This transcript was generated automatically and may contain small errors.
World War III. If this actually happens, what would happen to Australia's property market? It's something we all want to know. But instead of guessing, we can actually look back over the past 100 years and see how the major global events have impacted Australia's property market. When you look at the data, the relationship is not as direct as many people would expect.
So what really happens to property prices during times of war? That's exactly what we're going to talk about today. I'm Jo Ma, lead research analyst here at InvestorKit. Now let's get into it. With what's happening with Iran and the Strait of Hormuz lately, a lot of people are wondering if that would lead to a World War III and if that would impact Australia's property market and potentially lead to a property crash.
In this episode, we're going to talk about the possibility of that and look at what happened during the World Wars, the Korean War, the Vietnam War, the Arab-Israeli War in 1973, the Gulf War, the post-911 wars, the Syrian War, the Russia-Ukraine War, and so on. We've gone back in so much detail to give you a clear understanding of what potentially lies ahead for all of us. Now let's start with World War I. Here on the screen, there is this Australia capital city real median house price trend line from 1881 all the way to 2021. Prices are in 2021 dollar values, so the numbers you see here might be slightly different from what it actually was at that time.
During World War I, house prices experienced a decline as both the economy and the sentiment were impacted by the war directly. And then in World War II, similar thing. In real terms, house prices actually didn't move for many years as the war impacted both the economy and supply chains and the overall consumer sentiment. And the two World Wars were actually the only wars that directly impacted Australia. From that on, all the wars we have listed are almost far away from Australia.
In the 1950s, we have the Korean War and the Vietnam War started. During those times, Australia's property prices were not impacted, just kept rising. In 1973, there's this Arab-Israeli war happening in the Middle East. It actually disturbed the oil supply chain and oil prices, led to inflation in the next few years. And in the property market, in the first few years, we did not feel the direct impact.
But as the inflation started to impact the overall economy, house prices in real terms declined. And then fast forward to 1990s, the Gulf War. It actually overlapped with the early 1990s recession. In the house market, we saw a decline in housing prices, but that decline was directly related to the economic recession rather than related to the Gulf War. The war itself did impact consumer sentiment, but price declines were majorly contributed by the domestic economic recession.
And then into 2000s, we have the post-911 wars, the Afghanistan War and the Iraq War. These two wars actually happened when Australia's property market was booming. And from this chart, we do not see any direct impact of these two wars on price growth. In 2011, we see Syrian civil war. It lasted for more than a decade, just ended around 2024.
During this time, Australia's inflation overall stayed low and stable. Interest rates were coming down and major cities, especially Sydney and Melbourne, experienced a major boom from 2013 to around 2018. And now we look at the latest two conflicts. When Russia invaded Ukraine in 2022, Australia was at the COVID boom peak. Property prices in the major markets like Sydney, Melbourne or Brisbane started to decline in later 2022, but that was because of the surge in interest rates rather than a war happening in a faraway European country.
Then in 2023, we have the Israel-Hamas war. When that happened, most Australian cities were actually on their way to recovery and we do not see much impact of that war on property prices, even in the biggest cities. From these charts, what we really see is that when Australia is directly involved in a war, such as in World War I and World War II, the property market would likely be impacted directly. We could see price stagnation or price declines. But when the war is overseas, not directly impacting Australia itself, house prices are very unlikely to be directly impacted by any of those wars.
Indirectly, yes. If a war has caused, for example, oil supply disruption leading to inflation, which would then lead to high interest rates, that high interest rates would impact house price growth. But when it comes to direct impact, it is really unlikely. Now let's talk about why. First reason, very simple, the property market is illiquid.
While a global event can cause a crash in the share market, which is highly liquid, it takes weeks or even months for properties to get transacted. So when global event impacts the consumer sentiment and at the time when the impact is felted in the property market or is shown in the property market, it tends to be already diluted a lot and in many cases to an insignificant level. And the second reason is that Australia's property market is a highly localized market. Prices are dominated by local demand, local supply, and local confidence, which is heavily influenced by interest rates. That's why we see the major crashes in Australia's property market in history were all caused by domestic reasons, not overseas wars or any external factors.
For example, in the early 1990s, that price decline was not because of the Gulf War, but more because of the economic recession. In the first 20 years of the 21st century, while there have been wars happening in the Middle East, Australia's property markets have been growing really well because of stable inflation. The mining boom really supported economic development of multiple states, including WASA, Queensland. Then in the 2010s, the declining interest rates from a relatively high 4-5% to a historic low of almost 0%. And that is also why in 2022 to 2024, the rate hikes caused price declines in our major cities, including Sydney, Melbourne, Brisbane, and more.
Now back to today. We're confident that what's happening in Iran is not going to directly impact Australia's property market because one, we have seen in the past overseas wars rarely impacted Australia's property prices, and two, Australia is currently seeing really strong fundamentals, meaning really strong demand and supply. Some of these fundamentals include one, strong population growth supported by strong overseas migration, and two, the extremely limited housing supply. As of today, the nationally established supply level is still around 30% lower than what we saw pre-2020. And these two, in the short term at least, won't be impacted by the war directly.
That being said, we can still feel the indirect impact from that war through interest rates. The surging oil prices have already contributed to the high inflation. As a result, all major banks are predicting that our cash rate would be staying high for longer or even rise further in the coming months. So when that happens, sentiment in the property market would be impacted, growth could be limited. However, again, Australia is not one whole market where every market moves at the same pace.
We actually have seen that in 2022, when interest rates hiked, the most unaffordable markets slowed, even declined in value. But the more affordable ones, the smaller and regional cities such as Perth and Adelaide and all the regional cities have actually started to grow even stronger because of demand squeezed out from major cities. So experience from that time actually tells us even if interest rates are going to stay high for longer, we will still see different markets performing differently. Some would be performing well, supported by affordability, while some might be impacted by the high rates. So to answer the question, will there be a World War III?
We don't know. What we do know is that overseas wars do not directly impact Australia's property market. They do not cause property market crash. While they do impact the property market indirectly through interest rates, we have many different markets running in different cycles. While some might be impacted, some will not be.
When we try to invest in the property market, let's focus on the domestic, the local fundamentals instead of being influenced heavily by the headlines. I'm Jo Ma, the senior research analyst here at InvestorKit. I'll see you next time.
