Is Australia in a price bubble?
December 12, 2013 / Written by Rich Harvey
With Australian property prices rising so quickly, it's easy to understand why some industry observers have begun to speculate that a price bubble may be forming.
This is especially pertinent in a country like Australia, where residential real estate accounts for an average of 60 per cent of household wealth, well above the global average of 45 per cent, according to an October research paper from Credit Suisse.
November 30 figures from the RP Data - Rismark Daily Home Value Index, have shown the aggregate of average home prices in Sydney, Melbourne, Brisbane, Adelaide and Perth was approximately $608,000.
Of course, this number was even higher in Sydney alone, which boasted an average of approximately $724,000.
Yet the same question remains on everyone's lips, from owners of Brisbane property investment to potential buyers of luxury homes for sale in Sydney: Are we in a price bubble?
The short answer is: no.
Shane Oliver, chief economist at AMP, has noted that while "Sydney growth is strong, it’s worth noting that Sydney property prices have had no real growth since 2004 – over the last 8 years Sydney property prices have increased by an average 2.7 per cent, which is identical to the average 2.7 per cent inflation rate over the same period.”
Historically, Sydney has shown it tends to have flat line periods or gradual increases followed by a spike. This latest surge is fuelled by low interest rates and a serious under-supply situation. Vacancy rates remain relatively low and the National Housing Supply Council’s most recent report estimated a cumulative shortfall since 2001 of 228,000 dwellings. ANZ economists suggest that our market imbalance is currently around 300,000 dwellings.
New dwelling construction has been declining since 2002, yet the population of NSW has increased by 720,327 people! Sydney accounts for 506,982 of that growth. This is a classic case of demand starting to outstrip supply. If prices were rising in a market where supply was outstripping demand then we would also be making the case for an asset bubble risk. Clearly this is not the case in our current market.
Headline grabber and bearish economist Steve Keen told Business Review Weekly on November 14: "There’s a housing bubble, and it’s predominantly mortgage-debt driven."
However, President of the Federal Reserve Bank of Dallas Richard Fisher pointed to unique factors such as foreign investment as reasons for high prices, telling Business Review Weekly that he supports Reserve Bank of Australia's (RBA) Glenn Stevens' decisions regarding interest rates and the real estate market.
RBA Assistant Governor Malcolm Edey has spoken out against claims that Australia is facing a house price bubble earlier in the year.
“House prices have risen at a rate similar or level to growth in household income… The ratio has been roughly flat or tending actually to fall. Within that trend, there will be cycles and periods where that ratio rises or falls,” he said.
Another counter against the bubble argument is that the growth in housing credit is around a record low of just 4.6 per cent in the last 12 months compared to 20 per cent plus gains in 2004. Australian banks implement very cautious lending policies which means they provide quality loans to people that can afford them. The growth in credit has been quite subdued compared to previous real estate spikes.
It's also important to keep in mind that in many areas of the country, home prices are rising from very low levels, meaning that even with fast increases, current price levels are not necessarily historically high.
Affordability will keep a natural lid on a price bubble developing in Australia as we have become more fearful of taking on debt and some are worried about rising unemployment. Most of us have been paying down our mortgages helped by lower interest rates. And we are more aware of market trends and realise that house prices can go down as well as up.
Either way, it always comes down to the individual, especially in terms of what a home buyer can comfortably afford. This is just one of many reasons that working with an experienced buyers agent can help property investors save money and streamline their purchase process.
