Merrill Lynch: 6 Reasons Why Australia's Housing Is So Expensive

Hybrid House by Tasmin Salehian is displayed during the 2014 Sculptures by the Sea exhibition at Tamarama in Sydney. Cameron Spencer/Getty Images

There’s been a lot of discussion lately about Australia’s housing market — why it’s so expensive and whether the current prices leaps are the result of an overheated market.

And there’s been some suggestion that housing finance, especially that for investment, should be reined in. The Reserve Bank of Australia (RBA) is worried that a too-heated housing investment market could mean a hard fall later.

Saul Eslake, economist at Merrill Lynch Australia, says Australians live in some of the world’s most expensive housing both in absolute terms and relative to incomes.

In a research note to clients, he outlines his take on why Australian housing is so relatively expensive:

  • World-wide, housing tends to be expensive in cities with populations of over 1 million, and a higher proportion of Australians live in such cities than anywhere else except Hong Kong and Singapore;
  • Because Australian cities cover very large areas but their outer suburbs are often poorly serviced by roads and public transport, Australians have increasingly chosen to spend a higher proportion of their incomes on housing so as to spend a smaller proportion of their time commuting;
  • Australians tend to live in larger houses or apartments than people in most other countries, something not captured in international comparisons;
  • Australians are now among the world’s highest income-earners on average and can thus afford to live in more expensive housing;
  • Unlike the US, Spain or Ireland, but like the UK, Australia has a long-standing physical shortage of housing, relative to the “underlying” demand for it; and
  • Australia’s tax system plays an unusual role in encouraging individual investment in residential real estate, which serves to inflate housing prices.

Eslake says people who own property understandably appreciate seeing the price of it rise.

However, that doesn’t mean that high or rising property prices are a positive for the economy as a whole.

“In the current cycle, rising property prices are doing less to stimulate consumer spending than they have in the past, whilst arguably contributing to declining home ownership rates among younger age groups,” he says.

This IMF chart puts Australia at second place when it comes to house price to income ratios:

Eastlake cautions that he’s not arguing that Australian residential property prices cannot ever fall or even that they will continue to rise at recent rates.

“Rather, our argument is that there are some good reasons for their present, elevated, level: and that something would have to change in order to make them fall,” he says.

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