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Reasons Behind Australia’s Surging Housing Prices

Discuss about the Australian Surging Housing Prices.

The surging housing prices in Australia is spearheaded by the acceleration in the Sydney Australian, the largest as well as the most expensive market. As reflected in the most recent Home Value Index by CoreLogic RP Data, the capital city has its housing prices surging by 1.6 percent in May. This shot in housing prices left the rise over the first five months of the year at five percent (Draper 2000). The medium dwelling price in Australia across the nation pegs at $580,000. The trend has shown no slowdown but has rather bucked the anticipation from the various parties early in the year that prices of houses were due to deteriorating. The surging price is a clear manifestation of the high rise construction booms beginning to influence the values of the apartments (Karantonis and Janet Ge 2007).

A greater proportion of the price surging evolved from free prices that lurched 1.8 percent thereby overwhelming a smaller 0.1 percent rise in units. The strong 3.1 percent growth in Sydney that accounted for the gains witnessed in May that took median dwelling price to $782,000. The past quarter saw the prices in Sydney jumping by a record 6.6 percent leaving the gain over the previous year at 13.1 percent. The prices of housing outside Sydney in all capital except Perth recorded gains of between 0.1- and 2.5 percent (Duca, Muellbauer and Murphy 2010). Despite being far below the pace witnessed in Sydney over the same period, there was a thirteen percent price surging by May 2015, and this was the fasted annual pace across Australia.

The price leaped by 0.1 percent in Brisbane while it shot 0.7 percent in Darwin. In Canberra and Hobart, the surging were 2.2 percent and 2.5 percent in that order. Perth which is the most exposed capital to the mining sector fortunes and it went on record as the single capital to have recorded a decrease in the prices of the housing of 2.7 percent. Since May 2012, Australian Housing prices have increased by 36.6 percent with Sydney recording a surging of 57.5%, the steepest rise over the period (Rahman 2008). The record in Sydney showed that it outpaced gains of 18.5% and 39.4% for Brisbane and Melbourne respectively that took third and second spots.  

From the above table, the monthly, annual, as well as quarterly changes in the prices of house crossways Australia's capital besides the current median value per city, have been revealed. It has been suggested by Lawless, the leader of research at CoreLogic that a rise in investor operations ahead of the federal election probably accounted or hastening in property prices in Sydney in May. It has been noted that the degree to which the investors fuel the recent outpouring in Sydney home value is challenging to quantify (Rahman 2008).

Macroeconomic Solutions by Government to Ensure Affordable Housing

Nevertheless, the data from housing finance to March demonstrated that investors have been trending upward since hitting the latest trough in November 2015 at 42.9 percent as a proportion of the whole new mortgage commitments. Data drawn from March indicates that investors currently entail 47.6 percent of the whole new mortgage obligations that is the highest proportional reading since August 2015 (Rahman 2008).    

Other factors that have led to surging prices include short-term factors (interest rates, investment demand, and economic climate) institutional factors (financial deregulation as well as innovation, land supply as well as land-use planning system and government taxes, levies as well as charges). Long term factors include demography, wealth effects and economic growth.

The Australian government can embrace various macroeconomic factors to guarantee housing affordability to the young generation. It has been shown that government taxes, charges, and levies account for the surges in housing prices (Rahman 2008). The government imposes taxes, levies a well as charges at all levels in Australia on the urban land development and development. Investors, therefore, face such costs as developer levies, stamp duty on both transfer and sale of land as well as land tax alongside GST on new house construction as well as renovation of the existing houses.

The government can subsidize the housing sectors through reduction of these costs to ensure that developers do pass these burden to the eventual housing prices. This will reduce the ‘total indirect task take’ which is noted to be above $124,000 in Sydney and over $88,000 in Melbourne. Without this, this cost will add up to a remarkable component of prices of house and hence the lack of affordability of the housing for the young generation (Rahman 2008).

Both land prices and affordability correlate with the price of land that is determined by the developed urban land supply. The supply of residential land is influenced by the cost of development, the land development industry structure, and rules as well as the effectiveness of the land-use planning system (Ge and Williams 2015). The government has the power to control land uses which impact on both availability of developed land as well as the related cost of such lands. Since it takes quite some time to bring the underdeveloped land into commercial use besides the lags cost by government regulation on land use which decreases the short-term responsiveness of land supply to immediate land demand pressure, there is a need for the government to waive or reduce the lag (Draper 2000). Reducing this land would mean that the inelastic short-term price of supply is eliminated. Accordingly, since it the short-term price inelasticity of supply is an accelerator of price surging, its removal will result in affordable housing prices for the young generation (Oster and Miller 2005).  

