Is Australia’s Real Estate Boom Heading Towards Doom?
The soaring growth of the world’s most expensive real estate can’t last forever—right?
Australia may have been referred to world over by the moniker, “down-under”, but its real estate market is anything but sinking. The good old Oz is emerging as one of the most expensive real estate markets in the world, escalating at a rate that has trade pundits predicting a housing bubble that’s about to burst. Adam Schwab talks about a property auction he attended, for a three-bedroom home in Albert Park, Melbourne that had some nice touches (wine cellar, cinema room, garage stacker) but was relatively small and in a second-tier street. Yet, a 35-year-old buyer snagged it for $3.755 million, half-hour into the auction.
Schwab points out, “Housing prices (in Australia) are no longer a function of value, rather of how much people are prepared to pay.” New homebuyers in Sydney are willing to wipe out six years worth of savings to put down a 20 percent deposit to purchase a median-priced home. Not just Sydney, there’s been a nationwide boom in housing prices since 1996, with prices rising by 121 percent to 2014, making it one of the most expensive real estate markets in the world. Real estate prices in the major cities like Melbourne, Perth, Adelaide and Brisbane grew 11.2 percent annually, overthrowing expert opinions that they were in fact, declining. Not even in San Francisco, the most expensive metropolitan area in the U.S., have prices grown so fast, adds NYT.
Part of Australia’s real estate boom is the big four banks extending their home loans liberally. Banks are willing to hand out bigger loans at smaller interest rates. The easily available loans are enabling buyers to bid higher even on idle assets. Other factors contributing to the prices inflation are; migration, foreign investors, free land being sold off to overseas corporations and most importantly—people’s obsession with buying rather than renting. There exists an irrational social pressure in the Aussie culture to mortgage your life away. On the bright side, Australia’s government debt is still relatively low compared to the U.S., and the country could withstand some borrowing if pushed.
The pitfall of the housing boom is the social inequality it’s creating, the benefits reaped mostly by the affluent. A 2015 survey by the Australian Council of Social Service shows that the income of the top five percent or earners increased 78 percent from 1995-2012, while income of the bottom 20 percent grew 44 percent. The 48 percent of Australians who don’t own homes, especially single women over 50 were hemorrhaging money in rent and utilities, and then food, resulting in malnutrition. Even with the decline in social equality, the country views its high housing prices as a barometer of its economic success. The country’s two main income streams are after all, mining and the property market.
Opinions stay divided on whether the real estate boom is heading for a bust or will continue to soar unrealistically. But, if the simple law of physics were applied- everything that goes up must come down. In his book, Australia- Boom to Bust , economist Lindsay David uses a Disneyland analogy to best assess the outcome; Australia is very much like Disneyland. Everyone has a good job, everyone can afford an outrageous mortgage and everyone thinks that the prices will never come down.
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