Australian Housing Bubble

Are Australian houses overvalued? This is a question that has become controversy for quite some time. A lot of observers actually believe that when compared to other countries, property values in Australia are way overpriced. This statement is of course relative to rental yields, incomes and historic trends. That’s the reason why some people believe that there is a housing bubble currently growing in Australia.

Housing values in an unregulated economy ideally should be in balance with the availability versus demand, which means that if availability is low and/or demand is increasing then values will increase. In Australia these events have already occurred. This condition is triggered by several factors, first there has been an increased borrowing capacity in Australia in recent years due to easy credit conditions and low age interest rates. The second factor is a high population growth, which includes natural growth and immigration growth. Then the Australian government also limit the supply of new housing units through complicated regulations and high taxes. On the other hand, government incentives like taxes and grants are given to the property market, which finally improves demand. All those factors have created a rising trend on Australian house values especially in the period between the late 90’s and early 2000’s when the improvement was quite sharp and it stays relatively at those levels until today.

An analysis by The Economist several years ago stated that the Australian house prices have strayed far from historic trends. In fact, the house prices are more than 60% overvalued according to their calculation. If this analysis is accurate, that means Australia is currently the most overvalued housing market in the world.

Another analysis by Demographia stated that among the six countries they examined, which includes USA, UK, New Zealand, Ireland and Canada, house prices in Australia is the least affordable. This statement was based on the ratio of gross annual household income against the average house price. There was also an analysis made by Goldman Sachs regarding Australian house prices in 2010, which measured affordability rates based on mortgage rates, lending criteria, and income. The result was they found that the house prices in Australia are up to 35% overvalued.

Nowadays first home buyers in Australia have to face a situation where they have to spend twice as much money compared to their parents (relative to incomes). In most capital cities in Australia, the house prices are equal to more than a total of 7 years of average income, which is more than a hundred percent higher than what the previous generation have to pay.

The massive growth of debt in Australia relating to the property market has brought negative impacts to the Australians, or at least most of them. The increase of property credit probably boost the GDP figures, but unfortunately it’s not manifested in productivity and production gains of the real sector. It’s just indicating a huge amount of wasteful consumption, since these property debts are not used to develop new housing units, instead they are just used to pay for the existing housing units.

Even though very useful in providing basic shelter for the people, unfortunately housing doesn’t really contribute actual benefits to the economy after the construction process, unlike business investment that offers long-term economic benefits by stimulating technological development and creates employment. Sadly, capital flows in Australia are mostly directed towards the existing dwellings, which doesn’t offer much economic values to the country, if all those money could be used on more productive sectors, things will be much different.

To make things worse, there is also a growing trend of property hoarding, this is usually done by property investors who are keeping empty housing units hoping for huge capital gains in the future. Today rental crisis happens in most parts of the country, chance is this might be caused by too many property owners unwilling to put their excess properties in the market.

The Australian Bureau of Statistics (ABS) has not indicated any promising development yet, but there is still hope. In September 2010 for example, the ABS data showed that the house prices in five cities were heading down even though there was an increase in three other cities. Some experts actually saw that as a sign of a national fall, but is that really the case? Fortunately the public sentiment is still quite positive, because if the public sees any development that they find to be alarming, they might be spooked and it could speed up the falls. So public sentiment is a key element in this matter.

So regarding the Australian housing bubble, just how real is this situation? Are the house prices going to stagnate, boom or crash? Renting or buying, which is the best option? Time will give the best answers to these questions.

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