The Effects of Falling Australian House Prices on the Economy

This essay examines the effects of declining Australian house prices on the Australian economy. It begins with an introduction outlining the recent fall in house prices, citing data from the Australian Bureau of Statistics and the impact of tightened lending standards by the Australian Prudential Regulation Authority (APRA). The essay then explores the economic theory of the housing market, discussing supply, demand, and factors influencing price fluctuations, such as interest rates, consumer confidence, and lending practices. It provides data on declining house prices from December 2017 to June 2019, as well as year-to-year changes from 2015 to 2018. The essay analyzes the impact of falling house prices on the Australian economy, including effects on real GDP growth, inflation rates, and interest rates. It references data from the Reserve Bank of Australia and ANZ-Roy Morgan Australian CC Monthly Ratings to support its analysis. The conclusion highlights the negative economic impacts of falling house prices and the Reserve Bank's responses.

Running head: AUSTRALIAN FALLING HOUSE PRICES
1
“The effects of falling Australian house prices on the Australian economy”
Student’s Name
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AUSTRALIAN FALLING HOUSE PRICES 2
Introduction
For the last one and a half years, a dramatic fall in the Australian house prices been
witnessed. According to the “Australian Bureau of Statistics Residential Property Price Indexes
2018 December”, the Australian house prices dropped by 4.8% on an annual basis with Sydney
and Melbourne recording the highest falling percentages of -8.9% and -7% respectively. The
major reason behind the sharp decline in the Australian house prices was the tightened lending
standards by the “Australian Prudential Regulation Authority (APRA)” following the “Royal
Commission into Misconduct in the Banking, Superannuation and Financial Services Industry”.
This was after the Commission discovered irresponsibility in lending practices and fraud in
mortgages which were also termed as “subprime liar loans”. Since the early months of 2017, the
house prices have been in the fall.
In this essay, a discussion of the Australian falling prices and their effects on the
Australian economy as a major concern for everyone has been done. Policies have also been
suggested on what can be done by the Australian government and the Reserve Bank of Australia
to rectify the problem and an assessment of the success of the policies done.
Economic Theory of Housing Market
Housing market refers to a general market of houses being bought or sold by the buyers
or sellers respectively (Xiao, 2012). Buyers may either purchase houses directly from their
owners or indirectly through the brokers. It is really tough to predict the future of the housing
market since it is determined by so many factors.

AUSTRALIAN FALLING HOUSE PRICES 3
The housing market just like any other market is subject to demand and supply. The
economic theory of markets seeks to explain the housing price and the house demand and supply
and predict future outcomes in the housing market. The housing market consists of the users,
owners, renters, developers, renovators and facilitators (Muth, 2017). Users, renters and owners
constitute demand while the renovators and developers constitute supply.
The unique characteristics of properties include durability, heterogeneity, high costs of
transaction, long-time delays, investment as well as consumption good and immobility
(Henderson, 2014).
The demand in the housing market can generally be attributed to demographic factors but
also other factors such as consumer income, housing pricing, and credit availability among
others play a vital role (Summers, 2015). For instance, population growth in an economy is
associated with high demand for housing. Housing pricing and credit availability are determined
by the prevailing interest rates in an economy. When interest rates are low, consumers are likely
to purchase more property using the borrowed funds since they will repay with low-interest rates
which are not a burden to them (Wood & Ong, 2017). The reverse is expected when interest rates
are high. When the economy is strong or rather growing positively, consumers are likely to have
more income for consumption and therefore they may increase their demand for housing by
purchasing more property. High house prices discourage housing purchase for consumers
decreasing demand in the housing market while low house prices encourage consumers to
purchase new property and this increases demand in the housing market.
The supply in the housing market is done by the developers and the renovators who use,
labour, land and other factor inputs such as building materials and electricity to produce new

AUSTRALIAN FALLING HOUSE PRICES 4
property. The supply of housing depends on the cost of the above factor inputs, production
technology, population growth and other factors such as natural disasters. Population growth,
favourable costs of the factor inputs, improved production technology and absence of natural
disasters spur supply in the housing market and vice versa. Oversupply drives house prices
downwards while low supply drives house prices upwards due to bidding wars.
“Possible factors that cause a decline in house prices”
“Economic recession and unemployment”: The level of consumer income is a crucial
determinant factor for the demand for housing. When an economy is at recession or experiencing
a downfall, consumers have less income. Others even end up losing their jobs increasing the
level of unemployment in the economy. The phobia of unemployment also may discourage
people from entering the housing market. The low consumer income and increased
unemployment during an economy’s recession phase make consumers unable to afford property.
This lowers the demand for housing and pushes house prices downwards (Glindro et al, 2011).
“High-interest rates”: When interest rates are high, the mortgage payments are high. As a
result, the demand for buying houses decreases since consumers would prefer renting rather than
buying. The decrease in demand in the housing market due to high-interest rates causes a fall in
house prices.
“Consumer confidence and future expectations about house prices”: Consumer
confidence determines the willingness of consumers taking a mortgage. If consumers lack
confidence about the future economic conditions, then they will definitely not buy a house and
this will lower the housing market demand causing house prices to fall. Similarly, if consumers

