Is The Australian Property Market In A Bubble?

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With some Australian real estate property markets experiencing 15% and more over the past year, in these post GFC economic times, the question has to be asked, “Are we in a bubble” and if so, “When will the bubble burst?” Before we dive into the answers, it is best we get a definition of exactly what determines a real estate market bubble.

What Defines A Real Estate Market Bubble?

Most commentators would define a market bubble, as something identified only after it does the proverbial bursting. Many would argue that just because a market, in this case the Melbourne and Sydney real estate markets, have experienced above average growth over the past two years, and that these prices represent clearly inflated values, that this in itself is not sufficient to define a bubble.

I know you are probably thinking that, that sort of growth can’t possibly continue indefinitely, and you would be correct. There will reach a point when the bubble will burst, the market (crash) correct itself and prices will be more realistic to their true values. Then again, some would argue that the “bubble” will not burst, that the growth curve will flatten or recede but this will not produce any dramatic drop in the actual values of properties.

Why Are Sydney And Melbourne Real Estate Markets So High?

It comes down to a question of supply and demand. When demand exceeds supply, you have market pressure forcing prices higher. In both Sydney and Melbourne, there are limitations on property availability in several suburbs that have profiles of high desirability. Properties situated close to schools, hospitals, shops, parks, the CBD, transport, cinemas and entertainment areas traditionally attract high demand for the obvious reasons.

Now if you add in the capital gains from such market growth, then you have the added pressure from investors fueling the fire even further. It is a bit like bee’s being attracted to the honey pot. Well, actually there is a oft misquoted phrase, because bee’s make honey doesn’t mean they are attracted to it. Ants on the other hand…

So these ants that are attracted to the honey pot, investors, actually heat up the market according to their numbers. This creates a feeding frenzy and this in turn makes the impression of the bubble.

Why Aren’t Other Areas Of The Market Experiencing Such Growth?

Other parts of Australian, are not experiencing similar growth to be either Sydney or Melbourne, simply because they are not experiencing such growth. I know that sounds like a circular argument but it is true. Everybody wants to go where the action is and this is what pushes markets even higher. Forget the fact that Joe average can’t afford to play the game if he is just starting out as a first home buyer. He doesn’t figure in this rapid growth equation. I know this creates a socioeconomic problem of affordability versus occupancy, as values rise, rates of rental return need to keep step, otherwise the market will not be sustainable.

Simply put if rents are too high, then no one is going to be filling the investors properties and without that, the property values will fall.

Areas outside of the property hotspots, have remained at steady rates of growth that is more sustainable, simply because the investors are fueling the fires elsewhere. Speaking of investors where are they coming from?

Foreign Investors Fueling The Sydney And Melbourne Real Estate Bubble

In the Sydney Morning Herald today, Mark Mulligan explains that the recent trouble with the Chinese economy has brought about reforms that will increase the pressure on Australian Assets, including property, as China frees up the flow of money in and out of their economy. It is related to the equity, bond and currency markets, that will lead to inflated prices of assets across the world.

Foreign ownership of land is something that the authorities have lamely attempted to curb, all the while rubbing their collective hands together as their coffers are bursting at the seams. In NSW for instance, John Bairds government has reaped an enormous budget surplus out of the property boom, by way of collecting stamp duties. In just the first two months of this year, the Baird government netted a massive $1 billion in stamp duty as figures released from the NSW Office of State Revenue reveal.

What Might Trigger The Bubble To Burst?

If a real estate bubble does exist in these two markets, what might be the trigger of it bursting? Good question and to find an answer we can look at the sub-prime real estate bubble bursting in the US which lead to the worldwide economic meltdown we know as the GFC. In this situation we had a whole range of low interest loans coming out of the honeymoon phase, with an over represented proportion of home owners unable to pay the higher repayments suddenly either selling or going into foreclosure. This sent a chill through the market and the prices began to tumble.

It comes down to supply and demand, coupled with market reaction.

If there exists a very good reason to exit the market as a cashed up investor pulling out their gains, with the belief that the market has topped out is brought about by the sustainability factor capping prices, then this could accelerate to the point of everyone wanting to get out at the same time before the market falls too far.

Once this happens  and the speculative investors are out and only the long term buy and hold investors remain, those who bought at over inflated prices, who now face lower returns and a dropping value also decide to get out and so the bubble bursts in a spectacular fashion.

What Are The Experts Saying?

According to this article published on the SMH the 25 leading economic forecasters polled by the Fairfax paper, most believe that the Sydney market will experience growth of 10.4 per cent and Melbourne to grow by 6.4 per cent this year. If this is true, then this puts pressure on the federal reserve to act in a way to stimulate an otherwise lagging economy.

Well maybe they are right and there is no bubble and it won’t burst anytime soon. And then again, what would happen if another major worldwide economic shift came into play? The destabilisation of the EU with Greece’s recent troubles might not be the trigger but what is happening in China as demand for the worlds commodities comes off the boil could well be something to watch, according to Harry Dent.