Are We Paying Too Much for the Great Australian Dream?

Karl FitzgeraldCommentaryLeave a Comment

Creative Commons License photo credit: Pink Sherbet Photography

Adam Schwab from Crikey:

In one of the more remarkable occurrences, residential property, despite macroeconomic indicators to the contrary, has been an incredibly resilient asset class this year. In fact, the “affordable” sector of the property market is trading at record high levels, while auction clearance rates in major cities remain above 70 percent (in Melbourne, the clearance rate is above 80 percent). The use of inverted commas around the word “affordable” is intentional  — for many, the “affordable” sector of the housing is perhaps ironically, relatively unaffordable.

To purchase a property within 15 kilometres of a major city, first home owners are required to spend often upwards of six times average incomes, double the amount previous generations would spend on a home. That means one of two things is happening; people really like buying homes these days, or punters are vastly overpaying for residential property, or perhaps a little of both.

Property bulls will no doubt argue that the housing sector in Australia is not really over-priced, but due to the shortage of satisfactory property, the price is at an equilibrium level.

While supply issues no doubt have a short-term effect (Australia still has significant net population growth), in the longer term, the free market requires capacity to increase to match the higher demand. (Australia isn’t Monaco, urban centres take up a mere fraction of total land).

No, the major impetus for the prevailing boom is the continued, boosted first home owner’s grant and the ongoing lax lending standards exhibited by major banks. The FHOG is a dreadful piece of policy which has the unfortunate effect of inflating the cost of homes for young people. Various potential buyers, all with the grant in their back pocket, simply bid up the price of a property to what they could afford, plus the value of the grant, plus the leverage they are able to obtain. (Figures released last week indicated the “first home buyer” sector continues to dominate property prices with data indicating that 29.5 percent of owner-occupied mortgages were to first home buyers. Before the grant was boosted, the figure was around 12 percent).

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