Australian property bubble

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Chart 1: House Price Index and CPI. Source ABS

The Australian property bubble refers to the hypothesis that real estate in Australia is overvalued. The hypothesis has been proposed since at least 2001, yet Australian house prices have continued to rise. Some commentators, including one Treasury official,[1] claim the Australian property market is a significant bubble. Various industry professionals have suggested it is not a bubble and that house prices have the potential to keep rising in line with income growth. Commentators have accused state governments of restricting land supply, driving up the cost of land, lots, and thus homes.[2]

A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is normally characterised by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and rents, and then decline. Australian house prices rose strongly relative to incomes and rents during the late 1990s and early 2000s, however from 2003 to 2012 the price to income ratio and price to rent ratio have both remained fairly steady, with house prices tracking income and rent growth during that decade. Since 2012 prices have once again risen strongly relative to incomes and rents.

Australian property market[edit]

House prices to income ratio, 1965 to 2013.

The Australian property market has shown steady increases of around 3% per annum since the 1970s. Since the 1990s however, prices have risen by around 6% per annum.[3]

In the late 2000s, house prices in Australia, relative to incomes, were at levels similar to many comparable countries, prompting speculation that Australia was experiencing a real estate bubble like many comparable countries. Since then, several comparable countries have experienced property crashes.

Rising house prices[edit]

All capital cities, with the exception of Sydney, have exhibited strongly increasing prices since about 1998-9. Sydney house prices increased from $573,000 to $671,500 (+17%)[4] between 2003 and 2010 while other capitals have roughly doubled in price since 2003.

The 'Housing Affordability in Australia - Good house is hard to find' report stated that "the average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s." [5] Some factors that may have contributed to the increase in prices are;

  • Greater availability of credit due to financial deregulation
  • Low interest rates from 2008 onwards (increasing borrowing capacity due to lower repayments)
  • Limited government release of new land (reducing supply) [6]
  • The average floor area of new houses increasing by up to 53.8% in the 18 years from 1984-85 to 2002-03 [7]
  • A tax system that favours investors and existing home owners.
  • Government restrictions on the use of land preventing higher density land use.
  • Government restrictions on greenfield development designed to encourage "urban densification"
  • High population growth (now about double the world average - see Population growth rates chart).[8]
  • 2008 foreign investment rule changes for temporary visa holders[9]
  • Introduction by local councils of upfront infrastructure levies in the early 2000s.

Influence of tax system[edit]

Chart: % Population Growth. Australia - high growth rate strategy at 2.1% - source Wikipedia & ABS.

Investors using their superannuation have a tax advantage compared to 'savers' who are effectively taxed up to 45% (the top marginal taxation rate) on income from bank interest or bonds, as Superannuation contributions are normally only taxed at around 15% .

The RBA has noted that there are "a number of areas in which the taxation treatment in Australia is more favourable to investors than is the case in other countries."[10]

Land price inflation, CPI and interest rates[edit]

Some of these factors added especially to the borrowing power of investors. Debt growth averaged 15% per annum compounding (1998–2009). During the same period national economic growth was less than 3% with debt stripped out.[11]

Between 1998 and 2008 inflation was about 36%[12] and property prices increased by more than 300% in all capital cities except Melbourne (up 280%) and Sydney (up 180%).[13]

Foreign investment in residential property[edit]

In December 2008, the federal government introduced legislation relaxing rules for foreign buyers of Australian property. According to FIRB (Foreign Investment Review Board) data released in August 2009, foreign investment in Australian real estate had increased by more than 30% year to date. One agent said that "overseas investors buy them to land bank, not to rent them out. The houses just sit vacant because they are after capital growth."[14]

In April 2010, the government announced amendments to policies to "ensure that foreign non-residents can only invest in Australian real estate if that investment adds to the housing stock, and that investments by temporary residents in established properties are only for their use whilst they live in Australia."[15][16]

Under the rules, temporary residents and foreign students will be:

  • Screened by the Foreign Investment Review Board to determine if they will be allowed to buy a property.
  • Forced to sell property when they leave Australia.
  • Punished if they do not sell by a government-ordered sale plus confiscation of any capital gain.
  • Required to build on vacant land within two years of purchase to stop "land banking".

