fight in the war, as well as a slowdown in immigration, affected demand. As rents went down, investor demand decreased, partly as a result of government measures protecting soldiers from any increase in rents. Due to this decline in demand, supply was reduced.
It was not until 1920 that prices, rates, and rents began to rise as Australia began to recover from the damage caused by World War I. Immigration started to increase again, and unbeknownst to most people, the 1920s would be the decade in which Australia experienced an economic boom.
The Great Depression
During the Great Depression, the housing market fared substantially better than it had in the 1890s. Slightly below peak levels, nominal prices fell by more than 25%, but real prices declined by much less as a result of substantial deflation.
Property prices in Sydney and Melbourne fell by 11% and 13% in real terms from their highs in 1929 to their respective lows in 1932 and 1931 (compared with declines of 36% and 51% in the 1890s), and were mostly recovered by 1939.
World War Two
Government controlled house and rental prices in 1942. After the war, property prices were at ludicrously low levels by the time price controls were lifted in 1949 as a result of significant inflation. When the controls were removed, prices rose by 77% in 12 months in Sydney.
In 1950 prices peaked and then fell by 25% by 1953, primarily due to an overshoot in prices following the removal of price controls.
Interestingly, when price controls were lifted, the housing market changed. Capital cities’ rental share dropped from 55% in 1947 to 20% in 1961. There were many factors contributing to this. These factors included recovery from WWII, a huge influx of Europeans, a boom in economic growth in the 1950s, and major infrastructure projects initiated by Labor governments.
It was during this period that the ‘Australian dream’ of owning a home took shape.
The 1974 downturn
The property boom of the 1960s and early 1970s was influenced by several factors:
The natural economic upswing that took place after World War Two not only in Australia but overseas.
1960s mining boom.
Increased immigration leads to a big population increase.
Buildings with a higher density to fit more people.
Housing more people by expanding cities and infrastructure.
A growing international financial hub and the sophistication of capital markets.
A lending boom aided the housing boom.
By 1974, Sydney residential prices were up 116% from their 1950 peak in real terms, while Melbourne’s was up 47%. Sydney did better because the price of fringe land rose sharply.
From their peaks, Sydney prices fell 18% and 24%, respectively, in real terms. In contrast to real price falls in the 1890s and 1930s, high inflation in the 1970s cushioned the fall for the property market and protected banks.
In 1974, the median house price in Sydney was $31,800. In 2021, it was $1.31 million, which means that the median house price has increased by almost 40 times since 1974
1990s recession, we had to have
The seeds of the 1990s housing downturn were multifaceted. The early 80s brought a mini-mining boom that turned into an entrepreneurial boom, with colourful personalities including John Spalvin, Robert Holmes a Court, Alan Bond, John Elliott, and Christopher Skase splurging money lent by deregulated banks.
This was against a backdrop of significant economic reforms from the then Labor government, including the floating of the Australian dollar, the removal of limits on interest rates paid on deposits and charged for loans, and the introduction of competition from foreign banks.
Increased access to credit led to a boom in construction and lending in the late 1980s, which culminated in the bad bank debt crisis of 1990-1991. Many banks collapsed, including the State Bank of Victoria, the State Bank of South Australia, the Teachers Credit Union of Western Australia, and the Pyramid Building Society in Victoria.
During the recession, GDP fell by 1.7%, and the unemployment rate rose to 10.8%.
Despite this, the residential housing downturn was mild. From peak to trough, prices decreased nationally by just 8% in real terms. Melbourne’s market fared worse, with a 19% drop, thanks to banking failures and job losses.
It was the commercial property market that suffered the most. For instance, Sydney office prices declined by 40%.
Sydney’s median house price in 1991 was around $150,000 1. In 2021, Sydney’s median house price was around $1.1 million. This means that the median house price in Sydney has increased by around 633% over the past 30 years.
The Global Financial Crisis (GFC) 2007 -2009
During the period between mid-2007 and early 2009, global financial markets and banking systems experienced extreme stress due to the global financial crisis (GFC). A downturn in the US housing market contributed to the global financial crisis during the Great Financial Crisis. This crisis spread across the global financial system from the United States to other countries. To avoid bankruptcy, many banks suffered large losses and relied on government assistance. There were millions of job losses as advanced economies experienced their deepest recession since the Great Depression of the 1930s. Recovery from the recession was also much slower than previous recessions without financial concerns.
Although the Australian financial system was in much better shape before the GFC, given the magnitude of the shock to the global economy and to confidence in general, Australia responded in a large manner to ensure that the economy did not suffer a major downturn despite the magnitude of the shock. In particular, the Reserve Bank of Australia lowered the cash rate target significantly, while the Australian government implemented an expansionary fiscal policy and provided guarantees on bank deposits and bonds.
In response to the crisis, APRA strengthened global banking regulations in Australia. Additionally, APRA and the Australian Securities and Investments Commission have strengthened lending standards together to increase the resilience of the private and financial sectors.
The national median dwelling value fell -4.7% in 2008, and between 2008 and 2010, it rose 18.2% before rising interest rates and low wage growth lowered prices by -4.5% in 2011.
In 2008, Sydney’s median house price was $530,000, but in 2021, it was $1.31 million. Therefore, the median house price has doubled since 2008.
The 2000 Sydney Olympics
During the period of time between the announcement of the Olympics in 1993 and the actual Games in 2000, CoreLogic reported a 60% increase in Sydney’s property values.
In addition to revamping the Homebush area, the 2000 Olympics brought around $6 billion into the Australian economy.
COVID-19: the property market boom no one saw
As a result of the global pandemic, remarkable changes have occurred in the Australian housing market. A number of factors have impacted the housing market composition and dynamics during the COVID period, ranging from temporary city closures to unprecedented monetary policy decisions to the increasing popularity of regional and low-density housing preferences, as well as the introduction of various government home-buying incentives.
Housing values increased by 24.6% between March 2020 and February 2022, despite an initial dip. CoreLogic estimates residential real estate value at $9.8 trillion, up from $7.2 trillion at the beginning of the pandemic. Australian dwelling values increased from $173,805 to $728,034.
Sydney’s median house price was $395,000 in 2000. In 2021, Sydney’s median house price was $1.31 million. This means that Sydney’s median house price has increased 3 times since 2000.
The last 25 years
In the last 25 years, median house and unit values have increased by 412% and 316%, respectively, providing significant wealth gains for homeowners. A capital gain of 6.8% for houses and 5.9% for units over the past 25 years equates to an annual growth rate of 6.8% in dollar value. Since 1993, the median value of an Australian house has risen by $459,900, and unit values have risen by $392,000.
If we assume the same rate of growth for the next two decades, the national property value in Australia will reach an average price of $2.9 million by 2045 for houses and $2.1 million by 2045 for apartments. Prices in Sydney will increase to approximately $6.3 million on average.