House prices post-GFC: More household debt for longer

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Real house prices and household debt have risen in Australia amid growing concern of risks to the economy from a market correction. An intertemporal model of the housing market with household retirement and debt explains three observations relating to the post-GFC housing boom. First, people are remaining households for longer, which combined with strong population growth, has elevated the rate of household formation. Second, households are working for longer. Third, households are carrying more debt for longer: 1 in 2 home-owners aged 55-64 years have a mortgage, more than one third of whom are over-indebted. Ensuring that the rate of land release keeps pace with the rate of household formation and that banks maintain improved lending standards may help alleviate upward pressure on real house prices and contain risk for a given level of debt. Lower current real house prices indicate the burst of a speculative bubble in the absence of a fall in the present discounted value of real wages or rate of household formation relative to housing supply. The influence on house prices of ageing households, low interest rates, first home buyer grants, negative gearing and capital gains taxation calls for responsible lending.

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