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Analysis on Australian Housing Market

In: Business and Management

Submitted By jamesparrelli
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What are your thoughts on the growth of house prices in Australia? Are the recent trend in house prices consistent with an efficient market? Or is Australia in the midst of a housing bubble that can jeopardise the stability of the financial system/economy?

At a first glance, from all the media speculation and coverage on the Australian Property market, I believed that the Australian housing market was showing increased prices due mainly to foreign investment. But after undertaking The Financial System subject at UTS, as well as researching and gaining a greater insight into the matter I can state that my hypothesis is in fact that Australia's housing market is inconsistent with that of an efficient market, although it cannot be labelled as a ‘bubble' as a bubble only truly exists once it pops (Duke, 2015).

In an efficient housing market, an increase in the demand for property will see an increase supply. Although as seen in Australia over the past decade, this increased demand has far exceeded the supply and driven prices up drastically. Analysis done by the ANZ has indicated that although NSW is on track to construct 56,000 new homes next financial year, demand is expected to grow to 63,000 leaving a shortage of supply by 7,000 and a total housing shortage of 99,137 in NSW alone (Irvine, 2016). This housing shortage is causing frustrating for aspiring first home buyers like myself as prices continue to increase. The Federal Governments initial First home buyers grant of $15,000 for those purchasing property under $750,000 has only led to a further increase in median housing prices driven up by that amount.

Along with these rising housing prices, mortgage debt has increased at a much higher rate than inflation, GDP, rent prices and incomes with the stats showing since between 1996 and 2014 household debt had surpassed inflation at a rate of 1000% (Chung, 2015). This increased amount of household debt to net worth has resulted in the RBA making attempts to decrease household leverage to help stabilise the economy and prevent a ‘bubble'. If this ‘bubble' where to pop it would see property prices drop significantly, seeing an increase on foreclosed loans, potentially jeopardising the stability of the economy as seen in the USA with the global financial crisis, with property used for collateral on these mortgages worth nowhere near the amount that they where previously. The Reserve Bank of Australia has made attempts to slow these statistics by lowering the cash rate to extremely low levels at only 1.75% (Thakur & Ryan, 2015). These initial cuts in May of 2015 brought fear of overstimulation in the housing market but due to APRA implementing higher capital requirements, mortgage rates have risen, in turn decreasing the pace of investment and brought us into a period where the housing market is ‘cooling off'.

Despite the market beginning to cool, the risks associated with it should be manageable due to the fact interest rates are continuing to stay low without showing signs of increasing, steady growth of jobs across the country and also the fact that most household debt belongs to high-income earners (Craze, 2016).

To conclude, I have now justified that despite showing signs of an inefficient market, Australia is not in the midst of a housing ‘bubble', but rather a ‘cooling off' period in regards to housing price increases, bringing forward much doubt and speculation about the future of the housing market in Australia, in particular, for young aspiring home owners like myself.

References
Chung, F. (2015, May 22). Will Housing Bubble Pop in 2017. Retrieved May 23, 2016, from News.com.au: http://www.news.com.au/finance/real-estate/buying/will-housing-bubble-pop-in-2017/news-story/4fe05fed1c277a096df33242a26caf6c
Craze, K. (2016, April 1). Aussie homes ‘40 per cent overvalued’ leaving young buyers praying for property crash. Retrieved May 23rd, 2016, from News.com.au: http://www.news.com.au/finance/real-estate/buying/aussie-homes-40-per-cent-overvalued-leaving-young-buyers-praying-for-property-crash/news-story/1b1e75c355f6fa5778da82236aee4f1d
Duke, J. (2015, June 6). The Housing Bubble Explained. Retrieved May 2016, 23, from Domain.com.au: http://www.domain.com.au/news/the-housing-bubble-explained-20150606-ghha4m/
Irvine, J. (2016, March 2016). NSW housing shortage at unprecedented level. The Sydney Morning Herald Business Day .
Thakur, A., & Ryan, L. (2015, June). A Look at Rising Household Debt in Australia and the Implications for Policy. Retrieved May 23rd, 2016, from Pimco.com.au: https://www.pimco.com.au/insights/viewpoints/viewpoints/a-look-at-rising-household-debt-in-australia

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