The Great Australian Housing Bubble

Sep. 27, 2010 2:52 AM ETADE, EWA, FXA, KROO42 Comments
Leith van Onselen profile picture
Leith van Onselen

There is currently a widespread debate in Australia and abroad over whether Australia is experiencing an unsustainable housing bubble, or asset inflation based upon sound fundamentals.

Recent analysis by the Economist, the IMF, Demographia, Morgan Stanley, and Jeremy Grantham of GMO argue that Australian house prices are severely overvalued and due for correction.

On the other hand, Australia’s banks, the property industry, and industry 'experts' claim that Australia’s housing market is different to other countries and underpinned by sound fundamentals, including a strong economy, high population growth and housing shortages, as well as a robust banking system.

So which camp is right? Is Australia’s housing market a debt-fuelled time bomb underpinned by ‘Ponzi finance’ that requires the ‘greater fool’ and ever-increasing levels of debt to perpetuate it? Or are current valuations justified? Let’s examine the data.

One long boom:

The below chart plots Australia’s nominal house price growth against comparable countries. As you can see, Australia’s house prices growth has been nothing short of phenomenal, leaving the other countries in its wake.

Click to enlarge:

Next I have plotted average Australian established house prices against average Household Disposable Incomes (HDI) and Average Full-Time Ordinary Earnings (AFTOE).

Click to enlarge:

As you can see, the ratio of house prices to average earnings started at around 2.5 times HDI and 3.7 times AFTOE in 1986. This ratio increased slowly from the mid-1980s to 2000, rose rapidly from 2000 to around 2004 and then settled at around 6 times HDI and 7.7 times AFTOE in 2008/09.

The increased cost of housing is also reflected in the amount of HDI required to service the average mortgage (see below chart).

Click to enlarge:

As shown above, despite as significant reduction of mortgage interest rates over the past 20 years (shown below), the ratio of average mortgage interest payments to average HDI has increased from around

This article was written by

Leith van Onselen profile picture
An Australian currently working for a leading investment bank. I have previously worked as an Economist at the Australian Treasury and a Senior Economist at the Victorian Treasury.

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