Describe about the Australian Housing Prices for Global Housing Watch.
For years now, the Australian Property Bubble has been an ongoing debate. Many believe that Australian houses are significantly overpriced (Janda 2014). According to the IMF’s Global Housing Watch, Australia is one the most expensive places to buy a house (Jericho 2014). It is ranked number three, after Canada and Belgium. This year June, Sydney property prices for established houses rose by 3.2 percent. By 2015, Sydney had the highest median house price among capital cities at $929, 842 (Jericho 2014). It is worth noting that the house prices in the Australian real estate market are expected to continue rising.
Reasons behind Surging Housing Prices
Low-Interest Rates
Low-interest rates have characterized Australia since 2008 (HSBC Warns 2014). As a result, the borrowing capacity increased for the countries citizens owing to the lower repayment rates. In turn, this led to record levels of secured home loans to investors. Besides, the ten years before the beginning of the financial crisis saw the tripling of housing prices in the country. During this time, banks had the ability to create money through the money creation process each time they administered a loan (HSBC Warns 2014). As a result, the money created by banks increased significantly. The increased money in circulation caused by excessive lending was a major driver of the rise in housing prices.
Limited Government Releases of New Land
Around 1980, Australian states began implementing rigid planning laws that control the use of land (House Price Rises 2016). Mainly, these were systems of land rationing where developments were banned in all areas except the selected regions. Consequently, this created an extreme property price inflation due to the limited supply amid high demand for land. Over time, property prices increased significantly. In turn, this increased the cost of development and eventually led to the rise in house prices in the country.
Pressures of Supply and Demand
Housing prices in the country rise faster that income because of the pressures of demand and supply. Structural economic and development changes have led to increased urbanization. It is noteworthy that this increased urbanization has made urban land scarce (Australian Population Growth 2010). Therefore, as the population size increases, the scarcity of land increases. Over time, the growing demand for land and housing in urban areas for the available land puts pressure on the prices of houses to increase (Janda 2014). As a result, the prices of homes have become increasingly unaffordable to many individuals in Australia.
Unfavorable Tax System
By and large, the Australian tax system favors existing home homeowners and investors more than the savers. Investors are given substantive tax deductions as incentives to invest in the country. To make investment attractive, Australia has also allowed negative gearing for investors to claim losses against their taxable income (Janda, 2014). Thus, they are more motivated to invest in housing developments. In the process, citizens are sidelined and charged exorbitant taxes on their earnings. Consequently, this makes an investment in housing and other forms of property rather expensive (Rasche and Williams, 2005).
Investment Rule Changes for Foreigners
In 2008, the Australian government enacted legislations that relaxed rules for foreign buyers of property in the country. As a result, overseas investors take advantage of the laws to acquire property in the country. Unfortunately, they buy them to land bank and not rent them out because such investors are only interested in their capital growth (Schwab 2009). Additionally, many Australian lenders and banks offer home loans to non-residents to purchase property in the Australian market, thereby contributing to the increase in the country’s house prices (Schwab 2009).
Macroeconomic Solutions the Government Can Undertake to Ensure Affordable Housing for the Younger Generation
Monetary policies
Contractionary Monetary Policies to Increase Interest Rates Levels. The Australian government can implement contractionary monetary policies to increase interest rates in the country. According to Jericho (2014), contractionary monetary policies will lead to a decrease in the supply of money in the economy. A drop in the supply of money will lead to a significant increase in interest rates. Higher interests rate will result in reduced consumption and investment (Naylor n.d). It is worth noting that reduced consumption results in a lower aggregate demand. Likewise, the higher interest rates will increase the cost of borrowing and discourage Australians from taking loans and mortgages (Jericho 2014). The higher interest rates imply higher credit costs, and therefore the demand for housing by foreign investors, and existing homeowners will reduce considerably (Naylor n.d).
Increasing Reserve Requirement for Banks. The Australian government should consider increasing the cash reserve ratio for banks. This will increase the percentage of deposits that financial institutions are expected to hold as reserves and maintain liquidity (Rasche &Williams 2005). By raising the reserve ratio, the government will achieve a significant decrease of money created and lent by financial institutions to Australian citizens. The government will, therefore, be able to control the amount of lending in the economy as well as the money supply (Rasche &Williams 2005). Consequently, a reduction in the money supply will mean that not many Australians and foreign investors will have the money to purchase property in the Australian real estate market. In turn, this will lead to a significant decrease in the demand for houses. Subsequently, a reduction in the level of demand will reduce pressure on the limited supply, thereby relaxing house prices in the country by a substantial amount (Jerciho 2014).
Fiscal Policies
Revenue Policies/Tax policies. The Australian government can use instruments of fiscal policy to reduce the taxation levels for its citizens. By and large, revenue policies affect the level of personal income tax rates, indirect business tax rates, corporate profit tax rates, as well as contributions to social security (Naylor n.d.). Reducing the tax rates for its citizens will result in an increase in the disposable income available for individuals to invest in the real estate market. Additionally, Macroeconomic theory proposes that decreasing tax rates will reduce the level of GNP. Consequently, a decline in GNP will indirectly influence demand for housing by prompting variations in economic variables (Naylor n.d).
Decreasing Government Spending. Reducing government expenditure is a contractionary fiscal policy used when the price levels in the country are too high (Dolamore 2016). In this case, the high house prices in the Australian property market can be regulated by a contractionary fiscal policy that reduces competition of the government in real estate property can reduce can substantially reduce pressure on property demand, thereby reducing prices of houses in the country (Rasche &Williams 2005).
