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Australian Real Estate Bubble?

November 28, 2016

Is Australia approaching the bursting point of a housing bubble? Some argue that it isn't, however how can anyone really know for sure given that nearly all of the indicators of every bubble are different?

 

Below is graph comparing Australian house prices, household income, rents, and construction costs between 1986 and into 2014 using an index set in the second quarter of 1986.

 

 

Unfortunately I don't have a crystal ball in front of me, so I'll let you be the judge on whether Australia's real estate market will end up much like that of the USA's during the global financial crisis in 2008, of which had a serious impact on the country's financial system. This eventually lead the to the downfall of a number of institutions that beforehand were effectively catergorised as being bulletproof.

 

What is clear is the current rate of appreciation in the Australian market is unsustainable, much like many bubbles before us, of which have all had devastating impacts on the communities associated with them. The most notable ones were the dutch Tulip bubble, the South Sea bubble, Japan's real estate and stock market bubble, the Dot-Com Bubble, and most recently, the US Housing Bubble.

 

Much like Canada, the Australian economy has been driven by commodity prices, which have made the price of residential property far beyond the reach of their younger working class population, and putting the older generation in a position where they are asset rich cash poor.

 

So how do those who are asset rich cash poor get the most out of their financial position? Many choose to sell up, however such a strategy can sometimes invoke unfavourable financial implications, specifically around tax liability. Alternatively, some elderly Australians decide to enter into reverse mortgages, of which have a relatively high interest rate associated with them. Such instruments can also have considerable negative affects on quality of life in the latter stages of the load, leading to a degraded quality of life.

 

No matter how they go about it, those who are asset rich cash poor will struggle as long as the current rules remain around the assets means test, a support requirement of the aged pension. Those in such situations will need to be frugal with their expenses to ensure that their money is able to go as far as possible, or seek out other sources of income, such as the sell and stay concept.

 

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