Australia's Growth in Households and House Prices

• Author: Creina Day
• Published date: 01 December 2018
• DOI: http://doi.org/10.1111/1467-8462.12280
• Date: 01 December 2018

Australia’s Growth in Households and House Prices

Creina Day*

Abstract

Real house prices rise in Australia amid

growing concern of an impending correction.

This article explains why the household

formation rate has risen with strong population

growth due to higher net immigration and

average household size levelling off due to

population ageing. An intertemporal model is

developed to analyse the effect of an increase in

the household formation rate on the housing

market. I f‌ind that real house prices rise over

time if the rate of household formation

outstrips the rate of housing supply. Under

forward looking expectations, a rising house-

hold formation rate could explain rising real

house prices relative to the present discounted

value of future wages. The results explain why

real house prices may exhibit an upward trend

despite population ageing and how govern-

ment planning could have an impact.

1. Introduction

This article explores how and why changing

population has contributed to Australia’s

housing price boom. A baby is born every

one minute and forty-f‌ive seconds and some-

body dies every three minutes and twenty

seconds, on average, in Australia. There is a net

gain from overseas of one migrant every two

and a half minutes. As a result, the overall

population increases by one person every one

and a half minutes, and recently surpassed 24.5

million (ABS 2017). Australia’s population

resides in approximately 9.24 million house-

holds (ABS 2015). While housing has become

an increasingly important source of wealth

1

for

elderly households seeking to exit the market,

home ownership rates among young adults

have fallen.

The OECD recently warned that house

prices appear overvalued but continue to rise

in Australia, New Zealand and the United

Kingdom, posing a risk of impending sharp

corrections (OECD 2015). Figure 1 depicts the

rise in real house prices since the mid-2000s in

these countries and the United States. Australia

has witnessed a marked, long-lasting boom.

While Figure 2 shows that Australia’s rate of

population growth increased over the same

period, it is the number of new households, not

population per se, which contributes to aggre-

gate demand for housing.

This article explains how changing popula-

tion has translated to higher rates of household

formation in Australia. An optimising two-

period model of housing market demand and

land supply is developed to explain why higher

rates of household formation can contribute to

rising house prices over time. In doing so, I

shed light on recent concern that Australia

faces a correction in housing prices and the role

for government planning.

* Crawford School of Public Policy, Australian National

University, ACT 2601 Australia; email creina.day@

anu.edu.au. The author wishes to acknowledge the helpful

suggestions of the editor Ross Williams and two

anonymous referees

The Australian Economic Review, vol. 51, no. 4, pp. 502–511 DOI: 10.1111/1467-8462.12280

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C2018 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by John Wiley & Sons Australia, Ltd