Australian Housing Prices On Its Economic Performance Essay

Question:

Discuss about the Australian Housing Prices on its Economic Performance.

Answer:

The Impact of a fall in the Australian Housing Prices on its Economic Performance

Introduction

Australian housing prices has become a national threat for this country. The prices are very high such that the affordability has gone down to lower levels. Many people accuse the increased demand for housing by the Chinese buyers as the major factor that has pumped up the prices. However, Chau (2017) noted that the demand by the Chinese was too low to have a significant influence on the souring prices. He pointed out that the contribution of China to the real estate demand was less than 2% and thus blamed the increased prices on increased population growth and the low interest rate. There has however an increased spending of China on the Australian economy; the spending as at 2016 was $87.2 billion. This paper will determine the state of the Australian housing prices (whether overvalued or not); the overvaluation is determined by comparing the growth of housing prices to the growth of income. When the prices are higher, this is considered an economic bubble. Generally, every bubble is expected to burst after some time; the impact of a bubble burst has negative impacts on the economy that will be discussed below. The government policy actions are important in moderating the housing prices and preventing a bubble burst.

The Impact of Falling House Prices

The Australian housing prices according to various sources are overvalued. In the Australian largest states the overvaluation of housing prices is between 25 to 30pc and only a 10% fall is expected (Janda, 2017). The growth of Australian housing prices have been too high and a slugged growth in income; this provides enough evidence to believe that there is overvaluation of house prices. Paul Dale a Capital Economist provided information from his research that the current housing prices in Australia is way higher that of the U.S. before the global recession; the Australian housing prices are 38% higher than the fair value whereas the price for U.S. were 30% higher.

The burst in the Australian housing bubble could harm the economic growth of the Australian economy and may at extreme case push it into a recession (Creighton, 2017). The Australian economy has been on a persistent low interest rate so as to promote its economic growth. This has facilitated the acquisition of cheap capital which has been directed to investment of properties. The availability of cheap capital is also the major factor for the U.S. housing bubble before 2007-09 global crises. Many people have borrowed to take such investment; thus a significant fall on housing prices would hurt many Australian investors. The increased investment on housing and rentals has created many jobs to the Australian which has seen a fall in the unemployment rate. Generally, a significant fall in housing prices would make it less attractive to the investors and the investment level would fall resulting in a reduction in the jobs creating. The unemployment rate would rise as a result since less jobs will be created and others will lose their jobs since some investors will sell their investment and withdraw out of the housing market.

Just like in the U.S., the bubble burst would result in a loss in the value of the housing property. Consequently, the rental returns will be lower than the borrowing costs and thus this will mean that the investors will make losses (Burgess, 2017). The losses will undermine the ability of the investors to repay the loans they had initially obtained from banks; the default rates will rise and the banks will not have sufficient funds to loan to the investors (Ramlall, 2013). The increased default rates on mortgage will impact all other investments in Australia because the banks and other lending institutions will be tighter in advancing loans to avoid risking additional funds. There will be low funds available for lending; the economy’s investment will fall and unemployment would rise (Jones, White & Dunse, 2012). Due to the increased unemployment rate, the inflation rate would also fall due to the inadequacy of demand; this is because the households will have insufficient income for demanding goods and services. The relationship between low inflation rate and high unemployment rate is represented in the Philips curve (Forder, 2014).

Fig: The Philips Curve

The other impact will be on the Australian GDP; the low demand for goods and services will lower the Australian GDP. Since production would fall the economic growth rate would be lower. The producer’s confidence would also fall since there is uncertainty of whether prices would continue falling.

Australian Government’s Policy Options to Protect the Economy from Falling House Prices

Raising interest rate would only cause a significant fall in prices and this is thus not the best option. The best policies according to Brook (2017) are to control the additional ownership of houses by;

  • An annual cut of immigration to 70,000.
  • Increasing tax on empty properties left by investors.
  • Stopping the purchase of Australian properties by overseas buyers.
  • The Full time Airbnb properties should be banned.
  • The rental properties’ “no fault” evictions should be terminated.
  • Capital gains discount and the negative gearing on the sale of investment property should be phased out.
  • Martin (2017) further recommended a greater use of land taxes.

Conclusion

The Australian housing prices are overvalued and crap policies of significantly lowering the price would have a negative impact on the Australian macroeconomic performance. The result from this would be a lower GDP value, lower GDP growth, low inflation rate, high unemployment rate and lost investors’ confidence. The policies to be taken would therefore mean to prevent additional investment on housing properties and thus an insignificant fall in price.

References

Brook, B. (2017). Affordable Housing Party launches claiming renters and first-home buyers are being ignored by Canberra. NewsComAu. Retrieved 7 October 2017, from

Burgess, R. (2017). Australian house prices could have been so much lower. The New Daily. Retrieved 6 October 2017, from

Chau, D. (2017). Are Chinese buyers driving up Australia's housing prices? ABC News. Retrieved 6 October 2017, from

Creighton, A. (2017). If the housing bubble bursts economy will come tumbling down. Theaustralian.com.au. Retrieved 7 October 2017, from

Forder, J. (2014). Macroeconomics and the Phillips curve myth. Oxford: Oxford University press.

Janda, M. (2017). House prices overvalued by up to 30pc in Australia's biggest cities: economist. ABC News. Retrieved 6 October 2017, from

Jones, C., White, M., & Dunse, N. (2012). The challenges of the housing economy: An international perspective. Hoboken, N.J: Wiley-Blackwell.

Martin, P. (2017). OECD warns of 'rout' in house prices if investors head for the doors. The Sydney Morning Herald. Retrieved 7 October 2017, from

Ramlall, I. (2013). The impact of the subprime crisis on global financial markets, banks and international trade: A quest for sustainable policies. Newcastle: Cambridge Scholars Publishing.

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