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Is there a property bubble?

There is varying opinion in the media as to whether Australia - or, more specifically, Sydney - is in the midst of a property bubble.


There is varying opinion in the media as to whether Australia - or, more specifically, Sydney - is in the midst of a property bubble.

Many believe Sydney is headed towards a property meltdown, while others believe the property market will continue to prosper.

Generally speaking, the property market is driven by periods of highs and corresponding lows. Different economic conditions will determine the levels of success for the various property markets. With that said, it can be argued that Sydney is currently enjoying very favourable economic conditions.

Interest rates are sitting at record lows, and the government is determined to keep negative gearing in play. As such, it is easy to see why the demand (and therefore property prices) for housing in the capital city is dramatically rising.

But while prices are accelerating rapidly in Sydney, is it possible to argue that the level of growth is putting the market in bubble territory?

To determine whether or not Sydney is truly in a property bubble, we must first understand exactly what a bubble is.

A bubble, in its simplest terms, is something that grows and then bursts. In this instance, a property market “burst” would mean a dramatic fall in house prices. And, given Australia's economic dependence on the housing market, if there were a bubble and it did burst, this could mean a major recession.

So, is there a Bubble? Whilst there are some convincing arguments to support this theory, given the current economic climate, it is reasonable to assume prices may continue to rise. In other words, there is no bubble.

There has been substantial growth in the Sydney property market in recent years, with some areas enjoying 10-15% growth over a 12 month period. While we cannot expect to see continued growth of this level, a giant collapse is unlikely. In fact, a more plausible outcome is less growth but not necessarily no growth or a contraction.

Housing prices are dictated by the laws of supply and demand and, if we look at the data, it would appear as though supply cannot currently keep pace with the demand in Sydney.

Housing demand is fuelled by factors such as positive population growth, wage growth, higher rental prices, low interest rates, tax incentives. All of these are conditions are currently being seen in Sydney, suggesting there is still plenty of room for positive growth. 

Posted in: Property market

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