Australian property bubble

Chart 1: House Price Index and CPI. Source ABS

The Australian property bubble is the ongoing debate in Australia as to whether the Australian property market is significantly overpriced, and due for a significant downturn (also called a "correction" or "collapse"). The debate has been ongoing since at least 2001, with Australian property prices continuing to rise. Some commentators, including one Treasury official,[1] claim the Australian property market is in a significant bubble. Various industry professionals have suggested it is not a bubble and that house prices have the potential to keep rising in line with income growth. Commentators have blamed rising property prices on state governments' restrictions on land supply, driving up the cost of land, lots, and thus homes.[2]

A property bubble is normally characterised by a rapid increase in market prices of real property until they reach unsustainable levels relative to incomes and rents, and then decline. Australian house prices rose strongly relative to incomes and rents during the late 1990s and early 2000s; however, from 2003 to 2012 the price to income ratio and price to rent ratio have both remained fairly steady, with house prices tracking income and rent growth during that decade. Since 2012 prices have once again risen strongly relative to incomes and rents. In June 2014, the International Monetary Fund (IMF) reported that house prices in several developed countries are "well above the historical averages" and that Australia had the third highest house price-to-income ratio in the world.[3] In June 2016, the Organisation for Economic Co-operation and Development (OECD) reported that Australia's housing boom could end in 'dramatic and destabilising' real estate hard landing.[4]

Australian property market

House prices to income ratio, 1965 to 2013.

The Australian property market has seen steady increases of around 3% per annum since the 1970s. Since the 1990s, however, prices have risen by around 6% per annum.[5]

In the late 2000s, house prices in Australia, relative to incomes, were at levels similar to many comparable countries, prompting speculation that Australia was experiencing a real estate bubble like other comparable countries. Since then, several comparable countries have experienced property crashes.

Rising house prices

All capital cities, with the exception of Sydney, have seen strong increases in property prices since about 1998-9. Sydney house prices increased from $573,000 to $671,500 (+17%)[6] between 2003 and 2010 while other capitals have roughly doubled in price since 2003.

The Housing Affordability in Australia - Good house is hard to find report stated that "the average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s."[7] Some factors that may have contributed to the increase in property prices include:

Influence of planning laws

Beginning in the 1980s, Australian states (who under the Constitution have control of environmental and land use issues) started progressively implementing more rigid planning laws that regulated the use of land.[12] Planning laws often concentrated, after the 1990s, on restricting greenfield development in favour of "urban densification", or infill development.[13][14] Land rationing is a system of banning development in all but designated areas, and can lead to extreme land price inflation if insufficient land is designated as allowed to be developed.[14] The restrictive planning laws in Australia have used land rationing systems as part of the goal of restricting greenfield development in favour of infill development, but this inevitably lead to land prices, and thus house prices, rising significantly.[15] There is good evidence to suggest that the price of a new unit of housing is the ultimate anchor of all housing in an area, so when planning laws that implemented land rationing severely drove up the cost of new homes, all other homes followed suit.

Influence of tax system

Chart: % Population Growth. Australia - high growth rate strategy at 2.1% - source Wikipedia & ABS.

The Reserve Bank of Australia has noted that there are "a number of areas in which the taxation treatment in Australia is more favourable to investors than is the case in other countries."[16] The main tax incentives include tax deductions for losses on investment properties, even those that have been negatively geared, and the 50% discount on capital gains on sale of investments properties.

Investors using their superannuation for property investments have a tax advantage compared to 'savers' who are effectively taxed up to 45% (the top marginal taxation rate) on income from bank interest or bonds, as superannuation contributions are normally only taxed at around 15% .

Land price inflation, CPI and interest rates

Some of these factors added especially to the borrowing power of investors. Debt growth averaged 15% per annum compounding (1998–2009). During the same period national economic growth was less than 3% with debt stripped out.[17]

Between 1998 and 2008 inflation was about 36%[18] and property prices increased by more than 300% in all capital cities except Melbourne (up 280%) and Sydney (up 180%).[19]

Foreign investment in residential property

In December 2008, the federal government introduced legislation relaxing rules for foreign buyers of Australian property. According to FIRB (Foreign Investment Review Board) data released in August 2009, foreign investment in Australian real estate had increased by more than 30% year to date. One agent said that "overseas investors buy them to land bank, not to rent them out. The houses just sit vacant because they are after capital growth."[20]

In April 2010, the government announced amendments to policies to "ensure that foreign non-residents can only invest in Australian real estate if that investment adds to the housing stock, and that investments by temporary residents in established properties are only for their use whilst they live in Australia."[21][22]

Under the rules, temporary residents and foreign students will be:

Failure to do this would also lead to a government-ordered sale.[23]

Several Australian Banks and lenders provide home loans to non-residents for the purchase of Australian real estate. This is also thought by some to have contributed to the increases in Australia's property prices.

