Australian property bubble

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Chart 1: House Price Index and CPI. Source ABS 20100517 Australian House Price Index 1986 - 2009.pdf
Chart 1: House Price Index and CPI. Source ABS

The Australian property bubble is the economic theory that the Australian property market has become or is becoming significantly overpriced and due for a significant downturn (also called a correction or collapse). Since the early 2010s, various commentators, including one Treasury official, [1] have claimed the Australian property market is in a significant bubble.

Contents

Various industry professionals have argued that it is not a bubble and that house prices have the potential to keep rising in line with income growth. The RBA believe that most of the recent rise in property prices since the 1980s, when interest rates have decreased from medium term record highs to record lows, as a transmission mechanism to generate the wealth effect and stimulate the economy. [2]

A real-estate bubble is a form of economic bubble normally characterised by a rapid increase in market prices of real property 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 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. [3] In June 2014, the International Monetary Fund (IMF) reported that house prices in several developed countries are "well above the historical averages" and that Australia had the third highest house price-to-income ratio in the world. [4] In June 2016, the Organisation for Economic Co-operation and Development (OECD) reported that Australia's housing boom could end in 'dramatic and destabilising' real estate hard landing. [5]

Australian property market

Melbourne Median vs Wages 1960 to 2023.jpg

The Australian property market saw an average real price increase of around 0.5% per annum from 1890 to 1990, approximately matching CPI. Since the 1990s, however, prices have risen faster resulting in an elevated price to income ratio. [6]

In the late 2000s, house prices in Australia, relative to incomes, were at elevated levels similar to many comparable countries, prompting speculation that Australia was experiencing a real estate bubble like other comparable countries. Since then, several comparable countries have experienced property crashes.

Rising house prices

All capital cities have seen strong increases in property prices since about 1998. Sydney and Melbourne have seen the largest price increases, with house prices rising 105% and 93.5% respectively since 2009. These massive increases in house prices coincide with record low wage growth, record low interest rates and record household debt equal to 130% of GDP. This indicates unsustainable growth in property, driven by ever higher debt levels fuelled by the RBA's then chief, Glenn Stevens who began cutting rates beginning in 2011.[ citation needed ]

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 eight years of average earnings; up from three in the 1950s to the early 1980s. [7] Some factors that may have contributed to the increase in property prices include:

Influence of planning laws

Beginning in the 1980s, Australian states (who under the Constitution have control of environmental and land use issues) started progressively implementing more rigid planning laws that regulated the use of land. [13] Planning laws often concentrated, after the 1990s, on restricting greenfield development in favour of "urban densification", or infill development. [14] [15] Land rationing is a system of banning development in all but designated areas, and can lead to extreme land price inflation if insufficient land is designated as allowed to be developed. [15] The restrictive planning laws in Australia have used land rationing systems as part of the goal of restricting greenfield development in favour of infill development, but this inevitably lead to land prices, and thus house prices, rising significantly. [16] There is good evidence to suggest that the price of a new unit of housing is the ultimate anchor of all housing in an area, so when planning laws that implemented land rationing severely drove up the cost of new homes, all other homes followed suit.[ citation needed ]

Influence of tax system

Chart: % Population Growth. Australia - high growth rate strategy at 2.1% in 2010 - source Wikipedia & ABS. Chart comparative population growth 2010.pdf
Chart: % Population Growth. Australia - high growth rate strategy at 2.1% in 2010 - source Wikipedia & ABS.

The Reserve Bank of Australia 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." [17] The main tax incentives include tax deductions for losses on investment properties, even those that have been negatively geared, and the 50% discount on capital gains on sale of investments properties.