AUSTRALIAN FALLING HOUSE PRICES 5
expect future house prices to fall, then they will end up deferring house buying. This will lower
housing demand and drive house prices downwards.
“A fall in bank lending and mortgage availability”: When banks lower their lending and
require huge deposits for purchasing a house, consumers have little income for buying a house
since credit is not and mortgages are less. This decreases demand in the housing market and
leads to a fall in house prices.
“Oversupply”: When there is an excess supply of houses in the housing market, house
prices fall. This is because oversupply leads to disproportionate demand and supply where
supply exceeds demand in the housing market.
Declining house prices in Australia
As discussed earlier on, the Australian house prices have been on the fall for the last one
and half years. The decline has been attested to the tightened lending standards by the
“Australian Prudential Regulation Authority (APRA)” following the “Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry” after the
commission discovered irresponsible banking practices by the Australian banking sector. The
following data shows the “Residential Property Price Index percentage change from the previous
quarter”:
Residential Property Price Index percentage change from the previous quarter
Quarter
s Sydney Melbourne Brisbane Adelaide
Pert
h Hobart Darwin Canberra Average
Dec-2017 -0.1 2.6 0.9 0.6 1.1 3.9 -1.5 1.7 1.0
Mar-2018 -1.2 -0.6 -0.6 0.5 -0.9 4.3 -1.1 0.9 -0.7
Jun-2018 -1.2 -0.8 0.7 0.3 -0.1 3.0 -0.9 0.6 -0.7
Sep-2018 -1.9 -2.6 0.6 0.6 -0.6 1.3 -0.9 0.5 -1.5
Dec-2018 -3.7 -2.4 -1.1 0.1 -1.0 0.7 -0.6 -0.2 -2.4

AUSTRALIAN FALLING HOUSE PRICES 6
Mar-2019 -3.9 -3.8 -1.5 -0.2 -1.1 -0.4 -1.8 -0.9 -3.0
Jun-2019 -0.5 -0.8 -0.7 -0.6 -1.4 0.5 -1.8 0.2 -0.7
Source: “Australian Bureau of Statistics
(https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Jun%202019?
OpenDocument)”
The graph for the above data is as shown below.
Dec-2017 Mar-2018 Jun-2018 Sep-2018 Dec-2018 Mar-2019 Jun-2019
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Residential Property Price Index percentage change
from previous quarter
Sydney
Melbourne
Brisbane
Adelaide
Perth
Hobart
Darwin
Canberra
Average
Quarters
Percentage changes (%)
From the above data for the past quarters for all the eight Australian cities, it is evident
that house prices in the eight cities have been decreasing since the December 2017 quarter.
During the June 2019 quarter, the rate of decrease in the house prices for the eight cities has
decreased meaning that prices for the house prices have improved and may increase further in
future. Considering the average percentage change for the eight cities, the same trend is
established since the average percentage in house prices for all the quarters has been decreasing

AUSTRALIAN FALLING HOUSE PRICES 7
since the 2017 December quarter. The 2019 June quarter has shown a different trend since the
rate of decrease for the percentage change has decreased meaning house prices have improved.
The data for the Australian year to year “Residential Property Price Index percentage change” is
shown below from the year 2015.
Residential Property Price Index percentage change from year to year
Year Value (%)
Dec-2015 8.7
Dec-2016 7.7
Dec-2017 5
Dec-2018 -5.1
Source: “Australian Bureau of Statistics
(https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Jun%202019?
OpenDocument)
The graph for the above data is as shown below:
Jan-2015 Jan-2016 Jan-2017 Jan-2018
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Residential Property Price Index percentage
change
Value
Year
Annual percentage change (%)

