will it get too hot to handle?

But the strength of the price rally has stoked worries.

“It’s a bit of a blast off in house prices,” says AMP Capital economist, Shane Oliver. “But obviously it will, at some point, raise questions about housing affordability.”

Back in 2003 – at the tail end of a previous housing boom – then prime minister John Howard dismissed concerns about high property prices, saying: “I don’t get people stopping me in the street and saying, ‘John you’re outrageous, under your government the value of my house has increased’.” He claimed most people feel “more secure and feel better off” when the value of their home has gone up.

But opinion polls show the cost of housing has become a growing source of anxiety, especially in big cities.

When Gladys Berejiklian became NSW Premier in 2017 she famously cited housing affordability as one of her top priorities, saying at the time it was the “biggest concern people have across the state”.

The latest Ipsos Issues Monitor, which asks respondents to select the three most important issues facing the community, showed housing affordability is again worrying voters. Housing was the equal top concern in NSW in the December quarter, alongside health and unemployment. Concern about the cost of housing has also risen in Victoria.

During the past decade the housing market has also been cast as a demographic battleground where first-time buyers are pitted against cashed up investors who benefit from negative gearing and the capital gains discount. Meanwhile, an army of young renters is left wondering if they will ever own a home.

Grattan Institute economist Brendan Coates says the latest price surge continues a 25-year trend dividing housing haves-and-have-nots.

“Home ownership has been falling for all age groups under 65, particularly for younger lower-income households and what’s happening now will only exacerbate that trend,” he says.

“If house prices keep rising relative to incomes it’s going to become harder for young people, especially those on lower incomes, to purchase a home. So for them that great Australian dream will recede even further into the distance.”

While there has been an encouraging lift in borrowing by first time buyers in recent months, Coates does not expect that to have much effect on the overall level of home ownership.

“Some first home buyers have made gains recently but the reality is the bottom 40 per cent of income earners are priced out of most of our major cities,” he says. “I wouldn’t expect to see a big jump in home ownership rates among that lower income cohort which is the group we are more worried about.”

Falling home ownership has major long-term consequences for Australia, especially the distribution of wealth. It will also leave more people vulnerable to homelessness in old age, especially those with low incomes.

The experience of 67-year-old pensioner, Su Day, illustrates this challenge. She was recently made homeless following a dispute over her father’s estate and says high housing costs in Sydney make it “downright impossible” for people like her.

“I am locked out,” Day says. “It’s terrifying.”

A recent Human Rights Commission report found women aged over 55 were the fastest growing cohort of homeless Australians.

Day now lives at Mosman House, a project providing transitional accommodation for older women run by Link Housing. But she says her experience highlights the need for more social and affordable housing which offer permanent alternatives for low income earners.

Motivating forces

The main driver of the post-pandemic property boom has been record low interest rates. During the past 18 months the official cash rate has been cut from 1.25 per cent to just 0.1 per cent and the central bank has made it clear those settings will remain in place for an extended period to underpin the economic recovery.

Coates says “we shouldn’t be surprised” house prices have surged given interest rate reductions of that magnitude.

He points to Reserve Bank modelling published in 2019 which found a sustained reduction in interest rates of 1 percentage point would lift housing prices by 30 per cent over a period of three years.

In addition, pent up demand, government incentives, an improving post-pandemic economy and even a fear of missing out have helped stoke the boom.

Detached house prices have been especially strong, far outstripping unit prices during this upswing. The median house price in Sydney was 66 per cent higher than the median unit price in the December quarter, Domain Group data shows, the biggest difference since it began tracking prices in 1993. Melbourne’s median house price is now 64 per cent higher than the median unit price compares well above the average price gap of 52 per cent over the past decade.

So far, owner-occupier demand has been the main driver of price gains but the latest lending data shows investor interest in housing is now on the rise.

But the strength of the rally poses another question familiar to Australians: will the housing market overheat? Might the unique policy responses to the pandemic inadvertently inflate a dangerous housing bubble?

Reserve Bank Governor, Philip Lowe, told a parliamentary committee last month the recent strength of the house prices has been helpful for the economy as it recovers from recession.

“The past year would have been even more complicated if there had been large and widespread falls in housing prices,” he said.

But authorities are “watching closely.”

Dr Lowe will not lift interest rates in a bid to curb property price growth.

“The RBA does not – and should not – target housing prices,” he said last month.

But financial authorities can take other steps known as “macroprudential” regulations to ensure financial stability.

That might include caps on bank lending or a requirement for bigger deposits from home borrowers.

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On Wednesday the Council of Financial Regulators (which co-ordinates the nation’s main financial regulatory agencies) issued a pointed statement saying it put a “high emphasis on lending standards remaining sound, particularly in an environment of rising housing prices and low interest rates”.

The council will also “closely monitor developments and consider possible responses should lending standards deteriorate and financial risks increase”.

ANZ’s Felicity Emmett expects regulators to intervene later this year.

“That’s when we think they will step in to slow things down a little bit,” she says.

But in the meantime it seems Australia’s post-pandemic housing boom has a way to run.