Government inquiries related to housing

In 2002, the government initiated a Productivity Commission Inquiry into the homes ownership in Australia. The Commission's Report titled 'First Home Ownership'[24] observed inter alia that "general taxation arrangements [capital gains tax, negative gearing, capital works deductions and depreciation provisions] have lent impetus to the recent surge in investment in rental housing and consequent house price increases."

The government's response to the report stated that "There is no conclusive evidence that the tax system has had a significant impact on house prices."[25]

In 2008, another study was commissioned – the 2008 Senate Select Committee on Housing Affordability in Australia.[26] The report noted that "On some measures, housing affordability is at a record low." [7]

'Australia's Future Tax System' (AFTS) review, more commonly known as the 'Henry Tax Review', made a number of recommendations that would have impacted on the housing market, including:

In regard to recommendations of changes to tax policy that might impact the housing market, the Government advised "that it will not implement the following policies at any stage" (excerpt of list):

Effect of inflated housing prices on the greater economy

Diverting capital away from the rest of the economy

Increased residential housing costs can cause excessive lending to the residential housing sector, at the expense of businesses. This can lead to "a banking system which allocated capital away from the most productive areas of the economy — business — is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end, bad for Australia."[29]

Research conducted in overseas markets confirms that "in areas with high housing appreciation, banks increase the amount of mortgage lending and decrease the amount of commercial lending as a fraction of their total assets. This allocation results in firms receiving reduced loan amounts, paying higher interest rates, and reducing investment."[30]

Mortgage and rent stress

Increased housing prices and therefore increased borrowings can lead to difficulty in meeting housing payments. According to Ratings agency Standard & Poor's (S&P), "Arrears for sub-prime loans backing RMBS [residential mortgage-backed securities] jumped 126 basis points to 11.45 per cent"[31]

Australian specific market factors

The Australian market had several features either singly or together are not typical in other housing markets, being;