AUSTRALIAN FALLING HOUSE PRICES 8
From the above data of the year to year “Residential Property Price Index percentage
change”, the Australian house prices have been decreasing on an annual basis from 2015 to
2018. Each year shows a greater decline in the house prices as compared to previous. From 2015
to 2017, the annual percentage of house prices shows a positive change. However, for the year
2018, a negative percentage change is recorded. This was due to the tightened lending standards
by the “Australian Prudential Regulation Authority (APRA)”.
“The effects of declining Australia’s house prices on the Australian economy”
The following data has been used to explain the effects the Australian falling house prices
have on the Australian economy.
Quarter
s
Average (Residential
Property Price Index
percentage change)
Real GDP
Quarterly ($
Million)
Real GDP
growth rate
(%)
Quarterly
Inflation rate
(%)
Lending rates %
(Standard
mortgage)
Dec-2017 1.0 451489
2.5
1.9 5.28
Mar-2018 -0.7 456071
3.1
1.9 5.28
Jun-2018 -0.7 459252
3.1
2.1 5.28
Sep-2018 -1.5 460617
2.6
1.9 5.33
Dec-2018 -2.4 461263
2.2
1.8 5.36
Mar-2019 -3.0 463653
1.7
1.3 5.42
Jun-2019 -0.7 465885
1.4
1.6 5.30
Source: “Reserve Bank of Australia”
Year Residential Property Price Index percentage change Consumer Confidence
Dec-2015 8.7 112.3
Dec-2016 7.7 115.5
Dec-2017 5 113.9
Dec-2018 -5.1 118.5
Source: “ANZ-Roy Morgan Australian CC Monthly Ratings”

AUSTRALIAN FALLING HOUSE PRICES 9
Considering the above data, it is evident that the Australian falling prices have negatively
impacted the Australian economy. The sharp fall in the Australian house prices slowed the
Australian economic growth with effects been witnessed during the year 2018 after the
tightening of the lending standards by the “Australian Prudential Regulation Authority (APRA)”.
The Australian real gross domestic product growth rate declined significantly from June 2018 to
June 2019 from 3.1% to 1.4% which is quite a huge decline. Even the Reserve Bank of Australia
has lowered the value it had forecasted earlier on for the 2019 economic growth rate from 2.75%
to 2.5% (Nguyen & Wang, 2019). Considering the current situation of the consumer confidence
which has not been included in the table since it is on a monthly basis, it has decreased due to the
falling house prices. This has lowered the rate at which consumers spend their income on houses
and this has as well contributed towards lower economic growth.
The falling house prices have led to a decline in inflation rates for the Australian
economy. Inflation indicates a rise in the general price for goods and services over a given period
of time. For my case, quarterly inflation rates have been considered. Considering the obtained
data, it is evident that the falling house prices in Australia have resulted in a decrease in inflation
rates. It is crucial to note that low inflation is coupled with low economic growth. It is therefore
important to conclude that the Australian falling prices have led to a decrease in inflation and as
a result the Australian economic growth has slowed down.
The falling Australian house prices have led to a decrease in interest rates. After the house
prices continued to fall after the tightened lending standards by the “Australian Prudential
Regulation Authority (APRA)”, the Reserve Bank of Australia continued to hold cash rates at a
record low of 1.5%. However, due to the tendency of house prices continuing to fall, the Reserve
Bank of Australia has currently lowered the cash rates to a record low of 1%. The lending rates

AUSTRALIAN FALLING HOUSE PRICES 10
for the standard mortgage have been kept low at percentages ranging between 5% and 6% which
is below the set maximum repayment rate of 7% by the Reserve Bank of Australia. Also, despite
the fact that interest rates have been kept low, there is no tendency of increased lending activities
since consumers still have low confidence with the declining prices and the banking lending
standards are still tightened. The “Australian Prudential Regulation Authority (APRA)” had
earlier on in 2017 effected a cap of 30% on the lending of new loans (Rowley et al, 2017) which
together with the tightened banking practises led to the Australian house prices sharp decline.
Despite the removal of the cap by APRA on January 2019, prices still continued to fall.
The Australian house prices fall has also led to a decline in the Australian residential
construction activity. Rendering to the Australian Bureau of Statistics, dwellings approvals in
Australia have fallen 22.2% to around 86788 units during the 2019 first half. Queensland has
recorded the biggest decline of 32% followed by Australian Capital Territory with (-24.6%),
Victoria with (-22.5%), New South Wales with (-20.9%), South Australia with (-19.8%),
Northern Territory with (-15.2%) and Western Australia with (-6.8%). Tasmania showed an
exception since it recorded an increase in dwelling approvals by 6% during the 2019 first half.
“Why should everyone be concerned about the Australian declining house prices?”
The Australian falling house prices should be a major concern for everyone including the
economists. A continued fall in the house prices might harm the Australian economy and that of
the entire world severely and Australia might even land into an economic recession. A fall in
house prices impacts the consumer spending as well as their confidence and that of the entire
construction industry (Zhang, 2019). The housing consumption accounts for 60% of the total
Australian consumption. This is, therefore, clear evidence that a reduction in housing