Failure to do this would also lead to a government-ordered sale.[17]

Several Australian Banks and lenders provide home loans to non-residents for the purchase of Australian real estate. This is also thought by some to have contributed to the increases in Australia's property prices.

Government inquiries related to housing[edit]

In 2002, the government initiated a Productivity Commission Inquiry Report titled 'First Home Ownership'.[18] The report observed inter alia that "general taxation arrangements [capital gains tax, negative gearing, capital works deductions and depreciation provisions] have lent impetus to the recent surge in investment in rental housing and consequent house price increases."

The government's response to the report stated that "There is no conclusive evidence that the tax system has had a significant impact on house prices."[19]

In 2008, another study was commissioned – the 2008 Senate Select Committee on Housing Affordability in Australia.[20] The report noted that "On some measures, housing affordability is at a record low." [5]

'Australia's Future Tax System' (AFTS) review, more commonly known as the 'Henry Tax Review', made a number of recommendations that would have impacted on the housing market, including:

  • Introduction of land tax "on all land . . removing disincentives for institutional investment in rental property";
  • that "transfer taxes on property should be reduced, and ultimately removed";
  • a move to "more neutral personal income tax treatment of private residential rental investment . . through a 40 per cent discount on all net residential rental income and losses, and capital gains."[21]

In regard to recommendations of changes to tax policy that might impact the housing market, the Government advised "that it will not implement the following policies at any stage" (excerpt of list):

  • Include the family home in means tests (see Rec 88c)
  • Introduce land tax on the family home – this is a state tax and thus an issue for the states (see Rec 52 & 53)
  • Reduce the CGT discount, apply a discount to negative gearing deductions, or change grandfathering arrangements for CGT (see Rec 14 & 17c)[22]

Effect of inflated housing prices on the greater economy[edit]

Diverting capital away from the rest of the economy[edit]

Increased residential housing costs can cause excessive lending to the residential housing sector, at the expense of businesses. This can lead to "a banking system which allocated capital away from the most productive areas of the economy — business — is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end, bad for Australia."[23]

Research conducted in overseas markets confirms that "in areas with high housing appreciation, banks increase the amount of mortgage lending and decrease the amount of commercial lending as a fraction of their total assets. This allocation results in firms receiving reduced loan amounts, paying higher interest rates, and reducing investment."[24]

Mortgage and rent stress[edit]

Increased housing prices and therefore increased borrowings can lead to difficulty in meeting housing payments. According to Ratings agency Standard & Poor's (S&P), "Arrears for sub-prime loans backing RMBS [residential mortgage-backed securities] jumped 126 basis points to 11.45 per cent"[25]

Australian specific market factors[edit]

The Australian market had several features either singly or together are not typical in other housing markets, being;

  • Very constricted land supply and extremely onerous planning approval processes
  • Unusually high stamp duties
  • Income Tax relief through negative gearing
  • Social security (Centrelink) that offers payment including rent assistance that is calculated on the amount of rent paid
  • A Federal, state and local council divide that complicates land release and planning and direct and indirect taxation on land
  • Only recourse loans
  • One of the most highly urbanised populations
  • Large areas of rural and remote Australia can not secure loans from banks against land in those areas.
  • Statewide land use planning that heavily restricts subdivision and greenfield development, driving land prices to extreme heights



