Is it a housing boom or bubble?

The Australian housing market has many people scratching their heads.

On the one hand many analysts see great times ahead with double digit capital growth predicted for some of our capital city real estate markets next year.

On the other hand, there are those who are convinced our market is an unmistakable housing bubble and expect an eventual significant drop in house prices which will leave ugly, rich property investors nursing heavy losses.

So are we in a housing boom or is there a bubble?

The bottom line is we are not in a “bubble”, but home prices lifting from their trough in the middle of last year.  To better understand why I say this let’s do a Q&A.

What’s happening to dwelling prices?

Thelatest house price results from RPData – for the year to October – suggest a rather tame residential market in response to favourable influences such as low interest rates, an under supply of new housing starts, strong population growth and rising consumer confidence.

Annual changes in capital city


As you can see the Sydney market is booming, but if you look back over the past decade Sydney home prices have barely grown in line with inflation, having risen only 2.5% per annum.


What’s happened since the market bottomed last year?

In general home prices dropped in 2011, bottomed in mid 2012 and then started retracing as investors and home buyers embraced attractive market and economic conditions.

However if you look at recent growth periods following previous market lows, specifically at the beginning of 2001, 2007 and 2009 you can see from the next RPData graph that the rise in values this time round (over the last 17 months) is significantly more modest when compared with the previous three growth cycles.

What’s happened since the market bottomed last year?

What we are experiencing is the normal machinations of the property cycle.

What happens is that property values rise then they slump for a while, then they retrace and finally go into the next expansionary phase as you can see in the following graph from Dr. Andrew Wilson of Australian Property Monitors.

Australian Property Monitors.

Current price growth around the 6% per annum mark is in line with the long-run average. While dwelling prices are up by around 9% from the mid 2012 trough, they are only around 1% above the previous (late 2010) peak.

And these gains are concentrated in Sydney (where real prices have changed little since 2004) and Perth (where population growth is strong).  Price growth in other capitals and regional areas are more restrained.


But aren’t houses in Australia already too expensive?

Yes they are expensive by world standards, but this is a reflection of the fact that most of our population is concentrated in a few coastal capital cities. We also have high quality, large housing stock generally on big blocks of land.

Plus the poor state of public transport in our big cities only increases the premium on properties located close to the CBD.

Of course this has some bubblers saying houses are now ”overvalued” because the rise in house prices over the past few decades vastly outperformed the rise in wages.

This overlooks the historic boost to household borrowing capacity that occurred in the 1990s with the halving of interest rates. This, in effect, doubled the amount households were able to borrow their income.

At the same time the relaxation of lending standards by banks in response to financial deregulation increased the amount banks were willing to lend against that income. These two factors are largely responsible for the increase in household debt between the mid-1990’s and 2000’s.

However some bubblers are still convinced that debt levels are unsustainable andsome shock will happen and the bubble will pop.


What about credit growth?

Strong credit growth has been cited as a key factor in fuelling the housing bubble.

The bubblers warn that if more people are taking on debt and become heavily leveraged a sudden change in the wider economy such as a rise in interest rates or unemployment could see mortgage holders struggle to repay their debt.

Fact is the low interest rate environment is not currently causing a strong rise in new credit. Sure credit growth has lifted off its historic lows from earlier this year, but remains very soft relative to previous years. Housing credit growth lifted by 4.7 per cent in the 12 months to August.[sam id=31 codes=’true’]

Part of the reason why credit growth is growing at a slower pace is that about half of households, according to anecdotal evidence, are not reducing their regular mortgage payments as interest rates fell, putting them way ahead in their mortagge payments.

Another factor in our favour is our banks’ high lending standards compared to the lax standards overseas that, in part, led to the USA housing meltdown in 2008.


Is the Reserve Bank worried?

The RBA doesn’t seem to be concerned by what’s happening in the property market nor should they be surprised by our rising house prices.

It is part of the RBA’s plan to rebalance growth as the mining boom fades. Their mission has been to stimulate our economy in general and housing activity in particular, so they would have expected some sort of price impact!

Recently Dr. Luci Ellis, the head of the RBA’s financial stability department reaffirmed their position that we are not in a housing bubble.

She said Australia did come close to having housing bubble a decade ago, but on the basis of a ‘‘dispassionate’’ analysis of the data, there was ‘‘no comparison’’ with the current state of the market.


Is the government worried?

Recently both Prime Minister Tony Abbott and Treasurer Joe Hockey explained how rising dwelling prices are generally a good thing for Australia considering the wealth effect we get when our homes increase in value.


So what could cause our property markets to collapse?

It’s not as simplistic as the bubblers think. House prices only fall when people are forced to sell their homes.

Sure the market will turn again one day, but that doesn’t mean property values will collapse. What tends to happen is people choose to simply remain in their home and wait things out while property investors also try and hold on rather than realising their capital loss.

A true collapse in house prices would require some large external shock such as:

  1. High unemployment to trigger the wave of forced home sales. While unemployment is likely to creep up a little, no one is suggesting we’ll have a crippling unemployment rate in the foreseeable future.
  2.  High interest rates that would cause a raft of homeowners to default on their mortgages – again unlikely in the foreseeable future.
  3. A recession that would cripple our economy. If our politicians play their cards right this is unlikely to occur. Or..
  4. A severe oversupply of property.  Now this could occur in a few isolated markets but generally we have an undersupply of properties around Australia.


In summary:

An improvement in the interest sensitive housing sector is critical for Australia to successfully rebalance economic growth away from the declining mining investment boom.

As part of this, house prices need to rise to help boost household wealth and support consumer spending. More importantly the RBA wants this to occur to encourage an upturn in the housing construction cycle.