AUSTRALIAN FALLING HOUSE PRICES 11
consumption due to the falling Australian house prices will adversely affect the Australian
economy. For instance, Australian consumers already have a fear for the future. They have lost
confidence in housing expenditure as the value for their homes is now less as compared with
their outstanding mortgages. They are therefore spending less on housing and are cautious about
the future as the property value continues to fall (Cusbert & Kendall, 2019). Sydney and
Melbourne are likely to experience the highest surge in household consumption since they highly
rely on discretionary spending. The demand and supply for new homes in Australia is falling.
According to Australian Bureau of Statistics, the buying of new homes in Australia dropped by
28.3% during the 2019 first half. Also, the dwellings approvals fell by 22.2% to around 86788
units during the 2019 first half with Queensland recording the biggest decline of 32%. The
foreign housing consumption has also shown a similar trend with the applications for foreign
investment in the residential real estate for Australia falling to 10036 in 2018 as compared to
2016 applications which were 40141 according to the Foreign Investment Review Board. The
Australian economic growth has slowed due to the falling house prices and even the Reserve
Bank of Australia has lowered the value it had forecasted earlier on for the 2019 economic
growth rate from 2.75% to 2.5%. The above evidence shows that the falling Australian house
prices are already slowing down the economy and everyone should be concerned since the
economy might soon end up towards a recession with decreased consumption, higher
unemployment and low inflation (Paris, 2017).
“What should the government and the Reserve Bank of Australia do to help reverse the trend”
The Australian government should tighten its labour market. This will see wages growth
significantly. Considering the past 12 months, wages increased by only 1.2% which is quite low
considering the current state of the Australian economy (Isaac, 2018). The policy of tightening

AUSTRALIAN FALLING HOUSE PRICES 12
the labour market will of course work. This is because higher wages increase consumer level of
income and consequently raises their disposable income. The demand in housing market will
increase as consumers spend more on housing. When demand for housing increases the house
prices will start increasing. This policy will, of course, have inflationary effects on the Australian
economy but it will be coupled with economic growth.
The Reserve Bank of Australia should continue to hold cash rates at the current record
low of 1% for the time being. This policy will also work. The low cash rates mean that interest
rates at which the Australian banks lend credits will be low. As a result, more Australians will be
able to acquire more loans for expenditure including purchasing property such as new homes.
This will raise housing demand and increase house prices. The policy is also likely to see
Australian inflation rate increase coupled with economic growth.
The Australian government should ease its regulations on house buying by foreigners.
Foreigners account for 20% of the total Australian housing buying every year. However, the
tightened Australian regulations on foreign house buying have highly discouraged foreigners
from buying homes in Australian and as a result, the foreign property has decreased significantly.
The applications for foreign investment in the residential real estate for Australia falling to 10036
in 2018 as compared to 2016 applications which were 40141 according to the Foreign
Investment Review Board. New South Wales, Victoria and Queensland have increased stamp
duties for foreign home buyers while the government itself has put in place ghost tax for
investment properties which are left vacant for six months. This policy will work since easing the
foreign home buying regulations will increase foreign demand (Glick & Lansing, 2010) on
Australian housing market. This will help increase the Australian falling prices.

AUSTRALIAN FALLING HOUSE PRICES 13
Conclusion
For the last one and half years, the Australian house prices have been falling sharply after
a five years property bubble. The sharp decline in the Australian house prices has been attributed
to the tightened lending standards by the “Australian Prudential Regulation Authority (APRA)”
following the “Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry”. This was after the Commission discovered irresponsibility in
lending practices and fraud in mortgages which were also termed as “subprime liar loans”. Some
of the other factors which might lead to a fall in house prices include “economic recession and
unemployment, higher interest rates, consumer confidence and future expectations about house
prices”, a fall in bank lending and mortgage availability, housing oversupply, a change in
demographics and high affordability/house prices to earnings ratio.” The falling Australian prices
have lowered the nation’s gross domestic product while inflation has remained low since the
Reserve of Australia has continued to hold cash rates low. The government of Australia and the
Reserve Bank should tighten the labour market to see wages rise, ease the home buying
regulations by foreigners and continue to hold cash rates at a low record low of 1% in order to
change the trend of the Australian falling housing prices.

AUSTRALIAN FALLING HOUSE PRICES 14
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