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Soaring home prices in Australia's biggest cities are driven by strong demand and a lack of supply, rather than indicating a "bubble," according to one of the nation's top economists.
"At a national level, a key reason for rising housing prices has been housing under-supply," HSBC Holdings'  local chief economist Paul Bloxham wrote in a research note on Thursday.
In a week where traders will focus on Janet Yellen’s congressional testimony and core CPI, there are signs we could be set to see bond markets drive higher financial market volatility and equity weakness. (This video was produced in commercial partnership between Fairfax Media and IG Markets).
HSBC economist Paul Bloxham says the lift in commodity prices will lead to a growth in wages later this year.
"This also suggests that a significant fall in Australian housing prices, as occurred in the USÂ and Spain during the global financial crisis, is unlikely."
Five years of red-hot growth have left prices in Sydney and Melbourne up 80 and 60 per cent since mid-2012, fuelling bubble concerns.
In June, Moody's Investors Service slashed the long-term credit ratings of the big four banks, saying surging home prices, rising household debt and sluggish wage growth pose a threat to the lenders.
Bloxham, a former staffer at the Reserve Bank, said that "fundamental factors" largely explain the price boom and, "as a result, we do not judge it to be a bubble."
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Demand for housing in Melbourne and Sydney has been supported by domestic and international migration, foreign investment and a lack of new supply, he said.
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Experts have been calling the end of the property market for years. Photo: Judy Green
Banking regulator The Australian Prudential Regulation Authority has gradually been ratcheting up restrictions on riskier loans, and in recent months the big banks have all raised interest rates charged on interest-only loans.
Bloxham said he believes these regulatory measures will help cool the market, along with lower demand from overseas and increased supply.
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