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Australian Housing Bubble: The Lowdown

10 October 2013 |  by  |  Australia, Property Market

Housing Bubble Explained

Do a search on Australian Property and you would mostly likely come across the “Australian Housing Bubble”.  But what really is a bubble?

In real estate, a bubble or “Housing Bubble” for the residential market can be described as a situation where the asset or property prices appear to be based on unrealistic or implausible calculation of its intrinsic value. It is also characterised by rapid increases in real property prices as bubbles are only conclusively identified when followed by rapid drop, known as a “crash” or “bubble burst”.  This analogy was based on the prices increased based on nothing but air thus vulnerable to a sudden burst or collapse.

With the Australian property market currently in boom territory, the housing bubble debate ensues among noted economists, commentators and property advisors.

No Cause for Concern

In the Business Spectator, Stephen Koukoulas writes that we should just “have a cup of tea and a good lie down”, and explained:

Even though house price growth is reasonably solid at the moment, with prices up around 5.6 per cent over the past year, at least according to the RPData series, all that is happening is a catch-up from the house price falls that were evident between 2010 to early 2012. It is no more than this.

In other words, the level of house prices now is roughly the same as three years ago.

The quarterly ABS house price series shows a similar trend to that shown by RPData, with the weighted average of eight capital city house prices up just 0.5 per cent between the June quarter 2010 and the June quarter 2013. That is an average annual increase of 0.1 per cent!

Bubble? Trouble? Hardly.”

To conclude, Koukoulas writes,

“Of course, excessive house price growth is undesirable, particularly when it is driven by speculation and leverage, but for now, there is scant evidence that this is behind the rise in house prices over the past 18 months or so. One highlight of this week’s RBA Financial Stability Review was that credit growth was so weak, not strong, that banks would relax their lending standards to try to boost market share. Rather than a bubble, there is an ongoing slump in housing credit.

If, and it’s a big if, we see house prices up 20 per cent in two years’ time, you can bet the granny flat that interest rates will be significantly higher than now and that prices growth will be about to be on a path lower. For now, rest easy – house prices have recorded no net growth in the last three years, the recent rise is fundamentally based and will not get out of hand given the likely pragmatic approach from the RBA. ‘

Should We Be Worried?

The battle debate continues on with Chris Joye as posted in his blog in AFR:

I am worried about Australia’s housing market. Very worried. Not so much about the fundamentals, which are solid. Or current performance, which is robust without raising alarm. I am concerned about what lies around the corner – and here, I am talking months, not years.”

Furthermore in his next blog:

“Ignore or face risks in property market. What gives me pause is that national house price growth now looks to be running at three times wages. In Sydney the gap is even greater. And what is unprecedented is that the housing upswing coincides with the cheapest mortgage rates ever. In the boom of the early 2000s, discounted home loan costs troughed at 6.15 per cent, or 100 basis points higher than current rates.

…You can ignore these threats like the US Federal Reserve did before 2007, or confront them and reduce the probability that history eventually repeats itself.”

We’re Not In A Bubble Yet, But

Tim Lawless, national research director for RP Data stated to Property Observer that we are not in a bubble yet, but recognizes that this is an issue that needs to be discussed.

”Generally when you talk about a bubble you’re talking about a strong unsustainable ramp up that will be followed by a correction. Over the past quarter the growth rate is high and warrants this sort of discussion. They should be watched with scrutiny if we see the growth continue into 2014, but I don’t think we’re in a bubble yet. However, this conversation is healthy to have.”

Saul Eslake, Chief economist in Australia and New Zealand, Bank of America Merrill Lynch shares his sentiment, posted on the same blog.

“At this stage I don’t think it is accurate to characterise Australia’s property market as a ‘bubble’. It’s certainly true that Australian property prices have begun to rise again, spurred by very low interest rates and by the interaction between strong growth in ‘underlying’ demand and unresponsive supply. And it’s also true that the current rise is occurring from a very high base, both by historical and by international standards. So far, however, the current upswing in property prices doesn’t seem to be being driven by rapid growth in debt, which is another key hallmark of a ‘bubble’.

After rising very rapidly between 1992 and 2005, household debt has been fairly stable as a proportion of household disposable income since 2006. And over the past year, during which property prices have risen by an average of 5.3%, the total stock of housing debt outstanding has risen by only 4.7%, close to historical lows.

However, if interest rates remain at very low levels for an extended period (or fall further), it is quite conceivable that the Australian property market could take on ‘bubble’-like characteristics, with people borrowing in order to buy property purely in expectation of reaping capital gains. “

See our live market dashboard on the Australian property market so you can make up your own mind, and if you’re thinking of selling make sure you have the performance data on all your local agents so you can make an informed decision. Request your free agent report here.

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Thomas Roberts
Founder of Which Real Estate Agent.
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