How Housing Became Melbourne’s Biggest Asset Class

This is the second article in a series, in which I share some thoughts on the housing market in Melbourne. 

In the 18th century farmland was the world’s single-biggest asset class. In the 19th century the factories used to power the Industrial Revolution took the number-one spot. Now it is housing.  And Melbourne is no exception.  

In this article I attempt to give a brief history on how housing evolved as an asset class in Melbourne, and how the obsession with home ownership grew on parallel.  

Early days: the 1800s

Melbourne was founded in 1835.  However, unlike other Australian capital cities, Melbourne did not originate under official auspices. It owes its birth to the enterprise of some settlers from Tasmania (namely John Batman, John Fawkner, and their entourage), who sailed to the area in search for land suitable for pastoral purposes.  

The settlement, at its beginning, lacked the essentials of a town (a governing authority, a legal survey and ownership of lands); everyone seemed to do as they liked.  It remained as a province of New South Wales, till 1842 when it was incorporated as a town.   A Town Council was created to administer the affairs of the town, and elections were held for town councillors and aldermen.  By the end of 1840s, Melbourne’s status was changed from a Town to a City.  

By the early 1850’s, Victoria was separated from New South Wales and Melbourne became the capital of the colony.  The city was experiencing quite a rapid urbanization, fueled by the gold rush.  Shanty-towns were quickly developing.  However, what was surprising then was the high rates of home ownership in those relatively poor parts of Melbourne.  Why was homeownership so prevalent then?  At the time, landowning was a way to attain a vote in the political process. It was a line that continued, even after colonies ceased to apply to property qualifications for suffrage.  Figures collected suggest that 44% of Melburnians owned their home in 1881, with similar rates in Sydney and Adelaide.  These are not figures matched anywhere else in the developed world at the time.

First Half of the 20th Century

The turn of the 20th Century saw a surge of development activity in Melbourne.  However, while the city was taking shape (with construction of public buildings and transport infrastructure), something interesting was happening at the housing market; houses fed the families who lived in them.  Home wasn't just a place to live, but it was a place to grow the family’s food.  This led to the advent of the ever-famous quarter-acre block.  

The dominance of the quarter-acre block led to the low-density urban sprawl we see today, coupled by the availability of transport infrastructure and motor vehicles.  

Following the global depression of the 1930s, the commencement of the Second World War together with postwar building restrictions and material shortages, building development in Melbourne remained fairly static until the early 1950s.  And house prices were fairly stable.  Three main factors could explain this long-term price stability. First, mortgage markets were poorly developed. Second, rapid improvements in transport allowed people to live farther away from their place of work, increasing the amount of economically useful land. Third, there was not a lot of land regulation.  People could build when they wanted and in the way that suited them.

Second Half of the 20th Century

The late 1950s and 1960s saw enormous changes take place in the city and its housing market.  After the second world war, waves of migrants came to Melbourne from England, Ireland and Europe. Greeks and Italians, in particular were keen to own their own homes.   Melbourne / Australia provided an opportunity not available in Europe.  Gradually, house prices boomed both relative to the price of other goods and services and relative to incomes. Rents went up, too.  

In the few years that followed, housing markets underwent a revolution. Government vowed to boost home-ownership.  Perhaps they were motivated to ward off the communist threat, and/or home ownership was seen as a way to quell revolutionary tendencies.  The thinking was; a country of owner-occupiers would be financially stable. People will become better citizens.  And financially, people could draw down on equity in their homes when they hit retirement or if they found themselves in difficulty.  Over time, the notion that owner occupation was superior to renting became common, even apparently self-evident.  It became part of the Australian way of life; a dream everyone should have.  This translated into a surge in home ownership.  By the mid 1960s home ownership in Melbourne reached something of a saturation point: 70 per cent.  

Policies to promote owner-occupation proliferated all along the second half of the 20th century.  

The 1980s was the time for another change.  The finance industry was deregulated. Dual income households were the norm, making mortgages easier to attain. Prior to deregulation, the housing market was geared around owner-occupiers.  Property investors loaning from banks would incur a considerable rate penalty on their loans.  However, deregulation along with the consequent drop in interest rates moved the goal posts of home ownership.  Homes were increasingly purchased for their exchange value — used as leverage, as a vehicle for wealth accumulation.  

Also during the 1980s, annual housing price inflation was high, at nearly 10 per cent on average, but so too was general price inflation. 

By the early 1990s, property prices rose faster than inflation, while interest rates decreased. The 1990s until the mid 2000s were marked by quite high housing price inflation, of 7.2 per cent per annum, on average, in nominal terms.  A strong private rental market evolved to do "the heavy lifting" for investors.  The concept of negative gearing became popular.  It made investment in the private rental market seem attractive for landlords — thus expanding the rental market, and their portfolios.  

The 21st Century

The 21st century has been marked by a dramatic surge in housing prices.  Melbourne had the largest increase in property values - within a capital city in Australia - over the past 20 years.  Across the Top 100 suburbs for price growth over the past twenty-five years, the vast majority (41 suburbs) were located in Melbourne.  Median house price in Melbourne has risen from AUD191,000 in 2000 to AUD900,000 in December 2019.  

A number of factors fuelled this rise in the cost of housing, namely: 

• high population growth and high migration.
• influx of foreign investment after 2008. 
• greater access to credit/financing due to financial deregulation, the low interest rates (since 2008), availability of interest-only loans, and lower deposits.
• Shortage in supply of livable apartments close to the CBD. 
• Tax regulations that support investors and existing home owners, with policies such as negative gearing and capital gain tax discounts.

Since the mid 2000s, Melbourne has seen much higher net immigration (compared with the previous 2 decades) and population growth stepped up to a significantly higher rate, which all generated a sharp increase in demand for housing.   Annual demand for new housing increased by around 40 per cent from previous decades.

In December 2008, the federal government introduced legislation relaxing rules to encourage foreign investment in residential real estate (mainly from China).  As a result, foreign investment in Australian property experienced a “super boom” after 2009, rising from under AUD10 billion to a record AUD72 billion in 2015/16.  

Some people think that overseas investors are interested in land banking and capital gains.  Some do not even rent out their properties.  Which makes the vacancy figures interesting to examine.  According to Prosper Australia, over 60,000 residential properties were vacant in 2017 in Melbourne. This equated to a speculative vacancy rate of 3.9% for all residential property. Absolute vacancies - using zero litres of water - revealed over 21,000 residential properties at 1.3% (this means that more than $20 billion in vacant property existed at the height of Melbourne’s property boom).

Also during the past 2 decades, housing debt in Melbourne has more than doubled in real terms (increased some 400% in dollar terms).  Mainly fueled by irresponsible mortgage lending entrapping households to accumulate more debt than they could sustain.  Today Australians have the world's second-largest household debts, hovering around 120% of GDP.  Household debt to income ratio is close to 200 per cent.  Around three-in-ten households are classified as ‘over-indebted’.  Melbourne has the highest number of over-indebted households in Australia at 419,600 households (ABS, 2018).  All in all, housing debt is looking like a massive macro economic risk in the city (and in Australia).  

By the turn of this century, housing became to be perceived as the most important asset owned by the majority of Australian households. It is considered as a large component of household wealth and as an investment vehicle.  With most mortgages and many small business loans secured against residential dwellings in Australia, housing has also become an important part of the collateral backing the financial sector’s balance sheet.  Housing also saw a seismic shift in its role in the “Australian Dream”.  In the 1960s and 1970s, home ownership was a democratic ideal. Today, people look at the house not just for its use value as a “home” but for its economic value(s).