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Factors Affecting House Prices

Since the 1870s Australia’s average house prices have continued to go up. This growth is the back bone of the Australian dream of owning your own home and fueled much debate about affordability and whether houses prices will continue to go up or will eventually come down.  Discussed most of all are the factors of house prices and what types of shocks will most likely cause inflationary or deflationary effects.  What is clear from the available literature is that there are a number of possible factors (determinants) of Australian average house price.

They are:

  1. Population
  2. Household Income and Wealth
  3. Unemployment
  4. Inflation
  5. Interest Rates
  6. Financial Availability
  7. Supply of New Housing


Population totals appear to be the most obvious demand side factor and of particular significance. Population changes can occur from either natural internal changes or from international net migration. As natural changes occur very slowly, their real effect is likely to be negligible.

Net migration, however, is a significant factor for Australia’s population total and is likely to have a significant role in house prices .  A small 1% population increase positively affected house prices by as much as 4.5% percent. Others suggest that these “strong effects” will be important in shaping the demand and growth of Australian house prices in the years to come.

Household income and wealth

Household income and wealth also emerge as fundamental drivers of Australia’s average house price. Income effects the bottom line decisions of the consumer when purchasing property. An increase in income is an increase in the demand for housing and is an important determinant of price.

Australia’s Gross Domestic Product (GDP) can be used to summarise wealth and income. Many have economists have found that GDP plays a key function in determining Australian house prices.  Specifically a 1% increase in household income would positively affect real house prices by as much as 1.5% percent.

It is apparent that those of higher income would have a greater propensity for home ownership and would have a tendency to buy dearer property. This is mainly due to the capital ingredient of the mortgage shared with ongoing repayments. In fact, the wealth required to make the initial down payment is likely to be even more important than the income required in servicing the debt with long-term income expected to be more important than temporary short term change.


It is expected that if household income were a main determinant of house prices, then unemployment would also play a key part. Simply put, when more workers are employed, household income is higher. Additionally, just having a job increases a person’s chance of being approved for finance which, of course, further fuels the demand for housing. It has both long and short run effects on national real housing prices, and influences past and future income and wealth.

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Inflation and inflationary shocks are expected to play a significant contributory role in Australian house prices. For many, an investment in property is a means to hedge against inflation and to protect their wealth against unsavoury increases.

For many households, high inflation makes property a desirable investment. Expected capital return on investment fuels demand and drives up average house price. If house prices do rise, then this translates to an increase in wealth and a propensity for further investment.

On average, inflation accounts for more than half of the total variation in average house price over a five-year span. And in the short term its effect is even greater. Over twelve months, inflation significantly affected house prices as much as 90% dropping to 66% after 12 months.

Interest Rates

Interest rates are also a major determinant of Australian house prices. Considering the strong correlation that inflation and employment has with average house price, many commentators put interest rates at the forefront of average house price determinants. Regardless of whether autocorrelation is accounted for, real interest rates are considered to be “very significant”.

When monetary policies relax and interest rates wane, the cost of servicing mortgage debt declines, boosting the demand for housing. On the other hand, when monetary policy tightens the mortgage market will also follow increasing the cost of finance.

There is empirical evidence that interest rate shocks account for between 12% and 20% of real house price fluctuations.  A 1% per cent real-short term interest rate decrease, positively effects house prices by a significant 1.2% percent.   It is clear that interest rates play a significant role in determining house prices.

Financial Availability

Financial availability is also suggested to play a role since housing is an investment that predictably requires finance. Aside from subsidies from the government, the two main components making up the mortgage finance available to the buyer are capital and leverage.

Leverage or leveraging refers to the debt element of a mortgage.  Where leveraging is required, the availability, cost and flexibility of debt financing ultimately affects the demand for housing. These factors directly influence affordability. A higher mortgage rate will increase the cost of buying a home, therefore, reducing demand, and lowering house prices. Alternatively, lower mortgage rates will have the opposite effect, increasing real national house prices.

Financial innovation and deregulation has the ability to further bolster housing demand. Designing low cost financing options and providing greater accessibility, will unavoidably fuel demand with higher house prices the consequence.

The correlation between debt growth and house prices is evident in many countries, especially in countries with significant asset inflation.  Excessive credit expansion combined with neo-liberalisation also put significant upward pressure on prices. In the long term, debt growth and the mortgage finance variables, including bank credit and interest rates, can affect house prices by as much as 30%. It is apparent that financial availability, cost and flexibility are significant factors in determining Australian average house price.

Supply of Housing

Supply of housing affects Australian average house price. In particular, tough zoning rules, bureaucratic building regulations and slow administrative processing hinder efforts to increase the supply of housing. This restrictive practice can affect national house prices. To what degree is arguable. House prices and construction costs are palpably related, however, there has been no study outlining the effects of housing stock on housing prices. Considering that the supply of new housing is sluggish at meeting demand, at best, house prices will be precipitous when taking diminishing availability into account.

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Many economists attribute average house price variance simply to household income, population totals and restrictive government practice reducing the availability of land.

However what is clear from the available literature is that there are seven major determinants effecting Australian average house price.  They are population, household income and wealth, unemployment, inflation, interest rates, financial availability and the supply of new housing.

Currently in Australia, despite having a reducing population, household income and wealth, unemployment, inflation, interest rates, financial availability and finally the supply of new housing are all having positive effects on House Price and unless there are major changes in the determinants, prices will continue to rise for the foreseeable future.

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