Soaring house prices in Australia’s largest cities, particularly in Sydney and Melbourne, are driven by strong demand and a lack of supply, rather than a potential housing bubble, according to Paul Bloxham, chief economist at HSBC.
“At a national level, a key reason for rising housing prices has been housing undersupply. This also suggests that a significant fall in Australian housing prices, as occurred in the US and Spain during the global financial crisis, is unlikely,” Bloxham said in a recent note.
Five years of dizzying growth have caused house prices to soar in Sydney and Melbourne. The median house price in Sydney was $1.1m in the March quarter, and it was $844,000 in Melbourne during the same quarter, according to the Domain Group.
In June, Moody’s cut the long-term credit ratings of Australia’s Big Four banks, saying surging house prices, rising household debt, and sluggish wage growth posed a significant threat to lenders.
Bloxham, the former head of section at the Reserve Bank, said that “fundamental factors” largely explained the price boom. “As a result, we do not judge it to be a bubble,” he said.
Defending his conclusion, Bloxham said the demand for housing in the eastern capitals was currently bolstered by domestic and international migration, foreign investment, and a lack of new supply. Other regions of Australia haven’t been faring as well; price increases have been less severe in cities like Perth, where demand has been weakened by the end of the mining boom.
The Australian Prudential Regulation Authority (APRA) has been gradually tightening restrictions on riskier loans, and in recent months, the major lenders have raised interest rates on interest-only loans. Bloxham believes these regulatory measures will help cool the housing market, along with lower demand from overseas investors and increased supply.
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