Is there a housing bubble that’s about to burst in Australia?
- 2 hours ago September 18,
Australia and its valuable empty nests
IT’S the question all Aussie homeowners are asking: is there a housing bubble?
It’s no secret that Australia has some of the most unaffordable housing in the world.
The question is, are current prices unsustainable? And if the market is headed for correction, what will that mean for both current and future homeowners?
WHAT IS A HOUSING BUBBLE?
A housing bubble doesn’t just mean high prices — prices can be high in response to basic supply and demand.
Housing bubbles generally occur when speculators enter a market where demand is already high and attempt to profit through short-term buying and selling, further driving demand.
The concern for Australia is if a sudden increase in housing supply — as state governments speed up land release and development approvals, for example — coincides with a drop in demand.
Demand can be reduced by range of interconnected factors such as rising interest rates or more restrictive lending practices.
Whatever the reason, when supply suddenly outstrips demand, prices drop sharply and the bubble pops.
THE EXPENSIVE COUNTRY
A recent study by US consultancy Demographia found Australia had some of the most unaffordable housing in the world, with the highest number of housing markets termed ‘severely unaffordable’ — that is, where the median house price exceeds five times the annual median household income.
According to RP Data, house prices have risen by more than 16 per cent in Sydney over the past year, and almost 11 per cent across all the capital cities combined.
The current median house price in Sydney now sits at $700,000, $532,000 in Melbourne and $469,000 in Brisbane.
Strong, and in some cases double-digit price growth, over the past decade in Australia’s capital cities has raised concerns from some economists.
Figures released from the Australian Bureau of Statistics showed median monthly mortgage repayments increased by 38.5 per cent over the five years to 2011 to $1800, while in the same period, median weekly household income increased by only 20.2 per cent.
According to the ABS, three in every 10 households are now suffering mortgage stress — defined as when a borrower pays more than 30 per cent of their gross income into mortgage repayments.
Australian homeowners have a lot of skin in the game when it comes to the housing market.
But experts are divided on whether we are in the midst of a price bubble.
First home buyers are having a tough time.
Source: Supplied
THE CASE FOR
The housing bubble debate kicked off again this week after minutes from the most recent board meeting of the Reserve Bank of Australia revealed bank officials have become increasingly worried about double-digit percentage increases in house prices in Sydney and Melbourne.
The RBA noted there were “risks” associated with the spike in house prices in the major cities, and that the trend “warranted ongoing close observation”.
“Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later,” the minutes said.
Westpac chief economist Bill Evans said in a statement it was clear the RBA was “becoming significantly more concerned” about house prices. “This is the first time we have seen the Bank show genuine alarm at the recent lift in house prices,” he said.
Demographia’s housing affordability study also sounded a dire warning, noting that “sooner or later, the inherent instability and unsustainability that characterises bubbles will lead to house price declines in Australia”.
UBS global chief economist Larry Hatheway has also weighed in, telling Fairfax Media that unless the Australian dollar falls below 85 US cents, the Reserve Bank may have to resort to other measures besides changing interest rates to ease some of the “bubbly-like conditions” in the housing market.
Is talk of a housing bubble overblown?
Source: Supplied
THE CASE AGAINST
Treasurer Joe Hockey has dismissed talk of a housing bubble as “lazy analysis”, blaming the rapid price increases on a shortage of supply.
“It is just an easy mantra for international commentators and for analysts based overseas to say there’s a housing bubble emerging in Australia,” he said. “It is a rather lazy analysis because fundamentally we don’t have enough supply to meet demand.”
Economics commentator Alan Kohler has also hosed down bubble talk, describing it as “overblown”. “Is there a bubble in Sydney that we should be worried about? Maybe,” he said.
“But there’s a lot of demand, and the demand’s not going away. There is a lot being built, so yes, maybe apartment prices will come down, but really I think it’s all a bit overblown.”
He added that high house prices were not necessarily a bad thing. “What the Reserve Bank was talking about is the wealth effect of high house prices, which is turning into consumption and therefore employment.
“The real concern for the Reserve Bank in relation to housing is if there was a bubble and a crash, that might have a negative impact on consumption because of the negative wealth effect. The fact that house prices are high is a positive wealth effect, so it’s not necessarily a terrible thing that house prices are overvalued.”
STICKING WITH THE FUNDAMENTALS
David Rees, head of Australasian research at Jones Lang LaSalle, told AAP that although Australian housing was very expensive compared to much of the rest of the world, there was no housing bubble.
A housing bubble is when prices move away from fundamentals, Dr Rees said, but in Australia’s case, prices were responding to fundamentals, like low interest rates, population growth and an undersupply of new housing.
He said restrictive planning laws had created concerning affordability issues in the Sydney market.
“If you make it difficult and expensive to produce houses through a range of policies and if you encourage people to live in a congested area, in other words, increase demand and reduce supply, then the market will do what it’s supposed to do, which is prices going up,” Dr Rees said.
“There’s good reason to be concerned about [affordability] because it’s pretty tough getting into the Sydney housing market, especially if you’re a first-home buyer.”
http://www.news.com.au/finance/econ...rst-in-australia/story-e6frflo9-1227062516640