  • 1985: Australian government quarantines interest expenses, so that interest can only be claimed against rental income, not other income.[26]
  • 1998 to 2008: real net national disposable incomes increase by 2.8% a year on average from about $32,000 to about $42,000 per year.[27] There is a rise in the number of two-income households, relaxation of lending standards, active promotion of real estate as an investment, population growth creating demand that was not matched by supply, planning and land release issues and a tax system that was skewed in favour of property investors.
  • 1999: Property sale proceeds subject to Capital Gains Tax reduced from 100 to 50 percent (for property held at least one year), while 100 percent of costs remained deductible.
  • 2000: July - The Federal government introduces the First Home Owners Grant of $7,000 for established homes, and $14,000 for newly built homes.[28]
  • 2002: Urban Growth Boundary introduced for Melbourne, severely limiting land supply.[29]
  • 2003: Significant amendments to Queensland's planning law, the Integrated Planning Act, are made by state government.[30] These amendments aimed to better protect the environment by stopping "urban sprawl", and lead to massive land price inflation.[31] Queensland's property prices start to rise quickly at this point.
  • 2004: The Productivity Commission Inquiry on 'First Home Ownership' published its findings (No. 28, 31 March 2004). It identified several factors that had contributed to the rapid increase in real estate prices, including overall fairness of the tax system, lending regulations, lower interest rates and planning issues.[32]
  • 2008: A Senate Select Committee on Housing Affordability was established. Its final report 'A good house is hard to find' included dozens of recommendations.[33]
  • 2008: October - The First Home Owners Grant Boost is introduced as an addition to the First Home Owners Grant. This consisted of an extra $14000 available to first home owners buying or building a new home, as well as an extra $7000 made available for established homes. First Home Saver Accounts are also introduced, where the Federal Government will contribute up to $850 per annum towards savings for a deposit to purchase housing.
  • 2008: December - FIRB rules allow temporary visa holders including students, to more easily buy up 'second-hand dwellings'. Changes did not require notification of sales be made to the FIRB and the $300,000 cap on price was removed.[34]
  • 2009: October - First Home Owners Grant Boost is withdrawn. The UNSW City Futures Research Centre director said "the boost has resulted in inflated prices" and had created "a bit of a mini-bubble". A senior economist of Housing Industry Association (HIA) said the boost has not pushed prices up significantly.[35]
  • 2009: November - "capital city house prices . . climbed average 10 per cent" in 2009. Melbourne led the "house price boom, with values up 14.9 per cent in the 10 months . . to an average of $481,247." [36]
  • 2009: December - Reporting of RE data was questioned by one source: "AVERAGE house prices have been overstated by up to 18 per cent by the real estate industry . . . In September the average house price quoted by the Real Estate Institute of Victoria was $67,000 higher than the official figure, based on preliminary valuer-general data . . "[37]


