There’s been a lot of talk in the media lately about whether or not the Australian property market is in a housing bubble1. And now the mean price of a house in Sydney has surpassed $1million2. So is there anything homeowners and investors can do to stay ahead in this economic environment?
To consider this, we need to understand what a housing, or ‘price’, bubble is and what causes it.
The housing bubble explained
There are two main aspects to a price bubble:
The first occurs when there is a rapid rise in housing prices and it starts to become self-driving as buyers become motivated by news of recent price gains.
The second is when the price of houses rises above levels justified by incomes and rents3.
History provides plenty of price bubble ‘pops’ to remind us that we have been down this road before: the tulip bulbs price plunge of the 1600s4, the tech stocks crash of the early 2000s5 and the US sub-prime mortgage crisis of the 2000s6, to name a few.
But the question remains, is there really a housing bubble in Australia and is it likely to pop?
We talk to AMP Capital’s chief economist, Dr Shane Oliver, to ask: Is there really a housing bubble? How will investors and home buyers be affected? Is there anything we can do about it?
Shane suggests we look at property in two main groups – first Sydney and Melbourne, and then the rest of Australia. He says, “Outside of Sydney and Melbourne, it’s very hard to argue there is a housing price bubble. While prices are high, price gains are modest or non-existent and there is no sign they are being used as a signal by new buyers as a reason to get into the market.
“But it’s a bit different in Sydney, and to some degree in Melbourne, where prices are high and some buyers and investors are rushing in for fear of missing out. They are thinking ‘I’d better get in now because prices went up a lot last year and they will do the same again next year.’ Of course, this sort of thinking can be dangerous.”
Shane points out that home price growth in capital cities outside Sydney and Melbourne is averaging around just 1%, but Sydney is hovering around 15%.
“So you could say Sydney house prices are ‘bubbly’, but this doesn’t necessarily mean that prices will ‘pop’ as Sydney is still in undersupply. We have not seen deterioration in the quality of loans that banks are making, such as where US banks lent money to high-risk people without an income, which contributed to the US sub-prime housing price collapse. So it’s hard to see the trigger for a collapse.”
So how will this affect home buyers and investors? Is there anything we can do about it?
Shane’s advice is split between home buyers and investors:
For home buyers:
“If you are a young person and you want to move into your first house, now is probably not the best time to buy in Sydney. But there is opportunity for home buyers in other capital cities because you can take advantage of low interest rates and pay off your mortgage quickly, and the market is relatively quiet.”
“Be cautious. It’s not the best time to buy an investment property – certainly not in Sydney and, to a lesser degree, in Melbourne. After a run of strong years, prices have already run up sharply. So there’s a risk that prices will start to soften and the property market will come off the boil as banks slow lending to property investors – in response to pressure from the Australian Prudential Regulation Authority (APRA) and eventually (in a few years’ time) if the RBA starts to raise interest rates again."
“As an investor, given very low rental yields, you want to earn around 8% or so in capital growth over a run of years to make sure you get a decent return on your investment – that’s a big ask in the current environment and you may not get that. You need to be confident you are going to be able to keep your tenants over the longer term to see you through a possible downturn in capital growth.”
So is investment in property still a good way to build wealth? Like all investments, the answer to this depends on:
- your personal circumstances
- what you want to achieve
- how much risk you are willing to take
- and, of course, the property market.
Luckily, there are some simple steps you can take to build wealth over the long term.
- Understand the difference between good debt and bad debt
- Start saving—it’s never too late to save for rainy days and interest rate hikes. Use our savings calculator to see how much you could put aside or use our budget planner calculator.
- Protect your ability to pay your expenses—consider taking out income protection insurance.
- Seek professional advice. Find an adviser or call us on 131 267 so we can help you.
Do you have a question about investment markets or economic trends that you'd like to ask Dr Shane Oliver? Send your questions to AMP_Content_Team@amp.com.au. If your question is selected for the next issue of our newsletter, you'll win a $50 voucher.
2 Domain house price report, 23 July 2015 domain.com.au/group/wp-content/uploads/2015/07/Domain_House_Price_Report_June2015.pdf.
3 investopedia.com/articles/07/housing_bubble.asp: Why housing market bubbles pop.
4 The Tulip Mania in Holland in the Years 1636 and 1637(1929) by N. W. Posthumus, Journal of Economic and Business History maurits.net/Research/TulipMania.pdf.
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