Housing bubbles explained
What would cause a housing bubble in Australia? And what would make it burst?
Key takeaways
- A housing bubble is characterised by a period of fast, unsustainably high, price growth followed closely by a sharp, painful drop.
- Australia has many different housing markets so it can be hard to judge whether a housing bubble is happening.
- Factors that could cause a housing bubble could be rising interest rates, change of lender policy or declining overseas migration.
What is a housing bubble?
A bubble is characterised by a period of fast, unsustainably high, price growth followed closely by a sharp, painful drop.
We've had years of high house prices in many cities, especially Sydney and Melbourne. Buying a house has never been more expensive, especially as price growth has far outstripped wage growth. But no expert really thinks Australian property prices are going to suddenly collapse (a gradual decline is another story).
How have prices changed in Australia's cities?
Over the 12 months to July 2025, house prices across Australia have grown by 0.6%. But as we know there are several different housing markets in the country. Looking at each market separately, we can see that Darwin, Brisbane, Adelaide, Perth and regional markets have seen the largest growth.
We can also go back further to see how much property prices have changed.
In 2020, the median property price in Sydney was $881,000. That's a 39% increase to Sydney's median value in 2025.
Let's take a look at median house prices today:
So is there a housing bubble?
We can see that property prices are very high. And housing affordability is terrible because wage growth hasn't kept up with property price growth. But this doesn't mean we're in a bubble.
Here are some reasons why:
- Interest rates are pretty low, which means borrowing money is cheap.
- Property prices have fallen at certain points in the last decade. Unlike in a bubble, Australian property markets do experience temporary declines followed by more growth.
- Over a very long period (decades), there has always been a long-term upward trend in Australian property prices. This is bad news for buyers, but a bubble is characterised by short-term, very fast price growth.
- Australian governments and regulators are very concerned about policies that support home ownership and stable lending environments. Policy is geared towards encouraging home ownership, which in turn promotes price growth.
House price predictions
Finder's panel of economists and experts predict that house prices will increase by 4.9% by May 2026. The predicted rises are highest in Darwin and Sydney (5.4%) as well as Perth (5%).
Source:
Finder's RBA survey
What could cause a housing bubble to burst?
While we might not be in a bubble, how bubbles burst is instructive for understanding what drives property prices.
We've explored this question in-depth in an article on what happens to Australian property prices in a recession.
Broadly, the data and expert opinion suggest that the following factors could cause property prices to fall significantly:
- Interest rate rises. Low interest rates drive prices up. This is because when borrowing money is cheaper, you can afford to stretch your budget further. Prices rose significantly in 2021, at a time when interest rates were at record lows.
- Lending policy. Regulators like APRA can influence the market by restricting how much lenders can lend, what type of loans they can approve and how strict lenders have to be on new applicants.
- Declining overseas migration. Australia's economy and population growth depend in part on migration from overseas. During the pandemic, when overseas travel and migration plummeted, we did see property prices fall in the inner-city apartment category. It's hard to imagine a world where migration drastically falls for a long period, but this would certainly lower demand for property prices.
- Government policy. Debate about support for first home buyers and tax incentives for investors continue to rage. In theory, if a government scrapped the Capital Gains Tax discount for investors and reduced the tax benefits of investing, this could limit investor activity, which would give more space to home buyers. But this alone probably wouldn't destroy the market.
We have seen some of these factors play out in recent history. In late 2017, lenders became much more cautious in the wake of the royal commission into financial services.
Investment and property expert Christine Williams told Finder, "Lenders became very strict and APRA came down with some very hard-hitting policy changes" as a result of the Financial Services Royal Commission. "People just couldn't borrow the money because policies were so strict."
The commission lasted until 2019, and during this time, mortgage brokers also reported the same problem. Lenders were incredibly strict on new borrowers. And while property prices didn't fall off a cliff, they certainly fell.
Expert insight: The bubble has never popped
"Housing bubbles are FOMO-driven buying, unsustainable growth, and investors outbidding owner occupiers. But contrary to what most people think, the bubble has not popped in Australia EVER. Every capital city and major regional town has quadrupled in value in the last 30 years. We should be calling it something like the property market surge, settle, and soar! The market will grow rapidly, then only retract slightly, then grow again."
How do I protect myself from a property collapse?
The words "bubble" and "burst" are very stressful if you're a property owner or just about to buy. There's no need to panic, but you need to assess your situation and prepare for the worst.
- Build up equity. When prices are dropping fast, your home could be losing value. If you haven't repaid much of your mortgage principal (the amount you've borrowed), then you could be in negative equity. Try to build equity by making extra repayments on your mortgage. If you're on an interest-only loan, consider switching to a principal and interest loan. The more of your home you actually own, the better protected you are in a crash.
- Refinance. When did you last check your mortgage interest rate? Switching to a home loan with a lower rate will save you money. And you'd better switch fast. As prices fall, so does your equity (the amount of the property you own versus how much you owe the lender). This makes it harder to refinance.
- Assess your position. Is your current home big enough for your family? Will you need to upgrade soon? If your property suits your needs and you're not worried about selling or upgrading, then a housing bubble doesn't affect you all that much.
- Don't try to pick the "bottom" of the market. If you're buying a place to live, then buy a place you can afford that suits your needs. That should be your priority. Don't obsess over the bubble bursting and try to buy at the market's lowest point, which is likely to be a fruitless endeavour. Remember, you're buying a home, not an investment.
Frequently Asked Questions
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Your article on capital gains tax was very helpful. However, I think you should warn readers about the six-year rule. If you live in your property as main residence, then move out and rent it, you won’t pay capital gains tax on sale, as long as you move back in within six years of renting it out. You must START OFF by living in it yourself. But readers need to know that even if your new property is where you live, if you have a lodger living with you in your property when you first buy it, then actually, it ruins your eligibility for the six-year rule. It is as if you had rented it out immediately on buying. Can you verify that for me?
Hi Glenda,
Thanks for your comment! I believe you’re referring to our full guide to CGT, which can be found here. The ATO usually makes a distinction between a boarder (a family member or friend who shares a space with you and the board they pay covers the cost of meals, electricity, utilities and accomodation) and a renter (which can be anyone who pays to rent space from you, and generally buy their own groceries, provide their own furniture and contributes to household bills. For specific guidance, it’s best to contact the ATO directly as they can give advice about your situation and how the 6-year rule applies. You can reach them on 13 28 61. Best of luck!
I’ve had my property for lease in the market for 4 months but was still not able to lease it out. This had never happened for the last 9 years, a sign of over supply, area is Eastwood NSW
Hi Tara,
Thanks for your inquiry
While regulations in Australia ensure that undisciplined borrowers cannot simply access the keys to a property without meeting rigid serviceability requirements, some property investors could suffer if the property ‘bubble’ bursts.
Whether you’re an owner-occupier or an investor, you should view property as a long-term investment and prepare for market changes.
The experts above say that the main form of protection is not to be excessively geared. If you have conservative levels of gearing, then you can probably afford to ride out a period of price decline in the property market just as investors in the share market who are typically less geared than property investors have to do.
Hope this information helps
Cheers,
Arnold