Australia’s Property Market (and the recent correction starting in 2017)

This report provides an overview of the Australian property market, including industry background, market structure, associated issues, impacts on the industry and the Australian economy, and government policies. The report highlights the recent correction in the property market starting in 2017 and its impact on the industry and the economy. The report also discusses the controversial issue of negative gearing and the government policies to tackle the continuously rising pricing and the issue of negative gearing in the property market.

Running head: ECONOMICS
Australia’s Property Market (and the recent correction starting in 2017)
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1ECONOMICS
Australia’s Property Market (and the recent correction starting in 2017)
Table of Contents
Introduction....................................................................................................................................2
Industry background.....................................................................................................................2
Market structure............................................................................................................................5
The industry’s associated issue..................................................................................................6
Impacts of the issue on the industry and on the Australia economy....................................7
Government policy........................................................................................................................8
Conclusion......................................................................................................................................9
References...................................................................................................................................10

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Introduction
Property market in Australia is one of the major industries of the nation. The
sector is characterized by rapidly rising prices, which created inflation and a housing
bubble in the Australian economy. The average price of the property grew by 0.5%
annually for a century, 1890 to 1990, after inflation, however, the property prices started
to rise very fast 1990 onwards due to various economic reasons, and this resulted in an
Australian property bubble. 2017 onwards, it has been observed that the housing prices
are going downwards and thus showing signs of contraction of the bubbles (Wong et al.
2018). This report consists of an overview of the Australian property market. It will
highlight and discuss the industry background, market structure of the property sector,
along with the associated issue, its impact on the industry as well as on the Australian
economy, and the corresponding government policies.
Industry background
The real estate industry of Australia is one of the biggest industries, which has a
significant impact on the economy. In the past 5 years, there was a rapid boom in the
population and also in the economy of Australia, which was reflected in the residential
property market. The industry is non-uniform as high variation in prices and demand for
housing has been observed across the major cities and in the regional areas of
Australia (Crowe et al. 2013). The Australian economy has been experiencing a positive
economic growth for more than 2 decades, although there have been fluctuations in the
rate of growth, yet, the growth was always positive. This indicates improving
employment level and rate of inflation (Chua and Robinson 2018). This has contributed
in the growth of demand for the properties in a very rapid manner. In other words, there
has been soaring prices in the housing market of Australia. This increasing price has
resulted from positive and high economic growth, lack of availability of land and higher
demand for property. However, the market has also experienced falling prices in real
estate industry in different regions due to low wage growth, lower level of production,
economic uncertainties and high unemployment ratios. The highest housing prices have
been recorded in Sydney, Melbourne, Brisbane, Hobart and Canberra and in their

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suburban areas (Phillips and Joseph 2017). The property prices in the Australian
housing market are considered as highest compared to the average annual income of
people across the world.
The key issues of this industry are affordability, increase in immigration,
increasing foreign investment in the residential property market, and negative gearing
(Wong and Wakefield 2017). The housing prices soared due to fixed supply of land and
growing demand for the housing units, and also due to positive economic growth
leading to increasing trend of immigrated population, especially in the cities. Migration
has been happening due to high level of education in the reputed universities, and
increasing job opportunities for skilled workers. Thus, the demand for rental housing is
very high in the cities. The level of foreign investment has also increased significantly in
the past decade. It provides a huge inflow of foreign capital to the Australian economy.
Furthermore, the real estate industry channelizes the revenue to the government
through different types of taxes, such as, profit taxes, property taxes etc. (Wong et al.
2016).
The government’s policy of incentives and cutting the interest rates has acted as
an igniter for the investment in this industry and credit affordability of the individuals.
This has driven the growth in the housing prices over the last few years, despite
turbulences in the economy (IBISWorld 2019). Thus, the housing industry has been a
significant contributor in the GDP. On the other hand, there is a controversial issue in
the property market of Australia, that is, negative gearing. The Australian taxpayers
were allowed to negatively gear their properties and for that, the investors invest in
properties, which do not generate more profit. This enables the investors to pay less tax
to the government (Wood 2019).

