Graduate student, MBA in Real Estate, Ozyegin University
In the last 60 years, with its local peaks and pits, Australian house prices have shown an upwards trend. Different scholars attribute different reasons to such trends and this article focuses on their viewpoints in brief.
Hatzvi and Otto (2008) examined whether the asset pricing theory can explain residential property prices in Australia and question the existence of a housing bubble. They pointed out that the housing prices are increasing not only in absolute terms, but also with relative terms compared to the rents. The asset pricing model dictates that the price of an asset should be determined by the sum of present values of future cash flows. Therefore, the house prices should reflect the market expectation of future rent (or utility) flows, as well as the discount factor to apply to the model. However, the asset pricing model would also imply another reason for the price changes, which is speculative bubble where individuals purchase good in expectation to be able to sell it for a profit in the future. The authors come up with a model to nominate candidates for explanatory factors of housing price changes however some of them fail to be statistically significant, where others fail to explain 100% of the variation. This points out to the probability of a speculative housing bubble in Sydney. Particularly in the middle and outer rings of the city, the economic fundamentals are incapable of explaining the variances in prices and price/rent ratios, therefore the authors conclude that the most credible explanation is the role of some speculative bubble.
Other scholars sought to explain house price changes by the following factors as well: For instance, Stapledon (2012) examined the historical price changes in Australian housing market, and documented the underlying reasons for historical trends. The author identified five cyclical peaks in post-war era, which were 1950, 1974, 1981, 1989 and 2008. 1974 peak was due to a mining boom in early 1970’s. After 1974, prices fell with about 21% in average in two cities. The damage of the fall was controlled by high inflation rates. In 1981 peak, the reason was the high interest rates. This cycle faded through Australian post-war economic recession. As can be traced through the article as well as the economic history of Australia, housing booms in the metropolitan areas generally follow high interest rates. Starting with 1996, Australia had gotten into a cycle of rising interest rates. According to Stapledon, the 1996 and onwards cycle was the greatest ever in terms of magnitude, however if we are to compare only the booms on land prices, 1880 boom was larger than any other as the most recent cycle doubled the price index while 1880 boom increased it by seven times or more.
Abelson et al. (2005) developed a long term estimation model in an attempt to explain the changes in the housing market price indices in the period between 1970 and 2003. The study concluded that in the long run house price changes are positively correlated to disposable income and consumer price index and that negatively correlated to the unemployment rate, real mortgage rates, equity prices and the housing stock.
Another study by Abelson and Chung (2005) also examined the historical housing prices in Australia and came up with median price estimates on houses and flats, as well as consumer price indices in metropolitan areas. They found that the quality improvements are an important determinant of house prices, as improvements can be considered capital expenditures. As the Australian market, on average spends 2% of GDP on housing improvements excluding maintenance, the study controlled for the quality improvements and adjusted the aggregate housing price index accordingly. The result, predictably, showed that the variation in house prices across years when controlled for quality improvement expenditure were lower.