US analysts Demographia have found several cities in Australia to have some of the most unaffordable housing in the world. Certain localities in the cities of Sydney, Melbourne and Brisbane had median house prices in excess of five times the annual median household income.

Currently, average house prices for each city overall sit at $700,000 for Sydney, $532,000 for Melbourne, and $469,000 for Brisbane.

The Australian Bureau of statistics released figures showing an increase of 38.5 per cent in median monthly mortgage repayments over the last five years to 2011. However, the median household income increased over the same period by only 20.2 per cent.

This has led some domestic market analysts to wonder whether the extreme prices are more of a market bubble than a true reflection of supply and demand.

Speculators can sometimes enter a market with already high demand. They use this high demand to buy and sell quickly to drive up demand even further, and turn quick profits. Prices increase quickly as a result of increased demand, not underlying value. This divergence between demand and value is termed a market bubble.

Eventually the schism between demand and value will become too obvious and demand will drop off suddenly. Those still in the market are left with huge debts and goods (in this case homes) of significantly reduced worth.

The Reserve Bank of Australia has cautioned those thinking of entering the housing market saying the rise in house prices “warranted ongoing close observation.”

Westpac Chief Economist Bill Evans. Photo: www.abc.net.au

Westpac Chief Economist Bill Evans. Photo: www.abc.net.au

Chief economist for Westpac, Bill Evans believed the RBA was “becoming significantly more concerned” about housing affordability and that they “showed genuine alarm at the recent lift in house prices.”

But the alarmists have been dismissed by Treasurer Joe Hockey. He told reporters the increased house prices reflected the shortage of supply.

Alan Kohler, an economics commentator, agreed, “There’s a lot of demand, and the demand’s not going to go away. There is a lot being built, so yes, maybe apartment prices will come down, but really I think it’s all a bit overblown.”

The government is seeking to streamline and simplify the rules governing the construction and sale of homes. Doing so will reduce the cost of bringing them to market. It remains to be seen whether these lower costs will be passed on to buyers.

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