Investors using their superannuation for property investments have a tax advantage compared to 'savers' who are effectively taxed up to 45% (the top marginal taxation rate) on income from bank interest or bonds, as superannuation contributions are normally only taxed at around 15%.[ citation needed ]

The list of tax payer funded supports to the property market are numerous

Influence of banking system

The influence of interest rates and banking policy on property prices has been noted. The financial deregulation has led to greater availability of credit and a variety of financial products and options. Presently the Reserve Bank of Australia has maintained for some time a low cash interest rate policy which has also reduced the cost of financing property purchase. In addition, the easy availability of interest-only loans has also made possible for property investors to borrow to purchase a property and compounding the benefits of negative gearing.

Housing costs excluded from the CPI

One of the market distortions in the housing market relates to the calculation of the Consumer Price Index [CPI], a key metric the RBA uses to make fiscal policy decisions such as setting interest rates. One senior economist noted "The index ignores price changes in the single biggest purchase a person (or household) is likely to make in their lifetime – a dwelling″.[ citation needed ] This implies that Australia's main official cost of living measure is failing to represent actual living costs, particularly for younger Australians who may incur substantial costs of purchasing a home. [18]

Immigration to Australia

A number of economists, such as Macquarie Bank analyst Rory Robertson, assert that high immigration and the propensity of new arrivals to cluster in the capital cities is exacerbating the nation's housing affordability problem. [19] According to Robertson, Federal Government policies that fuel demand for housing, such as the currently high levels of immigration, as well as capital gains tax discounts and subsidies to boost fertility, have had a greater impact on housing affordability than land release on urban fringes. [20]

The Productivity Commission Inquiry Report No. 28 First Home Ownership (2004) also stated, in relation to housing, "that Growth in immigration since the mid-1990s has been an important contributor to underlying demand, particularly in Sydney and Melbourne." [21] This has been exacerbated by Australian lenders relaxing credit guidelines for temporary residents, allowing them to buy a home with a 10% deposit.

The RBA in its submission to the same PC Report also stated "rapid growth in overseas visitors such as students may have boosted demand for rental housing". [21] However, in question in the report was the statistical coverage of resident population. The "ABS population growth figures omit certain household formation groups – namely, overseas students and business migrants who do not continuously stay for 12 months in Australia." [21] This statistical omission lead to the admission: "The Commission recognises that the ABS resident population estimates have limitations when used for assessing housing demand. Given the significant influx of foreigners coming to work or study in Australia in recent years, it seems highly likely that short-stay visitor movements may have added to the demand for housing. However, the Commissions are unaware of any research that quantifies the effects." [21]

Some individuals and interest groups have also argued that immigration causes overburdened infrastructure. [22]

Foreign investment in residential property

In December 2008, the federal government introduced legislation relaxing rules for foreign buyers of Australian property. According to FIRB (Foreign Investment Review Board) 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." [23]

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." [24] [25]

Under the rules, temporary residents and foreign students will be:

Failure to do this would also lead to a government-ordered sale. [26]

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.

In 2002, the government initiated a Productivity Commission Inquiry into the homes ownership in Australia. The commission's report entitled "First Home Ownership" [27] 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."[ citation needed ]

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." [28]

In 2008, another study was commissioned – the 2008 Senate Select Committee on Housing Affordability in Australia. [29] The report noted that "On some measures, housing affordability is at a record low.

"Australia's Future Tax System" (AFTS) review, more commonly known as the "Henry Tax Review", made a number of recommendations that would have impacted on the housing market, including:

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" (excerpt of list):

In May 2015, the House of Representatives Standing Committee on Economics started an Inquiry into Home Ownership. Almost two years later the announcement was made that the Inquiry had made no recommendations whatsoever. [32]

In 2017, a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established. Hearings into banking misconduct began on 13 March.

