Impact of Property Price Bust on Macroeconomic Variables

Running head: INTERNATIONAL MACROECONOMICS
International Macroeconomics
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1INTERNATIONAL MACROECONOMICS
Introduction
Housing market in Australia has undergone several ups and down. Property bubble
refers to an economic bubble characterized as a rapid increase in real property prices unless
they reach to an unsustainable level in relation to income and rents and then experience a
sudden decline. In Australia, property price has reached to a peak in 2017 and then started to
fall ever since (Baur and Heaney 2017). As recorded in January 2019, housing price in
Sydney were 13 percent lower than the peak level of 2017. The housing market downfall has
an economy wide effect through its impact on different macroeconomics variables.
Implication of property price bust on macroeconomic variables
Home prices in Australia have been recorded a downfall since late 2017. The
downfall is expect to last for the upcoming years. The recent downturn is one of biggest
decline of housing market surpassing periods of housing market decline in late 1800s and in
the early 20th century. The decline in housing price though is not uniform in nature but the
impact has been realized all over the economy.
For most of the Australian household, one of the largest stores of wealth is family
home. The downfall in housing prices along with weakness of Australian stocks caused
household wealth to decline by 4% in real (inflation-adjusted) terms. The net housing wealth,
which is value of homes less the mortgage debt declined by 12 percent after reaching peak in
2017. In the first quarter of 2018, wealth declined by 2.5 percent in response to an acute
decline in housing price in capital cities such as Sydney, Melbourne and Perth (Scutt 2019).
Decline in household wealth hurt the confidence of confidence of consumers reducing
household spending. Household spending, which is one largest components of aggregate
output, a decline in household spending leads to a contraction of aggregate output affecting
broader Australian economy (Heijdra 2017). The economy recorded a sharp slowdown in
2018 with an annual growth rate of 1 percent in the second half of the year.

2INTERNATIONAL MACROECONOMICS
Figure 1: Decline in real net household wealth
(Source: Scutt 2019)
The weak household spending in turn has a counteracting effect on Australian labor
market condition. Continuous weakness in property market results in an increase in
household saving and the economy experiences sluggish growth in consumption spending.
The economic downturn eventually results in an increase in unemployment rate following a
slow-down in hiring (sbs.com.au 2019). This creates difficulty for RBA to maintain the stable
inflation rate within the targeted range of 2 to 3 percent. The economy has already recorded a
weak inflation rate. Price level is unlikely to recover if unemployment starts to increase
renewing the downward pressure on growth of real wage.
The property bubble burst and resulting economic instability discourages foreign
investor to invest in Australia. Those who invested capital in Australia in times of housing
market boom now withdraw their money (Heijdra 2017). Outflow of foreign capital and
decline in demand for Australian dollar results in a depreciation of domestic currency.