Are we headed for a housing bubble?


You’ve probably read the bold headlines crying out about about the impending burst of the Australian housing bubble. But what exactly is a housing bubble and do you need to be concerned?

A housing bubble is a term used to describe a market situation where demand exceeds supply and prices are driven up as a result. As demand increases, so do prices and the ‘bubble’ gets bigger. This may sound like a standard supply-and-demand scenario, but in terms of a housing bubble, a speculative investment market often creates that low supply/high demand. The bubble can ‘burst’ if demand falls or new supply enters the market; prices may drop and so too may overall property values. This can have a negative effect on anyone who owns or invests in property. So, is there a bubble and are we headed for a big bang?

We don’t know what we don’t know

The short answer is that no one really knows for sure if we are in a housing bubble and whether or not it will burst.  The existence of a housing bubble is also dependant on where you live. According to the Sydney Morning Herald’s financial journalist Michael Pascoe, it’s only Sydney prices that are set to pop. He notes that the RBA has described Sydney as sitting at price-breaking point, while Melbourne is still working its way there. The same sources say the rest of Australia is sitting on a gradual growth scale that doesn’t indicate a bubble, or anything like it. So – this is distinctly good news for some.

In the market for a home loan? See if you can get a better deal by comparing mortgages here

Unsurprisingly, the Australian Banker’s Association released a property market report that concluded there was “insufficient evidence” that a bubble existed anywhere in the country, or that growth was unsustainable. As we know, opinion can drive behaviour, so suggesting there is no problem is sometimes tantamount to eliminating it (you might recall the famous lines: the only thing we have to fear is fear itself). And they would hope this is the case, too, given the prospect of their own unsustainability when it came to a nation of mortgagees! But even if they were too hesitant to draw conclusions, the 2008 sub-prime mortgage crisis in the USA was enough to scare banks into far more responsible lending, so that is one slice of history we probably won’t see repeated for a long time.

housing bubble moneyLow interest rates and foreign investment

Interest rates in Australia are at an all time low, which makes home loan repayments, at least in the short term, easier to manage. Cashed up foreign investors looking for a quick financial return are also flooding the market, snapping up over 20% of new properties in Sydney and Melbourne last year. When we are talking supply and demand, this is an example of supply being rapidly diminished – which largely means we need more housing stock as well as some difficult political decisions, and this is an entirely different conversation!

Related Post: Thinking of refinancing your home loan?

real estate keyboardBeware of FOMO – the fear of missing out

People look to capitalise on high growth rates in the short term by buying property and selling it quickly. This buying-and-selling frenzy can drive prices higher, with more speculative investors bidding on properties and pushing prices up. There is also less incentive to manage risk with losses being offset via the negative gearing laws.

This can create anxiety in the market, especially amongst first time home-buyers or those looking to move ‘up’ the property ladder. Fear of missing out (FOMO), either on making a good return on investment or on purchasing a dream home, leads investors and buyers to pay more to secure properties in desirable/high growth areas, which, in turn, pushes prices up. Where does the cycle end? This is the Great Unanswerable.

house and bubblesThe Final Word

Whether or not Australia is heading towards a catastrophic burst of the property price bubble or not (and we’re inclined to think that most of the market is just not there – at least yet), buyers should always do their research to ensure they secure a suitable property at an appropriate price.

Understanding how much you can afford to borrow and what properties match your budget and lifestyle goals should guide your property buying. When you do find the perfect property, always compare home loan providers to find the best deal to suit your circumstances.


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