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Economics Explainer: Housing Boom (Part 1)

 

Visual courtesy of Elena Koskinas 

 

For the past several years, you haven't been able to turn on the news without hearing "housing boom" being mentioned at least once. So what exactly is it, is it still a "boom", and what does it mean for Australia's economy? 

What's the current situation on this "housing boom?"

 

At the moment, there are kind of mixed messages. 

 

On the one hand, people (a.k.a millennials) won’t stop complaining about how impossible home ownership is within a 50km radius of Sydney. To the current generation of 20-30 year-olds, first home ownership is as unrealistic as Kylie Jenner and Jordyn Woods ever being friends again. 

 

 

On the other hand, the news headlines still say that property prices have actually dropped by 10% in the last twelve months, and that the housing market is currently the “biggest threat to the Australian economy”.

 

So what exactly is going on?

The beginning 

 

The housing boom is a pretty complex phenomenon, especially considering that there could be a million different causes, since everything in the economy is connected. (Yikes). 

 

Needless to say, economists still don’t agree on the major cause of the housing boom. However, most experts think that that (a) interest rates, (b) government policy that is favourable to investors, and (c) population changes have factored in to the boom.  

 

 Us @ the housing market situation

 

(a) The interest rate is the cost of borrowing money. If your parents have ever borrowed money from the bank, you've probably heard them talking about the interest rate that they have to pay (for example, if they wanted to borrow $100 at an interest rate of 10%, when they eventually pay back the loan, they have to pay $110, not just the original $100.)

 

Low interest rates mean that it's cheaper for people to borrow money. If it's cheaper for people to borrow money, they will, and they'll use this money to buy real estate (aka properties). Recently, the interest rate has been very low (1.5% since 2016.) Because of this, demand for property (i.e. the amount of people who want to buy houses) has been high. 

 

(b) Government policy supporting property investment has also contributed to the boom. The housing market can be broadly separated into two categories: 1. owner-occupied properties (where the owner lives in the house/apartment they buy); and 2. investment properties (where the owner lets someone else live in the house, in return for rent). In recent years, negative gearing, a tax benefit that acts as a safety net for property investors, has increased demand for housing by investors, driving house prices up.

 

(c) There’s a third underlying cause for the housing boom - the increase in Australia’s population over the years. While the number of people have increased, the housing market hasn't kept up (because houses take a long time to plan and build.) More people who want houses + not as many houses available = house prices go up, because people compete for the limited number of houses available. 

 

 A growing population fighting for the limited number of properties 

Now that you understand how the housing boom began in the first place, get ready for next week's Housing Boom (Part 2), where we'll explain the other side of the story! 

 

 

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