Past two decades in Australia have witnessed a drastic hike in prices of houses when compared to rates of price hike domestically or internationally. It is argued that this inflation in housing prices are overvalued. We can see the rise of counter-arguments claiming that the tools and processes employed to reach this conclusion are flawed. But, house prices are slightly on a high pedestal as compared to current economic basics, but they stand at less footing when international averages are being compared with it. This becomes a perfect subject matter for an MPE781 Melbourne Housing Market case study.
Comparison Of Australian Price Hike With The OECD Average Over Two Decades
Australian real house pricing was steady and in line with real GDP per capita spanning three decades i.e. from 1960 to 1990. It witnessed a steep rise in the middle of the year 1990. It left income growth behind with a wide margin. It resulted into widening the gap between the income of the people and their purchasing power giving a shard rise to price to income ratio. This all happened despite the high terms of trade that increased Australian incomes in the last decade. This is when the prices of houses in Australia grew more than OECD average standards.
But, in the year 2014 claimed that if we see the price hike and critically look at the tools of valuation employed based on deviation like price to rent ratio, price to income ratio, etc from historical trends, they suggest that the prices have been over-valued by 20 to 25 per cent according to a study published by the International Monetary Fund Housing Watch. The information was particularly highlighted by the academicians of some of the best online assignment help in Melbourne.
The Rise In Household Debt To Income Ratio
It was observed that household debt to income ratio increased threefold from mere 47 per cent in 1990 to 155 per cent in 2014, which is historically the highest increase ever witnessed. Though the ratio was growing internationally, this price inflation was also seen in economies like the United Kingdom, Canada, and New Zealand as per an expert guiding students in Profits Revenue and Welfare assignment help.
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The household debt to income determines the financial stability and plays a key variable for the macroeconomic market as they reflect the degree of risk to which households are prone to and it also gives an insight into the plausible amplification of price high to the macroeconomy. This theory has been a focal point of many MPE781 Melbourne Housing Market assignment help solutions.
The Counter-Arguments Claiming That Price Hike Was Compared With The State Of Equilibrium
It has been argued that the price escalation of real estate property in Australia was following the economic policy on an absolute basis as they were rising for all measures. It is also claimed that the equilibrium levels have also witnessed inflation. The population rise was seen after 2000 was one of the influencing factors. The demand for houses was not in line with the demand. It grew significantly faster than the supply reducing the presumption of over-evaluation. However, it did not eliminate it wholly.
The Method Used In Comparing The Overvaluation And Undervaluation Was Inherently Flawed
To compute the rates of price hike and determine whether the prices were undervalued or overvalued, the average of differences in prices of houses across all Australia was taken into consideration. It was problematic as it was based on an assumption that the starting period was a state of equilibrium.
There is a possibility that the prices of houses were low in Australia in the year 1960 which is the starting point. Thus, it could be said that the increase in prices was not inflation. Rather it was catching up against the other economic paraphernalia. The problem was that changes in house prices were taken for comparison in place of actual price prices of the houses.
The Increase In The House To Income Ratio Is Natural
The infamous gap has been interpreted in isolation. The increase in ratio was a natural outcome as it hiked for all measures. If we are talking in national economic terms, the rate of increase in house prices corresponds to four to six times the average income, depending on the classes of houses i.e. basic, medium, or luxurious.
However, real estate markets and their sizes vary depending upon the location across borders of different states within a country. Various factors contribute to this even distribution of prices. The locations in urban and coastal areas have much higher rates as compared to the countryside because of higher demand. But, it is pertinent to note that despite glaring gaps between the prices, the price to income ratio was consistent for all locations over the years. This has been highlighted in an MPE781 Profits Revenue and Welfare assessment help.
Windsor & Jaaskela contend that housing is a good of utmost importance to households and they tend to spend more on it with the increase in their incomes. If this is taken into account, the prices of houses would increase more than an increase in income of the households thus increasing the income to price ratio. The result of this was that capacity to purchase a house for a class of population became hard and first-time homebuyers declined.
Thus, we can say that two most heavily populated cities, Sydney and Melbourne, have increased a steep price hike in the past decade including the investors’ segment. A drastic downturn in the real estate market in these cities may have resulted in a market deluge. This pointed to the urgent requirement for focused solutions that would include investor lending to mitigate the risks posing to the housing downturn.
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