The government can also respond to increase in housing prices through interest manipulations. This is because for a given level of price, the rates of interest means reduced mortgages repayments. With a reduction in repayment, developers have increased the opportunity of borrowing at any repayment to- income ratio. The effect of this would be a rise in the demand, and hence housing prices increase ceteris paribus. Conversely, a surged rate of interest will ease the demand (Bourassa, Hendershott and Murphy 2001). The effect would be either stagnating prices, a moderate rise in price or declining prices depending on the aggregated influence of other factors.

The government should control the prices of the housing by ensuring a high but stable interest rate so as to eliminate the influence that nominal mortgage rate of interest has on real house price surging both in the short- and long-term. This action will try to weaken the lasting effect that lower rates of interest have had on prices rise in the previous years that are still being felt to date through hiked housing price in the country (Bourassa and Hendershott 2005).

The government can also make sure that housing is affordable by controlling the wealth effect. Every society perceives housing as a central store of wealth. It is acknowledged that gross housing assets account for over 50% of the total personal wealth in Australia. Owner occupier, as well as landlord-investors, have a feeling of wealth when the prices of the existing houses are hiking (wealth effect) resulting in a rise in consumption spending (Bewley, Dvornak and Livera 2004). Accordingly, the aggregate demand and hence economic growth results in support of the increasing prices of the house via a self-reinforcing cycle. The current surging in prices have resulted from this and hence the government must not allow this to continue into the future. The government should curb the wealth effect by ensuring that prices of the existing housing do not shoot (Badcock 2009). The government needs to make sure that cases of decreased supply of affordable private rental housing, dwindling supply of social housing as well as prolonged time consumed to release new land are eliminated since all these are an essential recipe for lurching house prices in Australia.

The stamp duty concession, grant and cash assistance to the occupants by Federal Government First Home Owners are only but costly failures as they have perpetuated increase in expensive houses (Badcock 2004). These policies have failed as they only work on the ‘demand side’ of the housing market with no precise and significant rise in the supply of affordable housing. The government must focus on affordability policies that tend to increase housing supply especially low-cost housing.

Reduction of the duration taken to bring land and housing to market must receive particular attention henceforth. The desirable land supply accompanied by proper transport facilities and infrastructure alongside the affordable rental housing supply has to be enhanced. The government must give support to the marginal purchasers via appropriate assistance to dwell in their homes (Ahearne et al. 2005). The government needs to develop a national affordable housing strategy that will be helpful in the reduction of housing stress alongside housing crises in Australia. 

References

Ahearne, A.G., Ammer, J., Doyle, B.M., Kole, L.S. and Martin, R.F., 2005. House prices and monetary policy: A cross-country study. International finance discussion papers, 841.

Badcock, B., 2004. ‘Snakes or Ladders?’: The Housing Market and Wealth Distribution in Australia. International Journal of Urban and Regional Research, 18(4), pp.609-627.

Badcock, B., 2009. An Australian view of the rent gap hypothesis. Annals of the Association of American Geographers, 79(1), pp.125-145.

Bewley, R., Dvornak, N. and Livera, V., 2004. House price spirals: Where the buck starts. CommSec, Commonwealth Bank, Sydney.

Bourassa, S.C. and Hendershott, P.H., 2005. Australian capital city real house prices, 1979–1993. Australian Economic Review, 28(3), pp.16-26.

Bourassa, S.C., Hendershott, P.H. and Murphy, J., 2001. Further evidence on the existence of housing market bubbles. Journal of Property Research, 18(1), pp.1-19.

Draper, D.A.G., 2000. Rent control and the efficiency of the housing market.

Duca, J.V., Muellbauer, J. and Murphy, A., 2010. Housing markets and the financial crisis of 2007–2009: lessons for the future. Journal of Financial Stability, 6(4), pp.203-217.

Ge, X.J. and Williams, B., 2015. House Price Determinants in Sydney (No. eres2015-230). European Real Estate Society (ERES).

Karantonis, A. and Janet Ge, X., 2007. An empirical study of the determinants of Sydney’s dwelling price. Pacific Rim Property Research Journal, 13(4), pp.493-509.

Oster, A. and Miller, P.W., 2005. House Prices-Drivers and Links to the Broader Economy: Rational or Irrational Exuberance. [Department of] Economics, University of Western Australia.

Rahman, M.M., 2008. Australian housing market: causes and effects of rising price. In Proceedings of the 37th Australian Conference of Economists (ACE 2008). Economic Society of Australia (Queensland). 

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