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House prices as a ratio of household income are at historic highs in Australia. Some people suggest that this is causing a housing bubble, analogous to the United States. Others suggest this ratio is no longer relevant, because other factors have changed.
The Australian Housing Affordability Fund is a Labor Government initiative to invest up to $512 million over 5 years to lower the cost of building new homes. The Fund's focus is on proposals that improve the supply of new housing and make housing more affordable for first-time homeowners.
There is intense debate as to whether Australia has a housing bubble. Metrics such as the historically high ratio of house prices to household income, which were indicative of the U.S. housing bubble, suggest a bubble. However, counterclaims suggest that this ratio reflects a permanent shift in the desires of Australian householders, or that a genuine lack of supply is here to stay. In addition, the cause of such a bubble is itself debated.
House prices in the United States have been nationally declining since they peaked in 2005. The exact cause of the bursting of the housing bubble is a subject of vigorous debate, but a number of factors are commonly cited. These include an unsustainable ratio between incomes and the amount spent of housing (whether via a mortgage or rent), low interest rates (encouraging more people to borrow), and sub-prime lending (where mortgages were granted to high-risk applicants).
Michael Blythe
There is a general perception that Australian house prices are overcooked. It stems largely from a comparison of house prices relative to rents or wages. And on that basis, the ratios are out of kilter with historical norms. But what those calculations ignore is that there has been a significant shift in household preference for debt and for housing type ... unless we all decide to go back to living in fibro shacks, a lot of that rise in price will prove to be permanent.
Rod Cornish
Given the jump in mortgage interest rates and the deterioration in affordability, particularly in Brisbane, Adelaide and Melbourne, our house-price models point to some wider weakness and some price falls over the next 12 months (not just in Sydney), although not to the levels suggested by simplistic historic rations. The degree to which valuations are overstretched is most pronounced in outer regions and markets that experienced exceptionally strong growth last year.
Michael McNamara
Australian property is overpriced. Would-be home owners have never been more priced out of the market for well-located properties and, generally, we have never been so highly geared, paying more than eight times our income to pay for our homes. ... It is unlikely to be sustainable in the long term and the value of properties is likely to wind back to a more reasonable multiple of average household income.
Gerard Minack
Australian houses are much more overvalued than US houses; indeed on some measures, our houses are arguably the most expensive in the world. They're also less affordable.
Kevin Rudd
[You are asking me to] provide a prediction about where house prices are going to be across the country over a period of time. I’m not in the business of doing that, that’s irresponsible.
Kieran Davies
House prices are significantly overvalued in relation to wages and rents... For example, gross rental yields are less than 3 per cent, while the mortgage rate is 9.5 per cent. Also, house prices are 6 times annual household income, versus 4 times 10 years ago. ... After rapid growth over recent years, we expect house prices will stagnate for some time because of high interest rates and tighter credit conditions. Some decline in prices cannot be completely ruled out, depending on [unemployment]
Angie Zigomanis
In general, houses and units are not overpriced, although from an affordability perspective, many households are getting close to their capacity to pay. As long as unemployment remains low, households can accommodate current residential values.
Rod Cornish
Given the jump in mortgage interest rates and the deterioration in affordability, particularly in Brisbane, Adelaide and Melbourne, our house-price models point to some wider weakness and some price falls over the next 12 months (not just in Sydney), although not to the levels suggested by simplistic historic rations. The degree to which valuations are overstretched is most pronounced in outer regions and markets that experienced exceptionally strong growth last year.
Michael McNamara
Australian property is overpriced. Would-be home owners have never been more priced out of the market for well-located properties and, generally, we have never been so highly geared, paying more than eight times our income to pay for our homes. ... It is unlikely to be sustainable in the long term and the value of properties is likely to wind back to a more reasonable multiple of average household income.

New Comments

0 Points       ABCDiamond       11 Nov 2009     Is reduced affordability causing a housing bubble in Australia? Disagree
There is no doubt that Australian property prices in general have been rising faster than incomes, but what few people have commented on is the increasing sizes of houses, and the increasing 'opulence' of many of these properties. Opulence is exaggerating, but I think most will follow my meaning.

In 1990 a standard first home was 3 bed, 1 bath and 1 garage.
In 2009 a standard first home tends to be 4/5 bed, 2/3 bathrooms and a double garage, with all the trimmings, media room etc...

The Australian national average house floor size has changed over the years as follows:

From 149.7 sm in 1984/85 to 253.1 sm in 2008/09.

Just comparing on personal note, I bought a brand new first home buyers house in Sydney West for $110,000 in 1990.
In 2009 it has an asking price of $379,000...

That sounds like a big jump, but it actually works out at an average annual increase of 6.75% per year.

Now compare that increase to wages. Using the following ABS figures for full time male average wages between 1990 and 2009:
$1353.00 May-2009
$ 635.70 May-1990
This shows an annual growth in wages of 4.05%.

Looking at it in this way, the real increase in value of this specific property is only 2.7% per year.

However, how much is the average First home that MOST people want ? My guess, looking at all the new homes being built for First Home buyers these days, is MUCH higher than $379,000.

0 Points       ABCDiamond       11 Nov 2009     Is there a housing bubble in Australia? Disagree
I tend to feel that the comment "counterclaims suggest that this ratio reflects a permanent shift in the desires of Australian householders" may be quite accurate.

If you look at property prices more inland, rather than within an hour of the beaches etc., there appears to be a different pricing structure.

People that want the "location, location, location" as they say, seem prepared to pay what is being asked for such property.

Those that don't need, or want that, go further out and pay less.

It does appear though that the majority appear prepared to pay high prices for the locations they want.

0 Points       Benja       13 Sep 2008     Is there a housing bubble in the United States? General Comment
Ouch. Man those professors were wrong.


Real Estate Question Index

Is there a housing bubble in Australia?
Is there a housing bubble in the United States?
Is reduced affordability causing a housing bubble in Australia?
Do Australia's land and housing regulations choke supply?
Will Australia's Housing Affordability Fund work?