See also


  1. "Treasury Warning on Home Price Bubble". The Australian. Retrieved 2016-01-20.
  2. Matthewson, Paula (2012-06-21). "House prices must be allowed to fall - The Drum (Australian Broadcasting Corporation)". Retrieved 2016-01-20.
  3. ABC News, 12 June 2014: Australia has third highest house price-to-income ratio in the world: IMF
  4. ABC News, 3 June 2016: Housing boom could end in 'dramatic and destabilising' real estate hard landing: OECD
  5. Stapledon, Nigel. A History of Housing Prices in Australia 1880-2010. School of Economics Discussion Paper: 2010/18. Sydney, Australia: The University of New South Wales Australian School of Business. ISBN 978-0-7334-2956-9. Retrieved 1 May 2011
  6. "Australian Property Market Experts". Residex. Retrieved 2016-01-20.
  7. 1 2 "A good house is hard to find: Housing affordability in Australia - Executive Summary". Senate Select Committee on Housing Affordability in Australia. 16 June 2008.
  8. "Housing industry accuses state government of dragging its feet over releasing land". Seek Estate. 2 June 2014.
  9. "1301.0 - Year Book Australia, 2005". Retrieved 2016-01-20.
  10. "Australian population growth is double the world average". News Corp. 26 March 2010. Retrieved 2 May 2011.
  11. Archived from the original on 15 March 2011. Retrieved 19 March 2011. Missing or empty |title= (help)
  14. 1 2
  16. "Productivity Commission Inquiry on First Home Ownership". 2003-11-14. Retrieved 2016-01-20.
  17. Don't mention the debt Michael West, Sydney Morning Herald, 19 February 2009
  18. "Inflation Calculator". 1966-02-14. Retrieved 2016-01-20.
  19. Archived 29 August 2008 at the Wayback Machine.
  20. "Foreign buyers blow out the housing bubble". 2009-09-21. Retrieved 2016-01-20.
  21. Colebatch, Tim (24 April 2010). "Foreign home buyers backflip The Age 23 April 2010". Melbourne.
  22. "Government Tightens Foreign Investment Rules for Residential Housing Australian - Media release No 074". 24 April 2010. Retrieved 2016-01-20.
  23. "Prime Minister Kevin Rudd Slams Door in Asian Raiders". Retrieved 2016-01-20.
  24. (PDF) Archived from the original (PDF) on 3 June 2011. Retrieved 14 July 2011. Missing or empty |title= (help)
  25. Archived from the original on 26 October 2009. Retrieved 7 February 2010. Missing or empty |title= (help)
  26. Archived from the original on 13 March 2011. Retrieved 10 April 2011. Missing or empty |title= (help)
  27. 1 2 "Executive summary" (PDF). Retrieved 2016-01-20.
  28. 1 2 "Former Australian Government Department of Education, Employment and Workplace Relations | Australian Government Shared Services Centre" (PDF). 2013-09-18. Retrieved 2016-01-20.
  29. "Residential lending may hurt us in the long run". Crikey. 12 Feb 2010.
  30. "Do Asset Price Bubbles have Negative Real Effects?" (PDF). University of Pennsylvania. November 2013.
  31. "Mortgage holders showing stress". 2011-04-05. Retrieved 2016-01-20.
  32. 1 2 O’Donnell, Jim (July 2005). "Quarantining Interest Deductions for Negatively Geared Rental Property Investments". EJournal of Tax Research. Sydney: Atax, University of New South Wales. 3 (1). Retrieved 2 May 2011.
  33. "1383.0.55.001 - Measures of Australia's Progress: Summary Indicators, 2009". Retrieved 2016-01-20.
  34. "First Home Owners Scheme". Retrieved 2016-01-20.
  35. "Melbourne's Green wedge history - Peninsula Speaks Inc". Retrieved 2016-01-20.
  36. "INTEGRATED PLANNING AND OTHER LEGISLATION AMENDMENT BILL 2003 Explanatory Notes". Retrieved 2016-01-20.
  37. "House Affordability : Australia : Markets : 1981-2010" (JPG). Retrieved 2016-01-20.
  38. (PDF) Archived from the original (PDF) on 3 June 2011. Retrieved 14 July 2011. Missing or empty |title= (help)
  39. Archived from the original on 19 February 2009. Retrieved 2 June 2009. Missing or empty |title= (help)
  40. Archived 6 March 2010 at the Wayback Machine.
  41. "Home grant boost rolled back - ABC News (Australian Broadcasting Corporation)". 2009-10-01. Retrieved 2016-01-20.
  42. "Prices rise as new home sales fall - ABC News (Australian Broadcasting Corporation)". 2009-11-30. Retrieved 2016-01-20.
  43. "Victorian home prices overstated". Retrieved 2016-01-20.
  44. Uren, David (6 January 2010). "Housing sector hit by rate rises, end of grant". The Australian.
  45. "Soaring House Prices Strenthens Case for RBA to Lift Interest Rates". The Australian. Retrieved 2016-01-20.
  46. Colebatch, Tim (24 April 2010). "Foreign home buyers backflip". Melbourne: The Age.
  47. Uren, David (7 April 2011). "Buyer retreat spells slump in home prices". The Australian.
  48. (PDF) Archived from the original (PDF) on 4 February 2014. Retrieved 26 January 2014. Missing or empty |title= (help)
  49. Archived 19 February 2014 at the Wayback Machine.
  50. "Worries over property boom, dollar - RN Breakfast - ABC Radio National (Australian Broadcasting Corporation)". Retrieved 2016-01-20.
  51. Kehoe, John (May 2, 2015). "IMF to probe Australia's record property and debt levels". Australian Financial Review.
  52. Daniel Hurst. "Josh Frydenberg disputes top Treasury adviser's advice on housing bubble risk | Australia news". The Guardian. Retrieved 2016-01-20.
  53. "Property prices: House prices to fall in March 2016: Macquarie". 2015-10-12. Retrieved 2016-01-20.
  54. Elizabeth Knight (2015-10-14). "Westpac rate rise ushers in end of the property boom". Retrieved 2016-01-20.
  55. "Westpac's raising will hit economy but ward off hedge fund attack". 2015-10-14. Retrieved 2016-01-20.
  56. Kirsty Needham (2016-05-15). "Foreign buyer crackdown as new identity rules applied to Sydney property market". SMH. Retrieved 2016-07-06.
  57. Larry Schlesinger (2016-06-15). "New foreign buyer taxes cast their net far and wide: Frasers Property boss". Retrieved 2016-07-06.

External links

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