The Australian property bubble refers to the hypothesis that real estate in
Australia is overvalued. The hypothesis has been proposed since at least 2001,
yet Australian house prices have continued to rise. Some commentators,
including one Treasury official, claim the Australian property market is 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 accused state governments of restricting land
supply, driving up the cost of land, lots, and thus homes.
A real estate bubble or property bubble is a type of economic bubble that occurs
periodically in local or global real estate markets. It is normally
characterised by rapid increases in valuations of real property such as
housing 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. Australian property market
The Australian property market has shown steady increases of around 3% per annum
since the 1970s. Since the 1990s however, prices have risen by around 6%
per annum. 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 many comparable countries. Since then, several comparable countries
have experienced property crashes. Rising house prices
All capital cities, with the exception of Sydney, have exhibited strongly
increasing prices since about 1998-9. Sydney house prices increased from
$573,000 to $671,500 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." Some factors that may have
contributed to the increase in prices are;
Greater availability of credit due to financial deregulation
Low interest rates from 2008 onwards Limited government release of new land
The average floor area of new houses increasing by up to 53.8% in the 18
years from 1984-85 to 2002-03 A tax system that favours investors and
existing home owners. Government restrictions on the use of
land preventing higher density land use. Government restrictions on greenfield
development designed to encourage "urban densification"
High population growth. 2008 foreign investment rule changes for
temporary visa holders Introduction by local councils of
upfront infrastructure levies in the early 2000s.
= Influence of tax system = Investors using their superannuation
have a tax advantage compared to 'savers' who are effectively taxed up to
45% on income from bank interest or bonds, as Superannuation contributions
are normally only taxed at around 15% . The RBA 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."
= 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. During the same period
national economic growth was less than 3% with debt stripped out.
Between 1998 and 2008 inflation was about 36% and property prices increased
by more than 300% in all capital cities except Melbourne and Sydney.
= Foreign investment in residential property =
In December 2008, the federal government introduced legislation relaxing rules
for foreign buyers of Australian property. According to FIRB 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." 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."
Under the rules, temporary residents and foreign students will be:
Screened by the Foreign Investment Review Board to determine if they will
be allowed to buy a property. Forced to sell property when they leave
Australia. Punished if they do not sell by a
government-ordered sale plus confiscation of any capital gain.
Required to build on vacant land within two years of purchase to stop "land
banking". Failure to do this would also lead to a
government-ordered sale. 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 Report titled 'First Home Ownership'. The
report 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." In 2008, another study was commissioned
– the 2008 Senate Select Committee on Housing Affordability in Australia. The
report noted that "On some measures, housing affordability is at a record
low." 'Australia's Future Tax System' review,
more commonly known as the 'Henry Tax Review', made a number of
recommendations that would have impacted on the housing market, including:
Introduction of land tax "on all land . . removing disincentives for
institutional investment in rental property";
that "transfer taxes on property should be reduced, and ultimately removed";
a move to "more neutral personal income tax treatment of private residential
rental investment . . through a 40 per cent discount on all net residential
rental income and losses, and capital gains."
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": Include the family home in means tests
Introduce land tax on the family home – this is a state tax and thus an issue
for the states Reduce the CGT discount, apply a
discount to negative gearing deductions, or change grandfathering arrangements
for CGT 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."
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."
= 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, "Arrears for sub-prime loans
backing RMBS [residential mortgage-backed securities] jumped 126
basis points to 11.45 per cent" Australian specific market factors
The Australian market had several features either singly or together are
not typical in other housing markets, being;
Very constricted land supply and extremely onerous planning approval
processes Unusually high stamp duties
Income Tax relief through negative gearing
Social security that offers payment including rent assistance that is
calculated on the amount of rent paid A Federal, state and local council
divide that complicates land release and planning and direct and indirect
taxation on land Only recourse loans
One of the most highly urbanised populations
Large areas of rural and remote Australia can not secure loans from
banks against land in those areas. Statewide land use planning that heavily
restricts subdivision and greenfield development, driving land prices to
extreme heights Timeline
= 1980s–2009 = 1985: Australian government quarantines
interest expenses, so that interest can only be claimed against rental income,
not other income. 1987: Negative gearing is reintroduced.
1998 to 2008: real net national disposable incomes increase by 2.8% a
year on average from about $32,000 to about $42,000 per year. There is a rise
in the number of two-income households, relaxation of lending standards, active
promotion of real estate as an investment, population growth creating
demand that was not matched by supply, planning and land release issues and a
tax system that was skewed in favour of property investors.
1999: Property sale proceeds subject to Capital Gains Tax reduced from 100 to 50
percent, while 100 percent of costs remained deductible.
2000: July - The Federal government introduces the First Home Owners Grant
of $7,000 for established homes, and $14,000 for newly built homes.
2002: Urban Growth Boundary introduced for Melbourne, severely limiting land
supply. 2003: Significant amendments to
Queensland's planning law, the Integrated Planning Act, are made by
state government. These amendments aimed to better protect the environment by
stopping "urban sprawl", and lead to massive land price inflation.