Sure Australian housing is already among the most expensive in the world, but just because something is expensive doesn’t make it a bubble. Property values are only just back to where they were three years ago.

Where will they be next year or the year after?

Who knows?

I don’t have a crystal ball, but the fundamentals suggest we are at the beginning of the expansionary stage of the current property cycle, which could last a couple more years.

On the other hand if property values keep increasing by the equivalent of 20% a year (as has happened in Sydney and Melbourne over the last quarter) then the cycle is likely to be shorter and once again property values could fall – but they’re unlikely to crash.

What is most likely to happen is that growth will slow a little in Melbourne and Sydney. At the same time as our economy gets stronger and house prices rise the RBA will put some hurdles in the way by raising interest rates and the cycle will slow down.

However property prices are unlikely to crash!

In fact, according to John Edwards founder of Residex, we haven’t have a property market crash in Australia since the 1890’s.

Of course I’ll keep you up to date with how to take advantage of the changes happening in our property markets in future updates, but as so much is happening in property nowadays I’ll keep you updated almost every day with a short post in my blog – just click here and subscribe to it – that’s a different subscription to my regular newsletter – it gives you my short daily updates not available elsewhere.


What can you do about it?

If you want to take advantage of the opportunities our growing property markets will offer you now is a good time to consider your options.

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level. Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

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'Is it a housing boom or bubble?' have 13 comments


    January 22, 2014 Private Building Certifiers | Building Certifiers - Certification Brisbane

    Your writing is really very good. The blog is fully stuffed with unique and good information. Good keep it up.

    Wow! What a great post.



    October 29, 2013 Michael Correll

    Share market growth charts look different when measured in oz. of gold rather than dollars.
    I guess so will housing graphs.



    October 28, 2013 Brian Stinson

    Hi Michael,
    Isn’t it interesting that if property prices go up it is a bubble but if the share market goes up it is a normal cyclical growth phase. If one were cynical one might conclude the doomsayers have a vested interest in selling shares?


      Michael Yardney

      October 28, 2013 Michael Yardney

      Now that’s an interesting observation Brian
      I’m glad to see your local market in Perth is booming



    October 26, 2013 Rick

    Hi Michael there is massive growth planned in south west Sydney growth centre with extension of rail line into edmondson park and with the new Westfields planned for Oran park.Does this look like a good investment area over the next 10 years. It seems to have the growth drivers but is oversupply an issue as many new properties become available?

    Oran park



    October 26, 2013 Anesh

    In Australia we are not constructing enough houses we need that makes under supply and drive the prices up the simple reason is people cant afford to build new houses. Basically the established houses are bought and sold in excessive prices but the RBA want more construction done. Our treasurer says ricing prices make housing more affordable. What I don’t understand is if the prices rises again who will be able to do it ? and if a country cant afford to build enough houses is that the strength of that economy or weakness of that economy.


      Michael Yardney

      October 26, 2013 Michael Yardney

      Thanks for your comments Anesh
      You are right – housing will be unaffordable for some people – those trying to get in the market, but it’s always been that way. On the other hand if houses were unaffordable for most people we would be having the property boom we’re currently experiencing



    October 25, 2013 cheema

    Hi Micheal,

    What about buying a off the plan unit in sydney say areas like Hurstville or parramatta now and get the benefit of capital growth for next couple of years while the building is under construction. All we have to pay is 10% of price wait and watch. I know there are some risks involved like what if builder goes broke or building is faulty when completed. As every property investment carries some degree of risk but overall looks good idea to me your thoughts please.


      Michael Yardney

      October 25, 2013 Michael Yardney

      Hi Cheema
      If you’ve been reading my blogs you’d know I’d very much against off the plan for many reasons.
      The problem with your assumption is that if you buy off the plan today you are NOT buying at today’s price, so there is little or no capital growth. That’s what’s happened to so many people who buy off the plan. When they settle in a few years the valuation is still less than their asking price. I would stick to established properties in Sydney



    October 25, 2013 Greg H

    Thanks Michael – some good insights. In particular the graph showing we’ve only just entered the exapansinary stage is helpful.


      Michael Yardney

      October 25, 2013 Michael Yardney

      Thanks Greg
      You’re right we’re just a little above the previous peak values, so the new cycle is just starting and we’ve got a few great years ahead of us in property



    October 25, 2013 Lee

    Brisbane is the best value in my opinion. It actually suffered a 10-15% drop in most places within 15kms of CBD, making it affordable again. My friend is still underwater with his Brisbane property who bought few years back when I told him not to buy when everyone else was ! Brisbane has stabalised now and I think with the high prices in Sydney, investors will move to more affordable places such as Brisbane with better returns. I’ve just bought a nice investment property (house) in Brisbane for only $421k returning 5% with high rental demand and properties are now selling fast. Where as Sydney where I live, is only returning around 2-3% if you were to buy at the very high prices today. Sydney property will bleed you dry – the difference between mortgage payments, rates, strata if any and rent is huge and would negate any capital growth if any at this stage of the cycle in Sydney – I personally think Sydney is a dangerous bubble due to people taking on too much debt (I live here and in the real world without getting excited about fancy graphs showing a never ending property boom, I know a lot of middle class people who are stuggling with their mortgage payments and high cost of living – with inflation increasing it would only take a couple of rate increases and their houses would be gone and I believe would be domino effect) whereas places like Brisbane are still affordable for the average person with lower debt to income ratios.


      Michael Yardney

      October 25, 2013 Michael Yardney

      Thanks for your comments Lee

      remember most people buying property in Sydney (as everywhere else) are home buyers – not investors – so returns are not important to them. They are prepared to pay a premium to live in Sydney.

      But I definitley agree that Brisbane has turned the corner and will have some strong growth next year


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