  • 2010: January - The removal of First Home Owners Grant Boost. Mortgage applications reduce by 21.2%.[38] First-home buyers account for 13.1 per cent of new loan applications in December, whereas nine months previously they were at 28.1 per cent.
  • 2010 March: ABS declares that house prices "soared 20 per cent in the 12 months to March" - a rate that was described as the "fastest ever recorded" in Australian history. The Head of Australian economics at National Australia Bank admits "This is a shocker".[39]
  • 2010: April - Rules allowing foreign investment in real estate that were introduced in 2008 are withdrawn. Temporary residents are required to sell their Australian property when they leave Australia.[40]
  • 2010: May - 'Australia's Future Tax System' (AFTS) Review (aka 'Henry Tax Review') makes a number of recommendations on policies that could affect the housing market.[21]
  • The government responds to the AFTS review findings with a report 'Stronger, Fairer, Simpler: A Tax Plan for our Future'.[22]
  • 2011: February - New housing loans approved by Australian banks fall 5.6 per cent to a 10-year low in February.[41]
  • 2012: October - The RBA cuts interest rates to 3.25%.
  • 2012: December - The RBA cuts interest rates to 3.00%.
  • 2013: April - Glenn Stevens is re-appointed as RBA Governor for 3 more years.
  • 2013: May - The RBA cuts interest rates to 2.75%.
  • 2013: August - The RBA cuts interest rates to 2.50%.
  • 2013 - November - Statistics released by the Australian Prudential Regulation Authority revealed that the total amount of residential term loans to households held by all ADIs (authorised deposit taking institutions) was $1.15 trillion. This was an increase of 1.7% on 30 June 2013 and an increase of 7.5 on September 2012. Furthermore, investment loans accounted for 33.1 per cent of the loans. Major banks held $933 billion of these loans.[42]
  • 2014 - January 1 - RP Data reveals that national residential prices increased by 9.8% in 2013, with Sydney increasing by 15.2%.[43]
  • 2014 - January 13 - Housing Finance statistics released by the Australian Bureau of Statistics shows the value of outstanding home loans financed by the ADIs was $1.25 trillion. $842 billion of that amount was for owner occupied housing and $412 billion was for investment housing loans.[44]
  • 2014 - Data released by RP Data, APM, Residex and ABS in 2014 showed that Australian house prices continued to rise strongly throughout 2013 and 2014.[45]
  • 2015 - The International Monetary Fund sends an economic team to Australia to examine "the risks posed by property speculation and record-high household debt as part of a broad health check-up of the sagging domestic economy."[46]
  • 2015 - The head of the Federal Treasury Department, and the Federal government's most senior economic adviser, John Fraser publicly warned that Sydney and more expensive parts of Melbourne were experiencing a bubble. This was disputed by members of the government including the Prime Minister and Assistant Treasurer.[47]
  • 2015 - October - Macquarie Bank, a major Australian investment bank forecasted an end to property prices with "quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017, with a 7.5 per cent fall from peak to trough".[48] Westpac Bank independently raised the rates on its standard variable mortgage by 20 basis points against the Australian Reserve Bank. This was the first rate rise by an Australian bank in five years.[49][50]

See also[edit]


