Impacts - Causes and policies for the Australian Surging House Prices

Question: Discuss about theImpacts, Causes and Policies for the Australian Surging House Prices. Answer: The Impacts, Causes and policies for the Australian Surging House Prices The Factors Behind the Rising House Prices in Australia The surging of house prices in Australia poses a great threat to the growth of its economy. The housing has been left vulnerable owing to the houses being so expensive making households to have high level of debts. The most dangerous effect of this is that every boom is followed by a crash. Olive (2016) noted that the crash could only be avoidable if no recession occurred and the interest rate remained low. This is because high interest rate will change the consumption behavior of households. Many investors are always attracted to investing in housing as its generally considered a great investment. The movement of the interest rate determines the housing cycle. I.e. they are closely related. Every Aussies dream is to own a home in at least a quarter piece of land. However, since the late 1990s, there has been a surge in the house prices thereby lowering the affordability of houses. Glenn Stevens the governor of the RBA called it the two-speed economy price movement (Griffiths, 2016). According to duke (2016), its only have of Australian adults that own their homes. The other half are renters. In 2015, Australia was ranked 3rd in term of unaffordability among nine developed countries (Global Property Guide, 2016). The change in prices vary from one Australian state to the other. Source: Business Insider Australia The CoreLogics head of state Tim Lawless suggestion was that the factor that most likely contributed to the May rising price in Sydney was that ahead of the federal election was an increment in investors activities. Housing in Australia is expensive. The income of house rents to incomes of the households has been very high since 2003. The increment in households debt has also contributed to the rising prices (McKenna, 2015). The ratio of households debt to income has gone up. The following chart shows the deviation of debt to income ratio in the long run. Fig: Households debt and housing price Source: OECD, RBA, AMP Capital Despite the surging housing prices in Australia, the rental yields have been too low. For instance, Sydney which is the place for the most unaffordable homes recorded a declined rental yields in September 2015. The decline was by 3.3 %. The rise in rent in Australia is too low on an annual average. While the most common factors that are argued to be responsible for the rising house prices together with the households debt. The main factor is the downward movement of the interest rate. The low interest rate is one of the major factor behind the surging Australian house price (Hyam, 2016). Of the late years, the Australian economy hasnt been performing well as indicated by the falling trend of its GDP and the Rising trend of the unemployment rate. Due to this unhealthy economic growth, the RBA has implemented expansionary monetary policy tool of lower interest rate. The lower interest rate attracts too low interest on the saved money; thus it discourages saving. The following chart shows that there has been an excess demand since the year 2000. Janda (2016) noted that at the moment, the big driver of the market is the cut in the interest rate. He also noted that there is a loosening in the lending policies by some banks which has raised the availability of capital for investment. Fig: The houses demand and supply Source: ABS, AMP Capital Recommendations for Government Macroeconomic Solution Towards Improving House Affordability for Future Young Generation The most effective policies that the government should put in place are those that are with an objective of raising the supply of houses. If supply is able to meet the rising demand for homes, then the younger generation will benefit from the low prices that will result from the interaction of the demand and supply forces. The government could also cut taxes on those who are constructing houses to stimulate more house construction. With lower construction costs, investors will have more disposable income to invest in constructing new houses. The other side of the policies is aimed at reducing the demand for homes. Prices will fall with the reduction in homes demand. One of the major issue facing Australia is the problem of low inflation rate. This problem has led to the implementation of various microeconomic policies with an aim of restoring the economy to the best position. For this reason, the RBA has continuously revised its cash rate downward which has caused the interest rate to be too close to zero. This has raised the ability and willingness for households to seek more loans since the cost of servicing the loans is low. The government should therefore ensure that the interest rate in the economy is raised. It will help in inducing more saving as households will be attracted to the higher interest that the banks will be offering. This is a form of tightening the lending standards. Scutt (2016) noted that the action of the RBA alone may not be sufficient to solve this problem of rising prices. He argued for the ove rsight of the government over the investors lending to be tightened further. Only the interest-only loans should be allowed to remain high. The low-doc loans are expected to fall in supply (Olive, 2016). The following chart shows the movement with a tightened lending standards since the year 2008. Fig: The tightening of lending standards Source: APRA, AMP Capital Bill Shorten the leader of ALP disclosed planned policy towards the negative gearing tax break be made limited. This plans are for the newly built houses; for the existing one, the plans suggests a complete elimination of this negative gearing tax break (Scutt, 2016). Since investors are competing with the first home buyers, these plans are meant to ensure that there exist a level playing field for competition. Janda noted that a rise in the interest rate would leave those who hold mortgages being unable to service the, or rather it would take them longer to repay them. For this reason, the government may impose a policy that requires the mortgage providers to offer them at a fixed interest rate. This would help in ensuring that the consumers are not overburdened in a situation of rising interest rate. If the price of renting a house is way low compared to that of purchasing a home, many households may prefer renting as the best option. Since this is not good for an economy, the intervention by the government is important. There has been several downward adjustment in the cash rate by the RBA. The Australian economy is at its historically low interest rate. The future young generation are at a risk that the prices may continue going up that there is a high chance that they wont have the ability to afford their own homes. Its only the actions of the government and the RBA that can help in lowering the housing price. References Griffiths, K. (2016). Editorial: Housing policy discomfort as Sydney prices keep surging. [Online] The Sydney Morning Herald. Available at: https://www.smh.com.au/comment/smh-editorial/housing-policy-discomfort-as-sydney-prices-keep-surging-20160907-gramm5.html [Accessed 21 Oct. 2016]. Global Property Guide. (2016). House price rises accelerating in Australia. [Online] Available at: https://www.globalpropertyguide.com/Pacific/Australia/Price-History [Accessed 21 Oct. 2016]. Hyam, R. (2016). Home prices moderate, but Sydney and Melbourne continue to surge. [Online] ABC News. Available at: https://www.abc.net.au/news/2016-07-01/home-prices-moderate-but-sydney-and-melbourne-soar/7560508 [Accessed 21 Oct. 2016]. Janda, M. (2016). Home prices surge back to double-digit gains: CoreLogic index. [Online] ABC News. Available at: https://www.abc.net.au/news/2016-06-01/home-prices-surge-back-to-double-digit-gains/7465770 [Accessed 21 Oct. 2016]. McKenna, G. (2015). This chart shows how ridiculous Australian house prices are on a global scale. [Online] Business Insider Australia. Available at: https://www.businessinsider.com.au/this-chart-shows-how-ridiculous-australian-house-prices-are-on-a-global-scale-2015-2 [Accessed 21 Oct. 2016]. Olive, S. (2016). The Australian housing market surging unit supply, the economy and what it all means for investors. [Online] Ampcapital.com.au. Available at: https://www.ampcapital.com.au/article-detail?alias=/olivers-insights/october-2016/the-australian-housing-market [Accessed 21 Oct. 2016]. Scutt, D. (2016). Australian house prices are surging again. [Online] Business Insider Australia. Available at: https://www.businessinsider.com.au/australian-house-prices-are-surging-again-2016-6 [Accessed 21 Oct. 2016].