Australian Housing Price Changes - Assignment
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Added on 2020-03-16
Australian Housing Price Changes - Assignment
Added on 2020-03-16
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Running Head: Australian Housing Price ChangesThe Impact of a fall in the Australian Housing Prices on its Economic PerformanceStudent NameInstitutional AffiliationCourse/NumberInstructor NameDue Date
Australian Housing Price Changes2The Impact of a fall in the Australian Housing Prices on its Economic PerformanceIntroductionAustralian housing prices has become a national threat for this country. The prices are very high such that the affordability has gone down to lower levels. Many people accuse the increased demand for housing by the Chinese buyers as the major factor that has pumped up the prices. However, Chau (2017) noted that the demand by the Chinese was too low to have a significant influence on the souring prices. He pointed out that the contribution of China to the real estate demand was less than 2% and thus blamed the increased prices on increased population growth and the low interest rate. There has however an increased spending of China on the Australian economy; the spending as at 2016 was $87.2 billion. This paper will determine the state of the Australian housing prices (whether overvalued or not); the overvaluation is determined by comparing the growth of housing prices to the growth of income. When the pricesare higher, this is considered an economic bubble. Generally, every bubble is expected to burst after some time; the impact of a bubble burst has negative impacts on the economy that will be discussed below. The government policy actions are important in moderating the housing prices and preventing a bubble burst.The Impact of Falling House PricesThe Australian housing prices according to various sources are overvalued. In the Australian largest states the overvaluation of housing prices is between 25 to 30pc and only a 10% fall is expected (Janda, 2017). The growth of Australian housing prices have been too high and a slugged growth in income; this provides enough evidence to believe that there is overvaluation of house prices. Paul Dale a Capital Economist provided information from his research that the current housing prices in Australia is way higher that of the U.S. before the global recession; the Australian housing prices are 38% higher than the fair value whereas the price for U.S. were 30% higher. The burst in the Australian housing bubble could harm the economic growth of the Australian economy and may at extreme case push it into a recession (Creighton, 2017). The Australian economy has been on a persistent low interest rate so as to promote its economic growth. This has facilitated the acquisition of cheap capital which has been directed to investment of properties. The availability of cheap capital is also the major factor for the U.S. housing bubble before 2007-09 global crises. Many people have borrowed to take such
Australian Housing Price Changes3investment; thus a significant fall on housing prices would hurt many Australian investors. The increased investment on housing and rentals has created many jobs to the Australian which has seen a fall in the unemployment rate. Generally, a significant fall in housing prices would make it less attractive to the investors and the investment level would fall resulting in a reduction in thejobs creating. The unemployment rate would rise as a result since less jobs will be created and others will lose their jobs since some investors will sell their investment and withdraw out of the housing market.Just like in the U.S., the bubble burst would result in a loss in the value of the housing property. Consequently, the rental returns will be lower than the borrowing costs and thus this will mean that the investors will make losses (Burgess, 2017). The losses will undermine the ability of the investors to repay the loans they had initially obtained from banks; the default rates will rise and the banks will not have sufficient funds to loan to the investors (Ramlall, 2013). Theincreased default rates on mortgage will impact all other investments in Australia because the banks and other lending institutions will be tighter in advancing loans to avoid risking additional funds. There will be low funds available for lending; the economy’s investment will fall and unemployment would rise (Jones, White & Dunse, 2012). Due to the increased unemployment rate, the inflation rate would also fall due to the inadequacy of demand; this is because the households will have insufficient income for demanding goods and services. The relationship between low inflation rate and high unemployment rate is represented in the Philips curve (Forder, 2014).Fig: The Philips Curve Inflation Rate (%)5%2% Philips curve3% 7% Unemployment Rate (%)
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