The housing market down under
Australia—known as a country of kangaroos, koala bears and barbeques on the beach, sadly it’s not all sunshine for the area fondly known as “Oz”. Emulating most other major property markets in the world, Australia’s housing market is in somewhat of a bubble—or, at least, that’s how the Treasury and the Australian Securities and Investments Commission have chosen to describe it. Rather more drastically, the Reserve Bank of Australia admits a “build-up of [housing] risks”, with former head of the Liberal political party going as far as to describe it as a “crisis”. Put bluntly, Australia’s housing market is in dire straits.
Over the past year alone Australia’s property prices have escalated at an average rate of 11% in its state’s capitals and territories, with the majority of this growth concentrated in central hotspots like Melbourne and Sydney (both of which saw a growth of over 15% apiece). Even more worryingly, The Economist reports that “the average Sydneysider now shells out A$1.1m (over £633,000) for a house—13 times the median national income”. This is startling in itself, but is thrown into even sharper relief when considering that just 5 years ago the figure was A$659,000 (£379,500). Why, then, has property prices in Australia nearly doubled in just half a decade?
The same source cites two main reasons for this exponential growth: speculation and migration. Property speculators and investors alike have long since been living high off the hog thanks to Australia’s preferential property market, benefitting immensely from the country’s generous tax breaks and interest-only loans, which encourage purchase but do little in the way of encouraging market transactions—thus leaving the properties sitting empty. Additionally, the explosive price rise in most major areas of Australia can be explained away using the simple supply-demand analogy: as we have seen in markets across the globe, there are simply not enough houses to satiate demand, which has put upwards pressure on property prices. According to BIS Oxford Economics, Sydney in 2015 had a property deficit of 50,000 dwellings—not an ideal situation for a city whose population has increased by a monumental million residents in the 15 years from 2000, at an average rate of 66,600 people each and every year.
And this is where the problem comes in. The Economist sums up Australia’s catch-22 situation thus: “High house prices have made many families richer. But regulators are concerned that an overheating market now threatens financial stability. The problem is that wages have risen at a fraction of the pace of house prices, causing new home-owners to grow increasingly indebted—at over 130%, Australia has one of the world’s highest ratios of household debts to GDP”.
Australia’s property market is going up, up, up—but when it will stop, nobody knows. All we know for sure is that when it does it spells trouble for the Aussie economy, and the country would be wise to start making preparations for when that day comes.
