Bubble talk about the Australian housing market.

March 24, 2015 

More bubble talk about the Australian housing market, can it be true this time?

Whenever house prices rise in Australia someone is out there calling it a property bubble. Claiming that the Australian property market is a bubble that is about to burst is a full time job for some. I guess if you say that prices will fall often enough you will get it right part of the time. If you look at the historic housing price trends over time you will notice that the market, or should I say markets (as Australia has many different markets the major ones are the capital cities of the States and Territories which generally operate independently based on local conditions), goes in cycles with price rises and falls. If you are observant (and even if you are not so observant) you will see that prices though rising and falling tend to rise more than they fall over time. This rising more than falling and particularly after a rise leads the “bubble will burst” crowd to claim that there is a bubble that we should all be scared of because if we own real estate it will become worthless. I guess that when you don’t own property you have two choices:

1. buy property; or

2. hope that there is a bubble that will bust so that you can buy property at dirt cheap prices.

Option 2 sounds appealing but in the mean time property prices in those “bubble markets” just keep on rising.

So is Australia going to have a housing market crisis like the USA did that caused the Global Financial Crisis (GFC)?

That may be what some people are thinking, “if it happened in the USA, it could happen in Australia”. However, in the USA the situation leading up to the GFC were very different than in today’s Australian property market. In the USA mortgage brokers were selling mortgages with very low introductory interest rates (that only lasted for the first few years) to people with no job or income and no way that they could make the repayments. The theory, if there even was a theory, was that the house prices would rise and cover the costs before the borrower defaulted on their loan. Or maybe it was just unregulated mortgage brokers with an incentive to write the loan and no disincentive if they were unable to repay it.

Fortunately in Australian mortgage brokers are highly regulated (as with the banks and lenders) and loans must be shown to be affordable for the borrower or the lenders risk a court waiving the loan if they fail to repay it. There are therefore strict lending “tests” to ensure that the borrower is able to service the loan. The Australian banking industry is also regulated in other ways to keep the system stable and the strength of the Australian banking system through the GFC continuing until today is testament to that. This is not to say that over regulation is a good thing either, regulation should serve a purpose, and be targeted in an problem it is solving or risk that it is managing.

Well I think that I will leave it there. More on the Australian housing market later.

Ed.