Australia’s housing bubble: Myth, or ticking time bomb?

Australia’s housing bubble: Myth, or ticking time bomb?

The potential ‘housing bubble’ in the real estate market in Australia is an economically and politically charged issue, both domestically and internationally. However, there is still no clear consensus on whether or not a bubble actually exists.

The Australian economy is known for many things: its resources, its education system, its tourism, and, of course, its burgeoning property market. However, since 2001, the price of the average Australian home has been reaching astronomical levels, particularly in Sydney and Melbourne.

Unofficially, it has been described as a ‘housing bubble’, which various industry professionals, including leading economists, agree is going to ‘pop’ very soon.

The housing sector and the current conservative government have denied that there is anything wrong with the current housing market. These two opposing viewpoints are causing much uncertainty within the market, and many domestic and international buyers are unsure of what to make of the current housing crisis. This unclear message comes at a time when Australia’s economy is in a fragile position, especially with the sudden decrease in the price of iron ore.

The Australian bubble has been argued to be bigger than the American housing situation before the collapse in 2008. The issue lies not in the demand for houses (in places like Melbourne and Sydney), but instead in the surplus of housing where rent is being kept artificially high by the banking and finance centers.

This bubble has apparently been partly due to a combination of international and domestic buyers, developers, and local councils restricting new approvals. As commentator and economist Christopher Joyce points out, the ‘dollar value of Australian homes, mortgage debt, house prices relative to income, and the share of speculative investors purchasing properties, have never been higher.’

The Reserve Bank of Australia (RBA) cutting the cash rate to 2% and lowering interest rates to the lowest they have been in Australia’s history has not helped this situation. Although seemingly good for stimulating a flagging Australian economy, this has led to enormous mortgage debt being taken on by Australian property buyers.

Not only have these policies made the property market inaccessible for Australian investors, including first home buyers, but they have also made it more and more exclusively a target for overseas investment.

An unclear message

Despite evidence to the contrary, the Australian government denies that there is any housing bubble.

Australian Treasurer Joe Hockey has told the Australian public that ‘people would not be buying houses, if they were not affordable’ and also that ‘If you want to get a house, get a good job that pays good money’. This message conflicts with his head of department, John Fraser, and the RBA’s Governor, Glenn Stevens. What is clear is that there is a lack of affordability for young people within the market, and the promised ‘good jobs’ and monetary salaries to be able to acquire such property, for most, do not exist.

A rise in artificial demand and huge mortgage debt being taken on by mostly younger Australians has left the housing market exposed and very fragile. If this ‘pop’ in the housing market were to happen, paired with the rising unemployment and underemployment already occurring within the younger population of Australia, the results could be disastrous and a severe downturn in the market could be on the horizon.

International investment: A plague or a blessing?

One particular point of interest lies in that fact that there has been a major increase in foreign investment, particularly from China. FDI within the Australian economy has expanded massively, particularly since the resource boom of the 1990s.

Chinese investment in the property market has tripled in 2013-2014. Unlike domestic buyers who are tied to a weakening Australian dollar, foreign investors can deal in more fluid currencies, such as the US dollar and Chinese Yuan.

However, foreign investors face differing economic conditions, which have the potential to also act as a potential catalyst to a downturn in this market. A dive in the Australian dollar or a surge in their primary currency could lead to a big cut in property values and could see most international property developers diversifying their portfolios out and away from this market.

Due to a surge in nationalism from the conservative government’s voting base, a raft of new, tough laws have been introduced by the Australian government on foreign investment. These laws seek to curtail the influence of overseas investors and place heavy fines on those who break foreign ownership laws.

Although the rules are seen as a political move to counter growing discontent within the Australian public, moves to clamp down on foreign investment may have undesired effects and could potentially see investments pulled.

What’s next?

The future of the Australian housing market is uncertain. Although the rhetoric from the Australian government is mainly positive, many economists disagree with their upbeat attitude towards the market.

Reforms are needed within the housing sector including changes to negative gearing and investment properties. However, the necessary reforms have the potential to cause the ‘pop’ that they have been predicting.

What is certain is that, politically, this is a very charged issue that has the potential to cause crisis not just among investors domestically and internationally but among the voting public as well. The Australian government needs to be clear about the issues facing the housing sector.

While trying to clamp down on foreign investment may be seen as politically expedient, the negative effects and the collapse of the housing market are also a real possibility given the state of the Australian economy.

Categories: Asia Pacific, Economics

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