Introduction

• Published date: 01 September 2021
• Author: Sarantis Tsiaplias
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/1467-8462.12439

The Australian Economic Review, vol. 54, no. 3, pp. 359–361 DOI: 10.1111/1467-8462.12439

Policy Forum: Australian House Prices

Introduction

Sarantis Tsiaplias

In the 1970s and 1980s, the OECD's house

price‐to‐income ratio averaged around 76 for

Australia, rising to around 85 in the 1990s. In

2002, the ratio surpassed 100. Since 2018, the

ratio has exceeded 135, indicating a growing

historical divergence between house prices

and incomes. In the presence of such

divergence, the proportion of renters in New

South Wales and Victoria has increased from

below 20 per cent in the 1990s to

approximately 30 per cent.

In 2020, the global economic landscape

was shaken by the COVID‐19 pandemic. In a

climate of already high house prices and amid

forecasts of surging unemployment due to

COVID, many Australians anticipated a sharp

correction in house prices. According to the

Melbourne Institute's CASIE survey, con-

sumer sentiment towards the purchase of

dwellings plummeted in April 2020, with

housing market pessismists clearly outnum-

bering optimists. Moreover, in April 2020,

over 30 per cent of consumers expected house

prices to fall by up to 10 per cent over the next

12 months.

Notwithstanding these predictions, ABS

data in July 2021 show that dwelling prices

rose by 7.5 per cent in the past 12 months.

More recent data suggest double‐digit house

price growth over the year to August 2021.

Nowithstanding record dwelling prices,

monthly private sector housing approval

numbers exceeded 10,000 over the period

September 2020 to June 2021 (being the latest

data at the time of writing), with dwelling

approvals for April being the highest on

record.

The sharp contrast between the predicted

sharp fall in house prices and the observed sharp

rise in house prices suggests that factors such as

record‐low interest rates, job‐retainment

measures such as JobKeeper, and policies aimed

at supporting the construction sector have

played a significant role in shaping recent

housing market dynamics.

To better understand house price behaviour

in Australia, three papers have been sourced

from authors with signficant expertise in

modelling the Australian housing market.

The papers focus on short and long‐run house

price dynamics in Australia.

In the first paper, Otto uses the user cost

framework, which estimates fundamental

house prices by reference to the price of

rent, to examine how changes in interest rates

have influenced long‐term trends in Australian

house prices. In so doing, the exercise can be

compared and contrasted to evidence from the

United Kingdom, where the user cost frame-

work suggests that rising house prices over the

period 1985–2018 have been driven by falls in

real interest rates (Miles and Monroe 2020).

Otto presents evidence that house prices

have risen by a greater percentage than rents,

implying that the user cost of housing has

fallen. Since the user cost is comprised of the

sum of real interest rates, a house risk

premium, the depreciation rate of housing

and a proportional housing‐related cost (such

as stamp duties) net of expected house price

growth, the fall is attributable to one or more

of these factors. Over the full sample period

1987–2019, it is argued that the decline in

interest rates is responsible for a large

proportion of the increase in real house prices

(with the particular proportion depending on

the interest rate measure being used).

However, there are key differences in the

data when the sample is divided into two

subsamples (pre‐and post‐2004). Otto argues

that the differences are, to some extent,

reflective of the comparatively smaller fall in

real mortgage rates since the mid to late 2000s

© 2021 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd