The house price-to-income ratio has been the main focus in Australia. The house price-toincome ratio is comparatively high when compared to other countries. Also, the price-toincome ratio in Australia since has been more than 40% higher than the long term average. In the next sections a discussion of the fundamentals that govern the house prices in Australian residential housing market is examined. Also, the potential risks and rewards to the investors are explored in terms of the risk analysis framework presented earlier.

### **2.1. Introduction: How Australian real estate compares to the rest of the world.**

Since the U.S. housing crisis, analysts have been speculating about the potential housing bubble in the Australian residential property market. A report by Real Estate Institute of Australia (REIA) argued that analysts primarily focused their attention on the higher house price-to-income ratio in Australia as compared to other countries (REIA 2010). Moreover, it is observed that the house price-to-income ratio levels are at levels that are similar to that in the US before the housing market there crashed in 2008. The raise in the price-to-income ratio in Australia since 2003 by over 40% higher than the long term average adds fuels the speculation. However, it is important to analyze the fundamentals that govern Australian residential market price growth against the rest of world.
