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Australia’s Housing Bubble

I’ve been away from Australia for 20 years and I’ve seen other countries economies and their housing markets. Seeing the way Australia is at the moment, there are some stark contrasts. Australia’s housing market is not yet on the precipice, but I’m sure now is a bad idea to invest – if you must, don’t buy big. Let me explain.

When I left Australia, the annual average income was $28,000 a year. Cheap housing for uni students was $50 a week. The average house price for a 3 bedroom, brick veneer, two-port garage (not including two cars, two dogs, and a VCR) was about $350,000 at most. Finally, the population was 18 million people. Twenty years later, the average income is $88,000. The average weekly rent for a student is about $380 a week. The average two bedroom flat with a single outdoor parking space starts from $500,000. The rental market is now super competitive, with upwards 30 to 60 people applying for any place. The population of Australia is nearly 27 million.

Sunrise over Albert Park and Melbourne CBD
Sunrise over Albert Park and Melbourne CBD

In the 1990’s there were three situations that created the insane situation Australia is now in. The first is that the housing market was on the way up. My grandparents bought their house in about 1970 for $8,000, but sold for about $300,000 in about 1998. Property, in a newly developed, colonised country, was going up, as more and more things are built. Property in the 1990’s was seen as the safest investment you could make. Secondly, the government introduced negative gearing to the tax system. This incentivised people to buy second, third, and more properties to rent out for a profit. Added to that, property prices could only go up; never before has property prices in Australia’s colonised history have ever gone backwards. With an average 7% rental income, and rising values, there was no lose. Thirdly, politicians, from local, state, and federal levels of government can design the laws in their own favour, get in before other people realise how they can benefit from the new laws, and even strategise around zoning laws and allow themselves personal advantage. These factors, I’m sure, are the main contributions to the lack of supply and inflated prices for purchasing (new or used) and for rental. Consequently, the housing market is now artificially extremely over-valued.

Now, about 80% of Australian politicians have personally invested in three or more properties. They are personally incentivised to artificially inflate the value of residential properties further, and to benefit from increasing rent values. So, now with the unaffordability of housing and rent, working homeless, couch surfing becoming increasingly common, and university is now increasingly unaffordable. Where are the brakes on this runaway train?

New housing stock is urgently needed. 700,000 additional homes are needed today. The federal government (both Labor and Liberal parties) have committed to only 33,000 new stock, which will only replace aging stock – that’s all.

With the Greens Party pushing to increase housing stock and put a pause on rental costs – because it’s urgently needed, there has to be an increase in residential properties being built. Consequently, there will be a major correction to the housing market within the next ten to twenty years. Housing prices will drop as more become available. Consequently, people who bought at the height of market prices will default on loans that are valued more than the asset. Many people will realise that the market is overly inflated, and a contraction will come in the form of a bubble burst. Now is a bad time to buy big properties – they will lose value. Buy small now, and later buy the super cheap repossessed properties.

Other Reading

Greens Party – Housing Crisis

ABC – Family living in one room flat

ABC – Fix for housing crisis

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