Quantifying Investor-Driven Overvaluation in the Australian Housing Market: An Empirical Demand Attribution Price Model.

This paper presents an empirical demand‑pressure price model to calculate overvaluation of the Australian established housing market sector from 1999 to the present, a period marked by sustained investor demand supported by three generous tax concessions. The price model is intrinsically expressed in the economic fundamental: in a supply limited market demand drives prices up, housing buyer and price data allow market specific implementation of the model and in Australia’s case established housing supply is essentially fixed. Furthermore, buyers account for economic factors in their decision to buy or not along with the bank’s decision on lending to buyers. The model attributes marginal real house price movements to buyer types: first home buyers, non first home buyer owner-occupiers and investors. By tracking relative demand-pressure shifts of each buyer type with corresponding price changes, the model attributes the proportion of price inflation driven by buyer type.While all buyer type demand contributes to house price inflation, only the investor-attributable portion is treated as overvaluation, as it is driven primarily by tax distortions and expectations of future capital gains rather than housing consumption needs. This direct approach analysis indicates that approximately 46% of real house prices at the end of 2024 was attributable to investor-induced demand which equates to an 84% overvaluation of the established housing market. The evolution of this overvaluation meets Nobel Laureate Joseph Stiglitz’s definition of an asset bubble with one caveat, it is a rational bubble so long as investors believe the tax concessions will remain in place for the long term, a belief grounded not in economics but in historical political mandate. Notably, since the second tax concession investors own or have owned and traded approximately 9.6 million homes, a number representing 90% of Australia’s 11 million dwellings, illustrating the unprecedented scale of investor dominance in the Australian housing market.