Australia holds a crown for a no crisis economy from past many years, Australia is also ranked in fewer unemployment rates, and ranked 10th at world’s happiest country.
As you know about a housing bubble which was burst in the USA in 2007 and it causes the world for the great recession. So why and how Australia is going to face this same scenario in upcoming years and does it going to be as bad as like the USA or going to be a smooth landing? I am going to talk about this on this blog.
To understand this let’s first see what a housing bubble is.
In simple words, the property value is raising, and at a point, it is reached where the average income of a person is less than 1/3rd of property prices in a year, till 1/3rd there is no problem, but when prices rise above this, then it is a huge problem.
It is a situation when an increase in supply tops the demand for houses, and many owners have bought more loan than the worth of their home.
The biggest example is the USA’S house bubble in 2007-08, basically, it is stared in 2006 when the prices were at the top and after it started declining and the same thing is happening with Australia
So why I am talking Australia is going to face this crisis? Let’s discuss
1. Raising the price of houses in a country –
The Australian house prices first see the steady increase in prices in the 1970’s with just 3% annually, but since 1990’s price rise to 6% annually, and seen a strong rise in price from 1998, Sydney and Melbourne have seen the largest increase in price comparatively other parts of the country at with 105% and 93.5% respectively from 2009.
The same scenario is happened with the USA, from 1996 prices is started rising till it bubble burst.
2. Banking system –
As you guys now USA’s property bubble is made with the help of banking system, As banks started giving loan to people at much fewer rates than earlier so due to this everybody is can afford to take loans so due to this demand and ultimately prices also raised of housing In the USA and this same scenario is happening with Australia as Banks of Australia is also have a low interest rates since 2008 and due to this borrowing also raised. In addition to this Reserve bank of Australia is also maintained a low cash interest rate policy. Interest-only loans also raised in Australia that gives chance to many people to buy the houses.
3. Investments in housing –
Price can rise if there is a demand, and this also helps for a bubble In the USA many investors invest in housing industries as that time return to their investment is much higher than investment in shares or bonds etc. In Australia in December 2008 Federal Govt. relaxed rules for foreign buys to buy property in Australia, and due to this in August 2009 foreign investment had raised in by 30% year to the date. The main aim of these investors is to get maximum returns not for residential purpose so most of these houses left empty and the people who really need those houses have to find another house so basically it creates an artificial demand and these raise the price, but the good thing is that Australian govt. have seen this and make some necessary changes like FIRB have to determine if they allowed to buy property and Forced to sell the property when they leave Australia etc.
Above are some indicators of upcoming House Bubble in Australia. So now let’s see is it going to be bad as USA’s or it is going to be a smooth landing?
I would say it is not going to be as bad as USA’s as the Australian economy is already known effects and how to handle this situation from USA’s experience and the Australian economy is not a pole economy like the USA, so it is not bad.
It is not going to be wrong means it does not go to hurt at all, it will affect the Australian economy.
Many of Australian experts said it will be a smooth landing, but it will not as per my opinion let’s see how?
Australian property prices could crash by 50% in the upcoming crisis according to doomsayer.
Australian house prices rose sharply during late 1990’s and early 2000’s relative to income and rents but from 2003 to 2012 cost to income ratio and rate to rent ratio remains steady but from 2012 prices once again raise strongly relative to income and rent.
IMF has reported that house prices in several developed countries and Australia had the third highest house price – to – income ratio in the world.
Australia was experiencing a real estate bubble like other comparable counties, and those similar countries have faced a property crash.
It is going to be dangerous as the massive increase in house prices coincide with record low wages growth, record low interest rates and record household debt equity to 130% of GDP.
Many of people in housing industries going to lose their jobs, the stock market will get affected, and Economic growth will be slow down.
As we see in above points, it is not going to be a smooth landing.
So after watching this Australian property won’t crash soon due to some following reasons.
· Population growth
· Healthy economy
· Sound banking system
· Raising business
· Consumer confidence is been raising
This is my views due to which Australian economy can survive for the upcoming days.
As I said, earlier the Australian economy has an experience of USA’s crash so they can take steps according to it, and many steps also seized from them.
Conclusion -
Australian economy had done well so far, and it is expected to do same in future. Also, Housing bubble is started in Australia we just have to see how the Australian economy and Reserve bank of Australia will adopt policies according to this.
The housing bubble is created in the Australian economy, and it will burst on one day so now Australia has to figure it out how to deflate slowly to minimize the fall.
It is started to decline prices of property compared to last year, so I think it will start.
Many economists predicted this will happen in this year or starting of next year I am also supporting this though that this will happen soon in future.
I will keep posting an update on this when there will be a new update.
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