The property bubble: Everything you need to know

Apart from an occasional cyclical slowdown, Australian property prices have been steadily rising since the 1990s.

And throughout their stratospheric rise, talk of a property bubble is never far behind – particularly after a year of the type of turbo-charged growth we’ve seen in the country’s capital cities. With bubble speculation still rife, home owners, investors and would-be home buyers are no doubt asking themselves: are we heading for a bust?

 

What is a bubble?

A property bubble occurs after a period of rapid increases in housing prices until they reach unsustainable levels relative to income and rents. The bubble then “bursts” when there is a sudden drop in prices back to or at lower levels than when the growth began.

A sharp drop in prices, or the bursting of the bubble, usually occurs when there is an unforeseen event or an economic shock, such as high levels of unemployment or an oversupply of property.

 

But what creates a bubble in the first place? It comes down to a number of factors: an oversupply of property, an economy that is reliant on just one industry, a low interest rate environment or inappropriate fiscal policies.

 

While we have seen property bubbles burst in Australia before, they are usually isolated to specific areas. For example, the mining town of Port Headland suffered a bubble thanks to its over-reliance on one industry when the median house price jumped from $465,000 in 2006 to $1.2 million in 2012. In the past three years, however, Port Headland prices have been on a downward slide, with median prices for a house currently around $800,000.

 

Are we in a bubble now?

Most experts agree that it’s difficult to pick when a bubble is occurring until it bursts. As the Port Headland example shows, there is not one unified property market. Each town, metropolitan centre or city experiences different conditions so it’s important to remember that we are not talking about the country as a whole. And at the moment we are seeing different rates of growth or movement in different markets.

 

It’s true that property prices in capital cities have been on the rise for the past 38 months, with Sydney and Melbourne leading the charge. The average price of a home in Sydney is now $1 million, which is certainly fuelling speculation of a bubble.

The Sydney market has cooled down since its giddy heights earlier this year with price growth slowing, but prices have not dropped and sought-after areas continue to perform strongly.

 

While talk of a bubble can split opinions, the general view is that demand still exceeds supply in Sydney and other capital cities, so it’s safe to dismiss fears of a bubble in those markets. Experts expect prices to continue to rise in Sydney and Melbourne over the next 12 to 18 months, with a small correction but not a huge drop to come after that.

 

What does it mean for you?

Whether you’re an owner-occupier or an investor, the safest approach is to view property as a long-term investment and prepare for market changes. If there is a drop in prices, natural property cycles will continue to operate and prices will eventually rise again.

Bubble or not, as a property owner you should always have a buffer of funds to ensure you can afford increased mortgage repayments without stretching your personal budget. Having a dedicated savings account, safely out of reach of your everyday transaction account, is a good idea for building your savings in the event of an emergency. With a number of attractive high-interest options available, do your homework and pick the best one for you.

 

About Michelle Hutchison

Michelle Hutchison is the Money Expert for finder.com.au, one of the biggest online comparison networks in Australia, and the newly launched finder.com in the United States.

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