Australian Housing Bubble – Is It Real?
There has been much conjecture over whether or not the Australian Housing Bubble actually exists. Is it a bubble at all? Or is it the result of a flourishing economy that knows no bounds and is projected to continue rising to infinity and beyond? Unfortunately, the answer is not a simple one, although our friends at dontdoit.com.au have pulled an incredible amount of research from multiple sources (predominantly the ABS) so that you don’t have to! Apparently, the name ‘Dontdoit.com.au’ comes from the notion that you should do your research before making a large financial investment… Good advice! In our short advice below, we’ve borrowed some main points from their extensive report, highlighting only some of the gripping evidence that can be found in the full version here.
1. Identify Performance-Related Factors for Growth
In the case of the Australian Housing Bubble, a number of factors have contributed to the rather consistent rise in house prices over the last 30 years. The economy has experienced an extensive period of growth, with export opportunities and industry growth creating more jobs and potential to create wealth. Major cities have expanded tremendously, and population growth has also contributed. And, as any economist will tell you, the supply-demand argument is always relevant. Demand for housing drives prices up, but it also drives supply. Supply, on the other hand, can affect demand as well. For example, the oversupply of apartment complexes in some of Australia’s major cities had the building industry fearing a downturn in demand, and thus, prices. Obviously, there are many factors to consider, so do your research!
2. Identify Policy-Related Factors for Growth
Again, we’ll use the Australian Housing Bubble as an example. Interest rates, a reflection of the RBA cash rate, have certainly influenced the direction of the market. Figure 1 highlights this effect, and a further breakdown of this factor is presented here. Another interesting consideration is the effects of negative gearing, which has stimulated investment in the Australian housing market for some time. The ABC can explain this further, and dontdoit.com.au touch on the effects of Labor’s shock election loss which saw negative gearing remain for the time being. In addition to the two factors discussed so far, more incentives are being offered by the Australian government to make loans (debt) more accessible for first home buyers. APRA have changed lending standards to make it easier for banks to lend. Continued debt growth is crucial to ensure the survival of housing price growth. But are the measures influencing debt growth sustainable?
3. Identify Risk Factors
So, if there is no Australian Housing Bubble and the whole thing is a lie, then there should be no proverbial ‘pin’ to pop it with… But wage growth, the unemployment rate, and a struggling retail industry suggest otherwise. The disproportionate growth rates between debt/house prices and wages is frightening, says dontdoit.com.au. A nation of people once purchasing houses at 2 x their annual wage, are now being faced with a median house price 8 x their wage (10 x at the peak). Whilst some media commentators have cited the inability for prospective first home buyers to save, the growth rates in Figure 1 suggest otherwise. Dontdoit.com.au note that wage growth is basically flat, once correcting for inflation. Before accepting either argument, consider what current factors could affect prices in the future.
Australian Housing Bubble? It’s Never That Simple…
Unfortunately, it’s never that simple to claim that yes, there is an Australian Housing Bubble, or no, there isn’t. But hopefully this short brief has encouraged you to read the extensive report at dontdoit.com.au. Do your own research. Make your own mind up. Read what the experts are saying, but also consider if they have an agenda. Should you discount everything your real estate agent tells you? Not necessarily, but you probably shouldn’t mindlessly accept it all as truth either! So, in the words of our friends… “Don’t do it until you’ve run the numbers!” – Dontdoit.com.au