A Housing Bubble or the Potential for One?

Photo: Nagarjun Kandukuru

I wrote a few weeks ago about housing bubbles and misconceptions commonly associated with the term. 

A bubble is typically an illusion of economic strength that draws buyers in while masking underlying fragilities.

In some areas of Australia, the recent investor-led rally in property prices from an already inflated base is concerning.

However, unlike other economic bubbles, housing markets have plenty of complexities that can delay a severe correction – not least the stimulus of easy monetary policy, incentives, and speculation buoyed on by tax policies that encourage heated investor activity in the established housing terrain around our most desirable capital city locations.

The Danger of Investors Seeking Quick Returns

Our low interest rate environment, coupled with a honeymoon period of post-election confidence, is predictably forcing investors to seek out any area of imagined opportunity that can provide a better return on their dollar.

This runs the risk of stimulating higher levels of household debt (which is currently at around 150 per cent) directly tied to speculative behaviour. 

In the Australian culture, which veers towards the perceived safety of bricks and mortar, you don’t need a second guess as to where a large proportion of undiversified debt is currently being allocated.

Some interesting research was released last week by Jonathan Mott of financial services firm UBS, highlighting the above point aptly;

“If we compare Australia, New Zealand and the UK, all three countries have similar cultures, demographics and home ownership. However, investment property contributes 32 per cent of Australian mortgages, 20 per cent of NZ mortgages and 12 per cent of UK mortgages. 57 per cent of Australian landlords are leveraged (ATO data suggests this is closer to 81 per cent) compared to 28 per cent in NZ and just 13 per cent in the UK.”

This would be less of a concern if effective supply was keeping pace to soak up the overflow of demand, and thereby reduce volatility in values.

However, in areas of limited supply, the bubbly nature of the price gains disproportionally advantages those with existing assets, at the expense of those struggling to get a foothold.

Photo: macinate

Can the Current Trend Continue Without Some Correction?

When viewed against a less than desirable economic backdrop of rising unemployment, an unwinding mining boom, and weak wage growth, with a rise in the cash rate at some future point inevitable, you’d be foolish to think the current trend can continue without some correction.

Our politicians continue to miss the point. Tony Abbot said on 3AW last week:

“Don’t forget… if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset.”

What a sad world it is, when the most essential item young and old aspire to alike, for both their health and continued wellbeing, gradually becomes less affordable over time, requiring a greater level of debt to be serviced despite the somewhat falsely perceived advantage that low interest rates somehow make the buying environment and purchase of property easier.

And yet as a direct consequence, we have falling rates of ownership – particularly in the younger generations – an increase in overcrowding of accommodation, rising waiting lists for social housing, and the average age of ownership for those not benefitting from a gifted deposit, pushing closer to 40 years.

“What a sad world it is, when the most essential item young and old aspire to… gradually becomes less affordable over time…”

The housing market no longer revolves around promoting home ownership for the sake of personal wellbeing. It’s Australia’s largest domestic asset class with an aggregated value of over $4 trillion, and understandably, it’s now suggested that ASIC should recognise it as such.

Countless hours can be spent arguing what the term ‘bubble’ actually means – definitions are numerous. Equations are done regularly comparing price to rent, debt to GDP, and price to wages (a somewhat skewed calculation due to the inclusion of compulsory super).

However, do we really need a meteorologist to tell us what the weather’s like outside?

Whether you call it a bubble matters not, Australian house prices have been pumped up with many ingredients over the decades to get to such elevated levels. 

As a result, we have a market that is both over-priced and under-supplied, with the first-home buyers’ share of new home loans sitting at its lowest point in a decade.