By simple definition, a bubble refers to a market that is considered to be overvalued at the current moment. Whether by a housing shortage or being flocked by investors, they are both significant factors in determining the “value” of a market. Lets focus on Sydney in the “Australian property bubble” where the assumption of a bubble seems most relevant, rather than Australia as a whole.
Sydney is unarguably one of the world’s best cities attracting local buyers, overseas and local investors. Now consider the fact that there is a supposed housing shortage, why not expect an upsurge rather than a speculation of a Sydney Property Bubble?
Currently from the Australian Bureau of statistics, the August 2013 total built dwellings (seasonally adjusted to be more effectively compared with different months of the year) fell by 4.7%. This is not particularly helpful to a housing shortage. It is irrational for a bubble to burst when there are home buyers requiring a home, investors acquiring homes and not enough homes to go around.
NUMBER OF TOTAL DWELLING UNITS (ABS 2013)
“In seasonally adjusted terms the estimate fell 4.7% to 13,687 dwellings.” ABS 2013
There is vast support locally and internationally which is protecting against a bubble burst. Consider a situation where everyone concluded that property would indeed rapidly free-fall by 40% due to a spontaneous burst. Many buyers would consider this to be an exclusive opportunity to enter the market or build on a current portfolio. This in itself raises the value of the market which challenges the definition of a Property bubble by it being overvalued. Assuming there are investors which think alike, it is if anything ensuring a bubble will not burst.
As you can see from the National Housing Supply Council data below, there is an increasing under-supply of houses every year. In 2011 there was a shortage of 228,000 dwellings. This is expected to increase by 141,000 in 2016 to 369,000.
Moving on to clearance rates, for the period 14 Oct-20 Oct 2013, Auction rates are at 74.6% in NSW from RP data. The average house price for October so far is approximately $615,000.
The number of Sydney properties sold since the beginning of 2012 has also came to a new high.
Despite the rapid increase of Sydney property prices that proved to walk through the financial crisis, investors are monopolising the market and are causing an ongoing increase in prices. While investors are continuing to make benefit of the implied positive and negative gearing instruments, one would question why an investors would not want to be so property oriented. The only potential reason as to why investors would ease up on the property market is if the beneficial facilities are no longer rewarding either personally or finically including its tax benefits.
RP Data’s head of research Tim Lawless states, “By the end of October we’ll see the housing market move back to historic highs because we are now on an escalating rate of recovery or capital gains”. The current interest rate set by the Reserve bank is currently at 2.5 per cent. If the Reserve bank decides to lowers its rates once again for economical reasoning, the housing property will take on pressure to continue to increase as investors and buyers rush in to take advantage of the lower rates.
The Reserve bank would be very weary of the dangers of maintaining a low interest rate for long periods of time which could potentially cause an inflation of assets that can work to a bubble. The US is being criticised for holding its low interest rates for 2 years longer than they should have which was a major contributing factor to the global financial crisis, so holding rates for too much longer may raise concerns.
Mcgrath real estate owner John McGrath says “If there is pressure to keep growing at this level – which I don’t suspect we will – quarter after quarter after quarter, we’d probably end up in trouble because we just can’t grow this rapidly.” This would be prompted by further interest rate reductions by the RBA ending 2013 which is at the moment unlikely but still a possibility. As at 24 October 2013, the ASX 30 Day Interbank Cash Rate Futures November 2013 contract was trading at 97.515, indicating a 7% expectation of an interest rate decrease to 2.25% at the next RBA Board meeting. This decreased from a 27% expectation on the 1/10/2013.
Prices may decrease due to an increase in the Reserve bank rates in future, but there would need to be a series of catastrophic events for a bubble burst. Home buyers defaulting and an unexpected oversupply of property are not impossible but would certainly be necessary contributing factors for a possible burst. Another scenario is external contributing factors such as major government affordability schemes to fall in place aimed at increasing housing supplies that would typically reduce high rentals that would push investors away from the market.
The historically low interest rates currently in place would need to be held for longer periods by the RBA and there would need to be a balanced or over supply of housing for a bubble to develop effectively which does not seem to be the case unless there is a governing change.