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Figure 1: Trend in Prices in Property Market
(Source: Verrender 2018)
2017 onwards, there has been a fall in the property prices in Australia. The
house price downturn was the largest on record (Scutt 2019). It was observed that there
was a decrease in the numbers of housing transfers, which constrained the growth of
the industry. Moreover, the government has also restricted the level of foreign
investment on the properties, which reduced the revenue (Wong and Wakefield 2017).
According to a report by Zhou (2019), in 2018, the house prices dropped by 4.8%
across the nation, where Sydney experienced a 8.9% fall, Melbourne experienced 7%
fall. The tighter credit conditions were the driving factor behind lower demand of housing
and falling prices. According to a report by Oliver (2019), the fall in the house prices is
the biggest in the 40 years. The dwelling prices in the capital cities are down 9.7%
compared to the September 2017 high. The correction to the huge hike in house prices
in 2017 in Sydney and Melbourne overvalued the prices relative to the income of
individuals, rents and the long-term trend, poor affordability and high household debt.
The other factors contributing in the sharp decline in house prices are the end of the
investment in mining sector affecting wage growth in the economy, 80% fall in foreign
demand, lack of credit affordability, increase in supply of the units resulting in the rise in
rental vacancy in Sydney, decrease in falling price expectation resulting in reduced

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demand and the anticipation that Labor would win the election and negative gearing
would be limited and the capital gains tax would be halved (Oliver 2019).
Market structure
Market structure for any product or service is determined by several factors, such
as, number of firms, level of competition, ability of the producers to take or make the
prices, availability of close substitutes, level of barriers to entry or exit, threats from
existing competitors, and market forces of demand and supply (Daughety and
Reinganum 2018). The market for the physical assets, such as, the housing units, is
generally characterized by sales volume, higher yields and risks from external factors.
As stated by Tang, Leung and Ng (2018), the real estate market represents a unique
platform containing high profit and also high risk factors. While some experts consider
the real estate market to be a perfectly competitive market, some consider this to be an
oligopolistic market. As highlighted by (Diop 2018), a market becomes oligopoly, when,
few firms dominate the entire market with large number of buyers, the products are
close substitute of each other, the producers are price makers, the entry barriers are
high, there is high level of non-price competition and the firms behave like a group and
hence, interdependent.
By analyzing the real estate market structure of Australia, it is seen that few large
real estate companies, such as, Richardson & Wrench, LJ Hooker, Jellis Craig and
BARRY PLANT, dominate the entire manufacturing market, even though there are few
smaller firms without much influence on the market system. Number of buyers is large.
The products delivered in this market are not identical but close substitutes. The large
companies set the market price and they behave like a group. If one firm changes its
price, to remain in the competition, the other firms would also change their prices. The
dominance of these large firms create barriers to entry in the market for new firms. The
level of non-price competition is very high in the market structure of real estate. Hence,
the firms spend a huge amount of money for advertisements and all other types of
promotional activities. Thus, it can be stated that the property market of Australia follows
the oligopoly structure.

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The industry’s associated issue
For a long time, the property market of Australia played a significant role in the
growth of the economy. The price of housing is determined by the market forces of
demand and supply. As the supply of land is fixed and limited, the supply of housing is
also restrictive with relatively higher inelasticity (Harvey 2016). This creates excess
demand in the market for housing, resulting in housing price inflation. Similarly,
economic boom has increased the money supply into the economy and people tend to
invest more on assets that can give more value addition and better return. Moreover,
the unemployment and inflation rates are also moderate, which increased the housing
affordability of the people. Along with these factors, the increased migration of skilled
workers and students increased demand for rental housing. All these factors have
contributed in the rapid increase in demand for housing in Australia and since the
supply is limited, the prices soared very high (Wang et al. 2018).
As a result of the price increase, the housing bubble was created and
affordability decreased. This was a big issue for the property market of Australia. The
extreme rise in prices has been affecting the demand for housing ownership or rental
and thus, the growth of the industry was constrained. Another major issue of the
property market is the negative gearing. As stated by Blunden (2016), negative gearing
implies interest repayments and expenses on the investments are higher than the return
from the rent, that is, the investments are generating loss. In Australia, the property
investors are allowed to reduce their tax bills significantly when their investments are
negatively geared. In other words, the investors in the property market are enabled to
deduct the property expenses from the taxable income in which the investment amount
is more than the rent earned. These deductions include payments of interest on loans,
the amount for necessary maintenance and depreciation of the value of the properties
(Pawson 2018). It has become a controversial issue in politics as well as in the
economy of Australia. These issues have been affecting the growth of the property
market.

