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Why are house prices in Australia so high?

Comments on Alan Kohler "A housing bubble? You bewdy!" 18/09/2013, http://www.businessspectator.com.au/article/2013/9/18/economy/housing-bubble-you-bewdy

Alan, you listed two reasons, "a lack of spending on infrastructure by state governments and planning restrictions by local councils", for "why is there a persistent shortage of housing in Australia when it’s the 3rd least densely populated nation on earth. (Mongolia and Western Sahara are less dense)."

While they are correct, there may be other more important reasons. For example, the relative price of building a house in Australia may be much higher, due to high labour and building materials costs here. This reflects a general pattern that non-traded goods and services have a much higher price relative to trade goods and services in Australia.

Capital costs are generally higher in Australia as, much higher than in the US. This is because it is an small, growing and capital importing country. For example, it is probably common for the official interest rates in Australia to be more than 2 percentage point higher than in the US.

Further, state and local governments rely on either land tax or rates as a source of revenue, so if land value is lower, their revenue may be lower too. From that point of view, they have incentives to keep land value high, contributing to higher housing prices. This is particularly true for local governments given that rates are one of the main sources of revenue for them.

On the demand side, Australia's geographical location close to Asia where there are billions of people with much higher population densities and relatively scarce land in conjunction with Australia's fairly open policy on foreign buyers of real estate properties, mean external demand can be a significant factor in driving the house price higher than it would otherwise be.

In fact, I would argue that this is a very important fact behind Australia's much higher ratio of house price to income and has been overlooked by many economists and analysts when they say that Australia's housing price is too high and there is a significant bubble in the housing market in Australia.

If using housing price to income ratio as a definition for house market bubble, then it is true that there is a housing market bubble in Australia and indeed a quite big one. However, it can be argued that such  bubble may not be as easily to burst as in other industrialised countries because of the external demand factor.

This is likely to be a unique feature of the Australia housing market.

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