Many pessimists and alarmists in the media are telling us that Australia is on the edge of a “housing bubble.” While we can see how the argument is fairly seductive for those who are prone to drama, we can also see why it is grounded more in speculation and theory than it is in fact.
As mortgage brokers who have helped process a lot of home loans in the Kwinana, Rockingham and Baldivis areas, we feel that it is our job to keep an eye on what is happening in real estate. Besides monitoring Australian real estate, we read about bubbles and cycles in other countries, too.
Years of experience in brokering home loans and keeping an eye on real estate both here and overseas have taught us a lot about housing cycles and when the cycle goes awry, turning into a bubble. While it is impossible to put all of these years into a single blog post, we can tell you the basics of the housing cycle and what makes it turn into a bubble.
The Housing Cycle
In the boom phase, financing is easy to obtain and interest rates are low, property prices begin to rise and rental rates rise with them. The time that properties are on the market decreases. When the average rental rate is higher than the average mortgage repayment rate, it becomes more advantageous to buy than to rent.
Investors also buy more property heavily to take advantage of rising rent prices. Many home owners refinance their homes using rising equity as collateral. The media begin to cover the “boom” in a positive way at first but eventually focuses on a lack of affordability.
In the slump phase, the price growth levels off and then falls—properties are on the market longer. Lenders become less likely to provide financing and investors see lower returns on their properties. More rental properties are empty; some investors begin to sell properties—this, of course, causes prices to drop further.
The media usually paint a picture of gloom and doom during slumps, often complaining that property values are artificially high.
The recovery phase is the shortest of the three phases and represents a transitional period. Rents and cash flows begin to rise; properties begin to sell faster and prices increase. When the media cover this, they tend to say that the growth is not sustainable.
In a housing bubble, housing values and prices rise too quickly due to an overactive market—this is usually caused by excessive speculation. Prices rise to unsustainable levels until the mainstream buyer can no longer afford to buy. The media describe property as being overvalued—and they are right.
According to the RBA, a housing bubble is present when investors are buying properties because they are expecting them to rise in the future and not paying attention to rental yield. According to many, Australian property is overvalued to a point where there could be a bubble.
So, who’s right?
Our Educated Opinion on the State of the Australian Housing Market
As we have mentioned, we have been around a long time and watched prices rise and fall. We think there are two questions that are relevant: “Are prices being driven artificially high by rampant investing” and “Is housing so overvalued that the current prices are unsustainable?”
We think the answer to both questions is, “No.”
As far as we are concerned, we are at the start of a new property cycle. Prices are returning to levels from a few years ago but they are the result of an improving economy and more residential buyers. While investors are buying a fair amount of properties, there isn’t the kind of over-speculation that would cause a housing bubble.
The market was so sluggish that the RBA has lowered the interest rate to historically low levels—that is allowing more people to buy houses. In addition, the US market is showing slow recovery. That will have an effect on China’s economy, which will in turn be great for Australia.
We feel that the real estate market in Australia is currently in a “sweet spot” and that now is a great time to buy real estate. Whether you are someone looking to buy a residence or a small investor looking for a great place to invest your super, interest rates are low and prices haven’t risen to what will eventually be their peak.
Talk to Us
If you would like to talk to a mortgage broker about a home loan in Baldivis, Rockingham or Kwinana, call (08) 9527 1800 today.