The Bubble Story
Talk of a ‘property bubble’ is making the rounds within the media again. The last time I wrote about the impending burst of the ‘bubble’ was back in September last year, almost to the date we are back here again.
So is there a ‘property bubble’ or not? To be perfectly honest I read over my September 2013 article and I can’t help but feel everything I thought then is still true. But as I start to dig into the various articles and sources online, doubts do start to creep into my mind as a property owner, investor and an employee of the real estate industry - I could be facing it on all fronts.
I am not an economist by any means. But, I am a storyteller and I see where this story began and why it keeps circulating – I am also careful to look at the source and intentions of the author.
The story first caught my eye with an article in Business Day covering the ANZ chairman David Gonski’s speech to the Australian British Chamber of Commerce. He predicted that a correction would come soon and booming housing prices would have to level off or fall.
This seems like a sensible prediction, housing prices after all cannot continue a heated rise forever. Andrew Hedley, director of our Wollongong office, believes that prices will begin to level off as more stock comes into the market leading into spring.
However you have to follow the rest of Gonski’s presentation to know that he would like to see continued restrictions on second tier lenders such as regional banks, credit unions and building societies. He argues that if the sector is opened up it could risk the financial system by relaxing lending standards. Think subprime crisis in the US. It is of course in his interests to ensure that the big four banks maintain their lions share of the market and what better way to do that then advising caution in lending.
Interestingly though, in April of this year there were many articles on an impending bubble and what they focused on did make me a little more nervous. Business Day posted an article detailing the 16 key questions to ask to establish whether we are experiencing a bubble. Although it didn’t draw a yes or no conclusion, it did raise some interesting points about property pricing outstripping income growth and rental returns. Smart Company also in April quoted Philip Soos, Property market economist and housing bubble researcher, and his definition of a bubble is an increase in real estate prices, increase in debt used to purchase and net rental income loss.
In December of 2013, the Bureau of Statistics housing finance figures show investors now account for 39.8% of the value of homes loans issued. Investors are getting into the market in record numbers but rents are not climbing in value at the same rate as property prices. Most are using negative gearing and hoping for capital growth to ensure that their investment is a wise one.
However a bubble can only occur if some key economic conditions change such as an interest rate or unemployment rise. The thinking goes that if this occurs then many investors will need to move their properties and thus will flood the market and prices will fall as a result. This would also affect homeowners who have borrowed too tightly or lose their jobs.
I can see that this all makes sense, we certainly do seem to have the conditions for a bubble. But then I opened the Sydney Morning Herald last week to find an article about a couple who camped out the front of a real estate agency for three days in order to secure a piece of land. In desperation after a year of looking for a property they were willing to do anything to make it happen. With the influx of investors first homebuyers are increasingly being squeezed out of the market.
The highest unemployment rate in Australia was 10.9% in 1992 and the interest rate at the time was 7%. The unemployment rate is currently at 6.1% and the comparison rate with some lenders is as low at 4.7%.
Here are the reasons that after my research I don’t think there is going to be a bubble or a burst:
I repeat I am not an economist; all I can do is research and come to my own conclusion. And that is, the property market is probably a little over heated and may level off but that no bubble or burst is impending.
What do you think?
by Tanya Demello on 12 September 2014
Filed under Places