Queensland's property prices start to rise quickly at this point.
2004: The Productivity Commission Inquiry on 'First Home Ownership'
published its findings. It identified several factors that had contributed to
the rapid increase in real estate prices, including overall fairness of
the tax system, lending regulations, lower interest rates and planning
issues. 2008: A Senate Select Committee on
Housing Affordability was established. Its final report 'A good house is hard
to find' included dozens of recommendations.
2008: October - The First Home Owners Grant Boost is introduced as an addition
to the First Home Owners Grant. This consisted of an extra $14000 available
to first home owners buying or building a new home, as well as an extra $7000
made available for established homes. First Home Saver Accounts are also
introduced, where the Federal Government will contribute up to $850 per annum
towards savings for a deposit to purchase housing.
2008: December - FIRB rules allow temporary visa holders including
students, to more easily buy up 'second-hand dwellings'. Changes did not
require notification of sales be made to the FIRB and the $300,000 cap on price
was removed. 2009: October - First Home Owners Grant
Boost is withdrawn. The UNSW City Futures Research Centre director said
"the boost has resulted in inflated prices" and had created "a bit of a
mini-bubble". A senior economist of Housing Industry Association said the
boost has not pushed prices up significantly.
2009: November - "capital city house prices . . climbed average 10 per cent"
in 2009. Melbourne led the "house price boom, with values up 14.9 per cent in
the 10 months . . to an average of $481,247."
2009: December - Reporting of RE data was questioned by one source: "AVERAGE
house prices have been overstated by up to 18 per cent by the real estate
industry . . . In September the average house price quoted by the Real Estate
Institute of Victoria was $67,000 higher than the official figure, based on
preliminary valuer-general data . . " = 2010s =
2010: January - The removal of First Home Owners Grant Boost. Mortgage
applications reduce by 21.2%. First-home buyers account for 13.1 per cent of new
loan applications in December, whereas nine months previously they were at 28.1
per cent. 2010 March: ABS declares that house
prices "soared 20 per cent in the 12 months to March" - a rate that was
described as the "fastest ever recorded" in Australian history. The Head of
Australian economics at National Australia Bank admits "This is a
shocker". 2010: April - Rules allowing foreign
investment in real estate that were introduced in 2008 are withdrawn.
Temporary residents are required to sell their Australian property when they
leave Australia. 2010: May - 'Australia's Future Tax
System' Review makes a number of recommendations on policies that could
affect the housing market. The government responds to the AFTS
review findings with a report 'Stronger, Fairer, Simpler: A Tax Plan for our
Future'. 2011: February - New housing loans
approved by Australian banks fall 5.6 per cent to a 10-year low in February.
2012: October - The RBA cuts interest rates to 3.25%.
2012: December - The RBA cuts interest rates to 3.00%.
2013: April - Glenn Stevens is re-appointed as RBA Governor for 3 more
years. 2013: May - The RBA cuts interest rates
to 2.75%. 2013: August - The RBA cuts interest
rates to 2.50%. 2013 - November - Statistics released by
the Australian Prudential Regulation Authority revealed that the total amount
of residential term loans to households held by all ADIs was $1.15 trillion.
This was an increase of 1.7% on 30 June 2013 and an increase of 7.5 on September
2012. Furthermore, investment loans accounted for 33.1 per cent of the
loans. Major banks held $933 billion of these loans.
2014 - January 1 - RP Data reveals that national residential prices increased by
9.8% in 2013, with Sydney increasing by 15.2%.
2014 - January 13 - Housing Finance statistics released by the Australian
Bureau of Statistics shows the value of outstanding home loans financed by the
ADIs was $1.25 trillion. $842 billion of that amount was for owner occupied
housing and $412 billion was for investment housing loans.
2014 - Data released by RP Data, APM, Residex and ABS in 2014 showed that
Australian house prices continued to rise strongly throughout 2013 and 2014.
2015 - The International Monetary Fund sends an economic team to Australia to
examine "the risks posed by property speculation and record-high household
debt as part of a broad health check-up of the sagging domestic economy."
2015 - The head of the Federal Treasury Department, and the Federal government's
most senior economic adviser, John Fraser publically warned that Sydney and
more expensive parts of Melbourne were experiencing a bubble. This was disputed
by members of the government including the Prime Minister and Assistant
Treasurer. 2015 - October - Macquarie Bank, a major
Australian investment bank forecasted an end to property prices with
"quarter-on-quarter house prices to fall from the March 2016 quarter before
beginning to recover from June 2017, with a 7.5 per cent fall from peak to
trough". Westpac Bank independently raised the rates on its standard
variable mortgage by 20 basis points against the Australian Reserve Bank.
This was the first rate rise by an Australian bank in five years.
See also Australian Dream
Australian property market Home ownership in Australia
House price index References
External links Safe as houses - The Economist online 30
December 2009 Sydney property bubble - supply and
demand 25 October 2013