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." [33]

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." [34]

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 (S&P), "Arrears for sub-prime loans backing RMBS [residential mortgage-backed securities] jumped 126 basis points to 11.45 per cent" [35]

Australian specific market factors

The Australian market had several features either singly or together are not typical in other housing markets, being;

Timeline

1980s–2009

2010s

2010

  • January - The removal of First Home Owners Grant Boost. Mortgage applications reduce by 21.2%. [49] 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.
  • 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". [50]
  • 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. [51]
  • May - 'Australia's Future Tax System' (AFTS) Review (aka 'Henry Tax Review') makes a number of recommendations on policies that could affect the housing market. [52]
  • The government responds to the AFTS review findings with a report 'Stronger, Fairer, Simpler: A Tax Plan for our Future'. [31]

2011

  • February - New housing loans approved by Australian banks fall 5.6 per cent to a 10-year low in February. [53]

2012

  • October - The RBA cuts interest rates to 3.25%.
  • December - The RBA cuts interest rates to 3.00%.

2013

  • April - Glenn Stevens is re-appointed as RBA Governor for 3 more years.
  • May - The RBA cuts interest rates to 2.75%.
  • August - The RBA cuts interest rates to 2.50%.
  • November - Statistics released by the Australian Prudential Regulation Authority revealed that the total amount of residential term loans to households held by all ADIs (authorised deposit taking institutions) was $1.15 trillion. This was an increase of 1.7% on 30 June 2013 and an increase of 7.5 in September 2012. Furthermore, investment loans accounted for 33.1 per cent of the loans. Major banks held $933 billion of these loans. [54]

2014

  • 1 January - RP Data reveals that national residential prices increased by 9.8% in 2013, with Sydney increasing by 15.2%. [55]
  • 13 January - Housing Finance statistics released by the Australian Bureau of Statistics shows the value of outstanding home loans financed by the ADIs was $1.27 trillion. $849 billion of that amount was for owner occupied housing and $419 billion was for investment housing loans. [56]
  • Data released by RP Data, APM, Residex and ABS in 2014 showed that Australian house prices continued to rise strongly throughout 2013 and 2014. [57]

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." [58]
  • The head of the Federal Treasury Department, and the Federal government's most senior economic adviser, John Fraser publicly 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. [59]
  • June - APRA 10% investment credit growth limit introduced.
  • 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". [60] 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. [61] [62]

2016

  • 5 May - Philip Lowe appointed by Treasurer Scott Morrison as head of the RBA. [63]
  • May - From 1 July, "Foreign buyers will have to provide citizenship and visa details, as well as Foreign Investment Review Board clearance, through the stamp duty process." "The ATO will match data to ensure foreign buyers have paid a $5000 fee for any property sold for less than $1 million, and $10,000 for properties over $1 million." [64]
  • June - "In NSW, foreign buyers will be hit with a 4 per cent stamp duty surcharge from 21 June and 0.75 per cent land tax surcharge starting in 2017. Victoria will raise its existing 3 per cent stamp duty surcharge and 0.5 per cent land tax surcharge to 7 per cent and 1.5 per cent respectively on 1 July, while Queensland's 3 per cent stamp duty surcharge kicks in on 1 October." [65]
  • 3 August - The official cash rate drops to 1.5%, the lowest cash rate on record. [66] The cash rate remains at 1.5% as of 1 July 2018.

2017

  • March - APRA limits interest only lending to 30% of new loans.
  • March - The four major banks, NAB, Westpac, ANZ and Commonwealth Bank increase home loan rates despite Reserve Bank rates citing the rising costs and regulatory responsibilities. These four banks controls more than 80 per cent of the $1.6 trillion mortgage market. Owner-occupier customers repaying principal and interest experiences the smallest rise while investors with interest-only loans get the largest hike. The changes effective in April–May. [67]
  • April - The Governor of the RBA Philip Lowe states that increasing debt and rising house prices were risking the future health of the Australian economy. He noted that slow wage growth was making it harder for people to pay down their debt and attacked banks for lending to people with too little income buffer after interest. [68]
  • July - Stamp duty abolished for first home buyers in Victoria, Queensland and Western Australia. Investor tax deductions for depreciation and travel abolished.
  • September - The market reached its most recent peak in September 2017, according to Corelogic data. [69]
  • 14 December - Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry established.