The government may also instigate flexible legislations and policies as regards to the use of land in Australia. Also, this can be done through the utilization of under-utilized and state-owned land to enhance affordable housing development through the sale of land, leasing or establishment of a Community Land Trust (Whitzman, Newton & Sheko 2015). Furthermore, it should investigate funding mechanisms for affordable housing such as government backing for bond instruments, social housing bonds, and shared equity schemes alongside investors and developers to ensure the development of affordable housing options for the younger generation (Whitzman, Newton & Sheko 2015).
Furthermore, the state government should facilitate legislations to support the development of affordable housing in Australia financially. Whitzman, Newton and Sheko (2015) suggest that this can be achieved through value capture revenue and state-owned land release such as neighborhood gentrify. It is also the responsibility of the state and local governments to deliver a planning framework that dictates minimum design requirements as necessary to ensure the availability of quality, family friendly and affordable housing for the people of Australia.
Urban Planning Reforms
The Australian government should explore funding mechanisms for affordable housing in the country’s urban areas. According to Whitzman, Newton and Sheko (2015), this can be done through enabling accessory units and laneways that reduce requirements and restructure affordable housing approval procedures. Housing approval processes are made easier by limiting third party appeals, thereby allowing individuals to invest in building their own houses instead of being renters forever (Whitzman, Newton & Sheko 2015). What is more, the government could also instigate community housing organizations, developers, investors and the local governments to work together in the Transforming Housing deliberative planning partnership to enhance the affordable housing sector (Affordable Housing 2016).
Long-Term Tax-Credit Based Investments
The Australian government in collaboration with the Commonwealth states can support a long term, tax credit based investment strategy. Such an approach is bound to increase the availability of affordable housing options for the people of Australia. Such programs can be administered by the Treasury or the Australian Tax Office (Whitzman, Newton & Sheko 2015). Besides, this initiative will reduce the adverse effects of the current unfavorable tax system that favors investors and property owners at the expense of the savers and renters. Therefore, implementing tax-credit based investments will offer Australian citizens and residents the opportunity to invest in their own houses at rather affordable rates.
Integrated Policy
The lack of policy consistency in Australia creates additional risk and acts as a significant barrier to affordable housing in the country. Therefore, improving planning and infrastructure provisions will go a long way in developing affordable housing options in the state (Ma 2016). Primarily, affordable housing initiatives are based on the excellent horizontal integration of land use policies and transport with social infrastructure provision at the metropolitan and local scale of governance (Ma 2016). The state government in conjunction with the metropolitan governments can work together to maintain a lasting urban containment boundary within which there would be a rapid expansion of public transport making more areas available for affordable housing with good access to jobs and services (Whitzman, Newton & Sheko 2015).
Reference List
Affordable Housing Working Group Issues Paper. (2016). 1st ed. [eBook] Australian Treasury, p.416. Available from: https://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2016CFFR%20Affordable%20Housing%20Working%20Group/Key%20Documents/PDF/Issues_Paper.ashx [Accessed 15 Oct. 2016].
Australian Real Estate, 2016, Why are housing prices rising faster than wages?. [Online] Available from: https://www.australianreal-estate.com/Real-Estate/news/NewsArticle.jsp?News_ID=5 [Accessed 15 Oct. 2016].
Dolamore, R 2016, Fiscal and monetary policy-renewed international debate. [Online] Parliament of Australia. Available from: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/FiscalMonetaryPolicy [Accessed 15 Oct. 2016].
Global Property Guide, 2016, House price rises accelerating in Australia. [Online] Available from: https://www.globalpropertyguide.com/Pacific/Australia/Price-History [Accessed 15 Oct. 2016].
Janda, M. 2014, It’s official: Australia’s property prices are out of whack. [Online] ABC News. Available from: https://www.abc.net.au/news/2014-06-12/janda-it%27s-official:-property-prices-are-getting-out-of-reach/5517674 [Accessed 15 Oct. 2016].
Jericho, G 2014, Stimulating Australia: Why Lower Interest Rates May Not Be The Answer. [Online] The Guardian. Available from: https://www.theguardian.com/business/grogonomics/2014/aug/21/stimulating-australia-why-lower-interest-rates-may-not-be-the-answer [Accessed 15 Oct. 2016].
Naylor, T. The Impact of Fiscal and Monetary Policy on the Housing Market. [Online] Duke University. Available from: https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3162&context=lcp [Accessed 15 Oct. 2016].
Rasche, R. and Williams, M. (2005). The Effectiveness of Monetary Policy. 1st ed. [ebook] St. Louis: The Federal Reserve Bank, pp.12-67. Available at: https://research.stlouisfed.org/wp/2005/2005-048.pdf [Accessed 15 Oct. 2016].
Schwab, A 2009, Foreign Buyers Blow Out the Housing Bubble. [Online] Crikey. Available from: https://www.crikey.com.au/2009/09/21/the-role-of-foreign-buyers-in-the-ever-inflating-housing-bubble/ [Accessed 15 Oct. 2016].
The Australian 2014, HSBC Warns Risk Rising On The Housing Bubble. [Online] Available from: https://www.theaustralian.com.au/business/hsbc-warns-house-prices-risk-rising/news-story/662c89d36ed4ef67d8f11d2e1f977037 [Accessed 15 Oct. 2016].
Whitzman, C., Newton, C. and Sheko, A 2015, ‘Transforming Housing: Affordable Housing for AllPartnership options for policy, investment and demonstration projects.’ Proceedings of the Affordable Housing Summit, pp.3-30. Available from: https://msd.unimelb.edu.au/sites/default/files/docs/Affordable%20Housing%20Summit%20Options%20Paper_for_web.pdf [Accessed 15 Oct. 2016].
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