Graph 1: Australia's Median House Price 1960-2006 (Source: REIA and BIS Shrapnel)
Graph 2: Australia's household debt increase 1976-2010 (Source: Reserve Bank of Australia)
What caused the 1990-2010 property boom?
If you’ve kept an eye on property prices over the last 20 years you will undoubtedly have noticed the enormous increase that’s occurred. At first glance most people would say it’s been a great event in Australia’s history because it’s added to our wealth—at least to those people who own property!
The question, however, is why did house prices shoot up? Was it that we were making more money and could therefore afford to compete with each other to buy a bigger and better house? Or was it something else?
Perhaps these two graphs can give us some clues. The first one shows how the median house price in Australia increased between 1960 and 2006.
The second one shows us how Australian household debt increased between 1976 and 2010.
Our household debt now sits at around A$2 trillion: an increase of approximately 560% between 1995 and 2010. And during this same time period property prices increased by around 275%.
It looks as though we can see where the money came from that we used to chase up property prices. The question now is, “Where do we go from here?”
Michael Davies, in an article for the Reserve Bank of Australia, said, “Over the past two decades, Australian households’ debt levels have increased noticeably and are now fairly high by international standards. The increase in household debt is due largely to the sharp rise in housing debt.” He also adds, “During the 1980s, the ratio of debt to disposable income for Australian households was fairly stable at around 45%. But since 1990, this ratio has risen rapidly, reaching 157% in December 2007. Housing debt accounts for the bulk of the increase, with the ratio of housing debt to disposable income rising from 31% to 134% over the period.”
So, if it did require a massive increase in debt to move property prices up, do we have the ability to continue taking on debt, to keep alive the competition for properties—which is essential to keep prices going up? Only time will tell.
1 See Michael Davies, “Household debt in Australia”, BIS Papers No.46 http://www.bis.org/publ/bppdf/bispap46e.pdf