2018

  • 13 March - hearings into the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry begin.
  • 1 July - Since the previous peak in September 2017, the combined capital 5 city property market has declined by -1.3% according to Corelogic. [69]
  • 11 July - It is estimated by Digital Finance Analytics that there are approximately 1 million households in mortgage stress. These households risk defaulting on their mortgages in the event of interest rate rises of as little as 0.15%. [70] APRA chairman Wayne Byres announced that the "heavy lifting on lending standards has largely been done", and that there was unlikely to be any further tightening of macroprudential policy. [71]
  • 16 July - Pressure is growing on the big four banks to follow smaller lenders (including ME, AMP, Suncorp, Bendigo Bank, Macquarie Bank, Bank of Queensland, ING, Pepper Group, IMB, Auswide and Teachers Mutual Bank) who have been raising interest rates on mortgage products from April 2018 onwards. [72] This is due to a rise in the inter-bank Bank Bill Swap Rate (BBSW). It is speculated that the causes for BBSW changes include the US Federal reserve's increases in US rates and poor returns on Australian deposits drawing funds away to international markets and Australian equities for better returns, as well as income repatriation of large American companies following tax changes of Donald Trump. [73] The funding gap between deposits and funds lent in Australia is estimated to have grown to A$457 billion in the first quarter of 2018. [74] This is putting pressure on bank wholesale lending and profit margins, raising the likelihood of interest rate rises independently of the Reserve Bank of Australia by the big four banks, despite the ongoing Royal Commission.
  • 7 December - "Uncharted territory", despite "the unemployment rate's been coming down, the economy's growing at a reasonable pace", RBA deputy Guy Debelle promotes further interest rate cuts and QE (quantitative easing) as methods to support housing prices. [75]

2019

  • January 2019 - RBA releases a research discussion paper 'A Model of the Australian Housing Market', which concludes that the lower interest rates explain much of the rapid growth in housing prices and construction over the past few years. [76]
  • 7 February - Home prices across Sydney and Melbourne continue to fall as the RBA keeps rates on hold at 1.5 per cent for a record 29th month.
  • 3 March - Mathias Cormann described (downward) flexibility in the rate of wage growth as “a deliberate design feature of our economic architecture”, ensuring wage growth is subdued, requiring the RBA to maintain low interest rates. [77]
  • 12 May - The Federal government seeks to increase first home owners entering the market, through introduction of the First Home Loan Deposit Scheme
  • 4 June - The RBA drops interest rates to a record low of 1.25 per cent, suggesting further cuts were to come later in the year [78]
  • 2 July - RBA drops rates to another low of 1 per cent. [79]
  • 5 July - APRA reduces interest rate buffer requirements for ADIs from 7% to 2.5% above the loan rate [80]
  • 1 October - The RBA announces interest rate cut to 0.75%

2020s

2020

  • 3 March - The RBA reduced the cash rate to 0.5% (from 0.75%)
  • 19 March - The RBA introduces 4 core changes to support the economy as the COVID-19 pandemic shuts borders and businesses
    • Reduction in the cash rate to 0.25% (down from 0.5%)
    • Targeting the yield of the 3 year bond at 0.25%, through the commencement of bond buying
    • Establishment of the Term Funding Facility (TFF) to facilitate cheap credit to small business at rate of 0.25%
    • Increase in Exchange Settlement balances to 0.1% to decrease costs to the banking system for reserves held at the RBA
  • 2 June - The Federal government announces the HomeBuilder grant of $25,000 to support the construction industry to 31 December 2020, with a budgeted cost of $680m
  • April - Economists within the RBA propose pausing the real estate market to avoid a crash [81]
  • 26 August - RBA discussion paper shows that the banking sector could withstand an extreme but plausible 40% fall in Australian house prices. [82]
  • 25 September - The Federal government announces plans to remove Responsible Lending Obligations from the National Consumer Credit Protection Act 2009
  • 3 November - The RBA introduces 3 core changes to support the economic recovery
    • Reduction in the cash rate to 0.1% (down from 0.25% set in April 2020)
    • Reduction of target of 3 year bond yield to 0.1%, with commencement of Quantitative Easing, by announcing the quantity of bond buying - $100 billion of government bonds over a six-month period.
    • Reduction in the interest rate on Exchange Settlement balances to 0.0%
  • 30 November - The Federal government extends the HomeBuilder grants scheme until 31 March 2021 at a reduced rate of $15,000.