  1. ^ "Treasury Warning on Home Price Bubble". The Australian. Retrieved 2016-01-20. 
  2. ^ Matthewson, Paula (2012-06-21). "House prices must be allowed to fall - The Drum (Australian Broadcasting Corporation)". Retrieved 2016-01-20. 
  3. ^ Stapledon, Nigel. A History of Housing Prices in Australia 1880-2010. School of Economics Discussion Paper: 2010/18. Sydney, Australia: The University of New South Wales Australian School of Business. ISBN 978-0-7334-2956-9. Retrieved 1 May 2011 
  4. ^ "Australian Property Market Experts". Residex. Retrieved 2016-01-20. 
  5. ^ a b "A good house is hard to find: Housing affordability in Australia - Executive Summary". Senate Select Committee on Housing Affordability in Australia. 16 June 2008. 
  6. ^ "Housing industry accuses state government of dragging its feet over releasing land". Seek Estate. 2 June 2014. 
  7. ^ "1301.0 - Year Book Australia, 2005". Retrieved 2016-01-20. 
  8. ^ "Australian population growth is double the world average". (News Corp). 26 March 2010. Retrieved 2 May 2011. 
  9. ^ [1][dead link]
  10. ^ "Productivity Commission Inquiry on First Home Ownership". 2003-11-14. Retrieved 2016-01-20. 
  11. ^ Don't mention the debt Michael West, Sydney Morning Herald, 19 February 2009
  12. ^ "Inflation Calculator". 1966-02-14. Retrieved 2016-01-20. 
  13. ^ [2] Archived 29 August 2008 at the Wayback Machine
  14. ^ "Foreign buyers blow out the housing bubble". 2009-09-21. Retrieved 2016-01-20. 
  15. ^ Colebatch, Tim (24 April 2010). "Foreign home buyers backflip The Age 23 April 2010". Melbourne. 
  16. ^ "Government Tightens Foreign Investment Rules for Residential Housing Australian - Media release No 074". 24 April 2010. Retrieved 2016-01-20. 
  17. ^ "Prime Minister Kevin Rudd Slams Door in Asian Raiders". Retrieved 2016-01-20. 
  18. ^ [3][dead link]
  19. ^ [4][dead link]
  20. ^ [5][dead link]
  21. ^ a b "Executive summary" (PDF). Retrieved 2016-01-20. 
  22. ^ a b "Former Australian Government Department of Education, Employment and Workplace Relations | Australian Government Shared Services Centre" (PDF). 2013-09-18. Retrieved 2016-01-20. 
  23. ^ "Residential lending may hurt us in the long run". Crikey. 12 Feb 2010. 
  24. ^ "Do Asset Price Bubbles have Negative Real Effects?" (PDF). University of Pennsylvania. November 2013. 
  25. ^ "Mortgage holders showing stress". 2011-04-05. Retrieved 2016-01-20. 
  26. ^ a b O’Donnell, Jim (July 2005). "Quarantining Interest Deductions for Negatively Geared Rental Property Investments". EJournal of Tax Research (Sydney: Atax, University of New South Wales) 3 (1). Retrieved 2 May 2011. 
  27. ^ "1383.0.55.001 - Measures of Australia's Progress: Summary Indicators, 2009". Retrieved 2016-01-20. 
  28. ^ "First Home Owners Scheme". Retrieved 2016-01-20. 
  29. ^ "Melbourne's Green wedge history - Peninsula Speaks Inc". Retrieved 2016-01-20. 
  30. ^ "INTEGRATED PLANNING AND OTHER LEGISLATION AMENDMENT BILL 2003 Explanatory Notes". Retrieved 2016-01-20. 
  31. ^ "House Affordability : Australia : Markets : 1981-2010" (JPG). Retrieved 2016-01-20. 
  32. ^ [6][dead link]
  33. ^ [7][dead link]
  34. ^ [8] Archived 6 March 2010 at the Wayback Machine
  35. ^ "Home grant boost rolled back - ABC News (Australian Broadcasting Corporation)". 2009-10-01. Retrieved 2016-01-20. 
  36. ^ "Prices rise as new home sales fall - ABC News (Australian Broadcasting Corporation)". 2009-11-30. Retrieved 2016-01-20. 
  37. ^ "Victorian home prices overstated". Retrieved 2016-01-20. 
  38. ^ Uren, David (6 January 2010). "Housing sector hit by rate rises, end of grant". The Australian. 
  39. ^ "Soaring House Prices Strenthens Case for RBA to Lift Interest Rates". The Australian. Retrieved 2016-01-20. 
  40. ^ Colebatch, Tim (24 April 2010). "Foreign home buyers backflip". Melbourne: The Age. 
  41. ^ Uren, David (7 April 2011). "Buyer retreat spells slump in home prices". The Australian. 
  42. ^ [9][dead link]
  43. ^ [10] Archived 19 February 2014 at the Wayback Machine
  44. ^ [11][dead link]
  45. ^ "Worries over property boom, dollar - RN Breakfast - ABC Radio National (Australian Broadcasting Corporation)". Retrieved 2016-01-20. 
  46. ^ Kehoe, John (May 2, 2015). "IMF to probe Australia's record property and debt levels". Australian Financial Review. 
  47. ^ Daniel Hurst. "Josh Frydenberg disputes top Treasury adviser's advice on housing bubble risk | Australia news". The Guardian. Retrieved 2016-01-20. 
  48. ^ "Property prices: House prices to fall in March 2016: Macquarie". 2015-10-12. Retrieved 2016-01-20. 
  49. ^ Elizabeth Knight (2015-10-14). "Westpac rate rise ushers in end of the property boom". Retrieved 2016-01-20. 
  50. ^ "Westpac's raising will hit economy but ward off hedge fund attack". 2015-10-14. Retrieved 2016-01-20. 

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