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Impacts of the issue on the industry and on the Australia economy
Negative gearing has significant impact on the real estate industry as well as on
the Australian economy. Cho, Li and Uren (2017) argue that there are some benefits of
negative gearing as it helps many investors with moderate income level to invest on the
housing market. On one hand, the investment in the housing market promotes housing
construction and increase in the supply of housing and on the other hand, it helps the
investors with moderate income to save some taxes as the return on the investment is
negative. Moreover, if negative gearing is removed, the costs of the investors would
increase and consequently the rents from the properties will increase too. The property
prices would also be hurt, as the level of investment would fall (Pawson 2018).
On the other hand, this incidence of negative gearing encourages the property
investors but reduces the housing supply to the home buyers, and also increases the
price of the housing properties. Moreover, negative gearing benefits the investors with
more assets than the buyers, and that helps the riches to get richer and it also
encourages risky investment. According to the experts of the property markets, negative
gearing is harmful for first time home owners as the barriers to entry into the market are
quite high (Gribbin 2017). This negative gearing offers opportunities to the tax payers
for decreasing their income and also encourages these investors to invest more in the
property market, however, the benefits are highly concentrated for the wealthier
investors, and not for the investors with low or middle income level. Around 1.3million
Australians are owners of at least one negatively geared investment property and
among them, almost half of them earn less than $80,000 (Thompson and McDonald
2018). Another report by Clarke (2019) shows that if negative gearing is removed, the
property prices would reduce and the rents would go up. In 2015, the property prices
increased by an average 8.7% and did not show any sign of slowing down.
Other than the negative gearing, the continuously rising price is another issue
that has been affecting the industry and the Australian economy. The limitations in the
supply of land, low credit availability, increased immigration, and high property taxes
have pushed the property prices sky high and the demand for purchasing property has
decreased significantly. However, the high rental price issue remained as the number of

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international students and skilled workers kept on increasing in the major cities, which
continued to increase the demand for the rental housing and that pushed up the rent
prices. Furthermore, growing international investments in the property market,
especially from the Chinese investors, have also contributed in the price rise in the
Australian property markets, which has been deterring the new investors to enter the
market or purchase properties (Wang et al. 2018).
Government policy
The property market of Australia has undergone a wide range of fluctuations in
the recent past, and corrective measures were observed since 2017. Initially, the
government policies of offering incentives to the investors, tax reduction on negatively
geared properties and allowance for foreign investments made the property market
unaffordable to the domestic buyers (James 2016). However, to control the price hike in
this industry, the government has lowered the interest rates, reduced corporate tax
rates, restricted the level of foreign investments in the property market and is also
planning to abolish the negative gearing.
However, the government of Australia made some changes in their policies to
tackle the continuously rising pricing and the issue of negative gearing in the property
market. The four major banks in Australia had increased the home loan rates in 2017 to
discourage borrowing for investing in the property market. On the other hand, the
reduction in the corporate tax rates and restrictions on foreign ownership of the
residential property have been encouraging the domestic investors and potential
homebuyers to invest their money in the real estate industry. At the same time, RBA
has also reduced allowable deductions for the property investors and abolished the
stamp duty for the first time homebuyers from July 1, 2017. Over the next few months,
the property market experienced the largest and sharpest drop in the house prices
(Janda 2018).
Along with that, the labor party has planned to abolish negative gearing in
Australia if they win the election. Clarke (2019) mentioned that if there are changes in
the negative gearing, the property prices will go down but the rent prices will go up.

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Doherty (2018) showed that if the negative gearing is scrapped, then almost 75% of the
Australian households would be better off. This huge percentage of households could
enter the property market and purchase a house. The house prices would go down by
1.2%, and the rents would rise marginally. At present the home ownership rate is
66.7%, lowest since mid-1950s and if the negative gearing is abolished, then the home
ownership rate would increase to 72.2%, highest since 1991.
Conclusion
From the above discussion, it can be concluded that the property market in
Australia has been facing high fluctuations in the recent past due to various factors as
mentioned above. Although the housing bubble had been existing in the property
market for a long time increasing the housing crisis, the government is finally taking
corrective measures to tackle the issue, increase the home ownership rate, and control
the hike in rental prices. As per the agenda of the Labor party, one of the most
controversial issues in the property market, that is, negative gearing would be limited to
put a halt to unfair tax reductions by the property investors and the home ownership is
expected to increase due to increased affordability in the coming years. Thus, it is
assumed that the situation in the property market would be improved in the near future
due to the corrections undertaken by the government.

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