2021

  • 1 February - The housing market started the year strongly with a national price increase of 0.9%.
  • 1 March - The housing market saw euphoria through February with national prices rising 2.1% in the calendar month, fear of missing out (FOMO) leading to first home owners and owner occupiers making up the majority of buyers.
  • 12 March - In a sign the interest rate cycle may have turned, rising global bond yields through 2021 caused the 30 year US mortgage rate to increase 0.4% (2.65% -> 3.05%) through January and February, despite central banks doubling down on low interest commitments to assure markets they will let inflation run rather than raise rates prematurely.
  • 15 March - Term Funding Facility creates debt binge for banking sector [83]
  • 16 March - APRA release quarterly ADI statistics for December quarter 2020, showing "higher loan-to-valuation ratios and debt-to-income ratio" [84]
    • Debt-to-income ≥ 6x increase by 26.3%
    • LVR ≥ 95 increase by 27.4%
  • 19 March - Parents become 9th biggest lender in Australia, creating a financial system feedback loop ensuring that a downturn in housing affects not only first home owners and young families but also retirees, with large implications to pension and superannuation systems. [85]
  • 29 March - APRA chairman Wayne Byres states house prices not within remit of financial stability mandate. [86]
  • 29 March - The Term Funding Facility (TFF) is alleged to fuel a 2023 housing debt time bomb [87]
  • 30 March - Banks plan to avoid 2023 debt cliff by repaying TTF early and increasing saving rates [88]
  • 9 April - RBA flags booming property market as risk to the financial system [89]
  • 22 April - Mortgage rates in Australia begin the long path northwards [90]
  • 30 April - As the housing affordability crises worsens, the blame game ramps up, with Federal tax concessions, State planning laws, loose monetary policy and lax lending standards all contributing factors [91]
  • 30 Dec - Major Australian banks start predicting price drops for 2023. [92]

See also

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The property bubble in New Zealand is a major national economic and social issue. Since the early 1990s, house prices in New Zealand have risen considerably faster than incomes, putting increasing pressure on public housing providers as fewer households have access to housing on the private market. The property bubble has produced significant impacts on inequality in New Zealand, which now has one of the highest homelessness rate in the OECD and a record-high waiting list for public housing. Government policies have attempted to address the crisis since 2013, but have produced limited impacts to reduce prices or increase the supply of affordable housing. However, prices started falling in 2022 in response to tightening of mortgage availability and supply increasing. Some areas saw drops as high as around 9% - albeit from very high prices.

<span class="mw-page-title-main">Canadian property bubble</span> Rise in real estate prices since 2002

The Canadian property bubble refers to a significant rise in Canadian real estate prices from 2002 to present. The Dallas Federal Reserve rated Canadian real estate as "exuberant" beginning in 2003. From 2003 to 2018, Canada saw an increase in home and property prices of up to 337% in some cities. In 2016, the OECD warned that Canada's financial stability was at risk due to elevated housing prices, investment and household debt. By 2018, home-owning costs were above 1990 levels when Canada saw its last housing bubble burst. Bloomberg Economics ranked Canada as the second largest housing bubble across the OECD in 2019 and 2021. Toronto scored the highest in the world in Swiss bank UBS' real estate bubble index in 2022, with Vancouver also scoring among the 10 riskiest cities in the world.

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