On February 18, local time, the Reserve Bank of Australia (RBA) announced a decrease in the benchmark interest rate by 25 basis points, bringing it down to 4.10%. This marks the first rate cut since November 2020. In conjunction with this move, the Australian Labor government issued a "buying ban," prohibiting foreign buyers from purchasing existing homes for the next two years.
Together, these two policies aim to tackle the ongoing housing cost crisis in Australia. But will they indeed provide the relief that the housing market desperately needs?
Fiona Yang, co-founder and executive partner at Plus Agency, shared her insights in an interview with a major financial news outlet. She noted that, in comparison to local buyers, the cost of purchasing property in Australia for overseas investors is considerably higher. This is primarily due to hefty additional stamp duties and application fees from the Foreign Investment Review Board, which many Australians are not fully aware of. Nevertheless, the interest rate cut from the RBA is expected to ease the burden of home buying, making it easier for potential buyers to commit to a purchase.
The Australian real estate market remains buoyant. Yang elaborated on this by pointing out that auction clearance rates serve as a key indicator of market vitality. For instance, in the Sydney market, the auction clearance rate was at 54% at the beginning of the year and soared to 73% the following week. Projections suggest this number could soon reach 80%, indicating robust demand and active participation from buyers.
In a recent statement, Clare O'Neil, the Australian Minister for Housing, announced restrictions for foreign investors, including temporary residents like international students and foreign businesses, from purchasing property in Australia between April 1, 2025, and March 31, 2027. O'Neil emphasized that this policy aims to "free up thousands of properties for Australians."
According to Daniel Ho, co-founder and managing director of the global real estate technology company Juwai IQI, foreign buyers accounted for less than 1% of the approximately 520,000 homes sold annually in Australia, translating to fewer than 5,000 sales. Notably, approximately one-third of these sales involved existing homes, meaning around 1,600 transactions each year may be impacted by this new regulation.
The housing cost crisis has escalated significantly over the years. A poll conducted by Gallup revealed that in January, the percentage of Australians dissatisfied with housing conditions reached a record high of 76% in 2024. In stark contrast, the median dissatisfaction rate among residents of OECD high-income countries stood at only around 50%.
Australia's average full-time salary hovers around A$100,000, while the median house price in Sydney is nearing A$1.5 million and A$860,000 for apartments. Only dual-income households earning more than A$200,000 or the top 2.3% earners are financially capable of purchasing an average home in Sydney with a 20% mortgage deposit.
Analyzing the dynamics of supply and demand, Yang identifies local demand as the primary driver behind rising housing prices, rather than foreign investment. On one hand, developers typically choose to build within a 400-meter radius of transport hubs, referred to as "walkable areas." These locations, due to their convenient access and limited availability, boast high land prices. Additionally, building and labor costs have remained elevated without any significant downward trend.
For instance, according to a report from the New South Wales Productivity and Equality Commission, financing costs for property developers have doubled since 2018, land prices have increased by 50%, and construction costs have surged nearly 30%.
Building costs for mid-rise apartments in Sydney have risen by 36% since 2018, with an increase of about A$240,000 for each unit, as evidenced by a report from the same commission published in September 2024. Such increases necessitate developers to sell their units for 36% more than previously, just to break even. Not to mention, this does not account for additional taxes, rising labor costs, and financing costs caused by high interest rates, all of which contribute to the current property price inflation, Yang summarized.
However, the relaxation in monetary policy is likely to result in renewed upward pressure on housing prices. Institutions such as CoreLogic, the Commonwealth Bank of Australia, and Westpac predict that should the RBA implement three further interest rate cuts by 2025, property prices in major Australian cities could soar by double-digit percentages. Historical data shows that in 2021, when the RBA's interest rate was at a historic low of 0.1%, Sydney saw a staggering 29.6% increase in median house prices, Brisbane's prices rose by 30.4%, and Melbourne's climbed by 17.9%.
What exactly is the "cure" to this ongoing housing predicament?
In response to the worsening housing crisis, both the federal and state governments of Australia unveiled the "National Housing Accord" in 2022. This ambitious initiative aims to deliver 1 million new homes by mid-2024 over a five-year period, with a recent revision pushing that target to 1.2 million over the next five years, emphasizing a “rapid delivery” approach. To meet this revised objective, a monthly approval of 20,000 housing units is planned, though initial data from February 2024 revealed that only 15,174 housing approvals were granted in December 2024, falling short by 5,000 units from the targeted approval rate.
Yang elaborated on the Australian government's multi-faceted approach to remedy the housing shortfall.
"The government is making efforts to increase population density in suburban areas to alleviate housing pressure in urban centers. Currently, Australia's suburbs lack adequate public transportation, shopping centers, and key infrastructure, which discourages people from moving there. Thus, the core of this strategy is aimed at improving transportation infrastructure through the addition of train stations, shopping precincts, and schools to facilitate easier relocation to the suburbs," Yang explained.
Furthermore, to assist young families and low-income groups in accessing the property market, the Australian government has introduced additional incentives for first-time homebuyers to lower the entry threshold. These include subsidies and exemptions from stamp duty, aimed at alleviating financial pressures on these prospective buyers.
Notably, the government has also approved increased density allowances for new development projects, which enhances the supply in the housing market. Historically, many areas in Sydney permitted only low-density housing on a given plot of land. However, if that land is situated within a 400-meter radius of transport hubs, developers are now permitted to build higher-density residences on those lots. The pivot from single-house constructions to multiple residential units has significantly expanded housing availability.
Moreover, the New South Wales government has implemented a Transit-Oriented Development (TOD) plan to encourage high-density residential and commercial developments around transport hubs, optimizing transportation resources and enhancing land-use efficiency.
Nevertheless, Greg Hankinson, a member of the Housing Industry Association (HIA), noted that Australia’s ingrained cultural preference for low-density suburban housing and car-dependence presents a significant barrier. While the TOD lifestyle may attract younger generations, a broader shift in mindset across various demographics may take longer than anticipated.