John Flavell, CEO Mortgage Choice
If you’ve opened a newspaper or watched the nightly news recently, you’ll have no doubt heard the term ‘property bubble’ being bandied around.
Some economists and market commentators believe Australia is in the midst of a housing bubble. More specifically, these economists believe certain markets – Sydney and Melbourne – are destined for a crash in property prices.
So what would a crash look like and are we heading for one?
Put simply, if property prices were to ‘crash’ and the bubble was to ‘burst’, we would probably have to see prices fall by a significant margin in a very short period of time. For example, a 20% drop in property values over a 12-month period may be considered a ‘crash’.
So, is this ‘crash’ likely to happen over the short to medium term?
In my humble opinion, the short and simple answer is ‘no’.
Sure, we’re likely to see property price growth stagnate across some markets – specifically Sydney – but stagnant property price growth is not the same as a ‘crash’.
Significant changes have been made to investment lending policy in recent months. Moreover, interest rates have been sitting at historical lows for well over 12 months and will continue to sit at historically low levels for some time yet. Both of these things have combined to take some of the heat out of the market.
For a crash to occur in the housing market, there would need to be a number of economic factors at play.
First, supply would need to significantly exceed demand. Secondly, the cost of borrowing money would need to rise rapidly in a very short period of time, and unemployment would also need to reach dramatically high levels.
Moreover, there would need to be a large number of people looking to liquidate their properties at the same time.
If all those factors were to occur, a crash could be a possibility, but based on how our economy is travelling at the moment, it’s fair to say that we’re not in for a crash.
According to the Australian Bureau of Statistics (ABS), Australia’s population grew 1.6%1 over the year to March 2017 – which is significantly higher than other developed nations.
In total numbers, our population grew by 389,100 last year, and all of those people need somewhere to live. If we want to cater to our growing population, we need to build more properties, and that’s exactly what we’re doing.
At the same time, interest rates are low and we expect them to stay lower for longer. Meanwhile, the unemployment rate is trending downwards, hovering around the low 5%2 barrier.
When you consider all of the above economic data, there’s nothing to suggest that a property price crash is in our near future.