When will the Australian property bubble burst?
Is Australia’s property market headed for a fall? If so, what would a burst property bubble mean for investors?
At various stages throughout the year, media reports have been rife with speculation about Australia’s property bubble. Depending on which experts you listen to, the Australian property market seems to often be in the midst of a property bubble with the threat of that bubble “bursting” always looming just around the corner.
But what would it mean for Australian homeowners and investors if the property bubble did burst, and is that likely to happen any time soon? Let’s take a closer look.
What is a property bubble and is Australia in the midst of one?
To understand whether or not Australia is in the midst of a property bubble, it’s important to first look at exactly what a bubble is. For that we turn to Tim Godden, national director at buyer’s agent service Seekology.
“A housing bubble refers to a period of above-average growth in property prices, which is fuelled by high property demand and speculation in the market,” Godden says. “Within our major property markets, demand is far outweighing supply, causing property prices to increase dramatically. Due to this, the Australian property market has been categorised as being in a bubble.”
But debate surrounds the issue of whether or not it’s possible to label an entire nation’s property market as being in the middle of a bubble. After all, the market conditions in a major city like Sydney can be very different to those in regional and rural areas of Australia.
“The Australian property market is very diverse and to say the entire country is in a property bubble would be a large generalisation,” Godden explains. “However, the two largest markets – Sydney and Melbourne – are certainly going through a boom driven by low interest rates and a high demand for a variety of properties.”
Wendi Turner, principal/director of Victoria’s Red Creek Real Estate, says speculation is rife on whether Australia's housing market has peaked, and a correction may be imminent. However, this is a broad statement, and looking at Australia's true property position can only be assessed if a break-down analysis takes place.
“For example, the picture of an oversupply of off-the-plan apartments in cities is not a true reflection of what is happening out of the city where property prices can be strong in the leafy suburbs or sea change locations,” Turner says. “However, the banks have been tightening their lending policies for developers and housing investors for over a year, which indicates their risk strategy has kicked in.”
National picture vs local factors
Referring to Australia’s property market as one single entity is to greatly oversimplify the many competing factors that influence housing prices around the country. Godden points out that Australia consists of many different property markets, and although it’s easy to generalise all of Australia by looking at Sydney and Melbourne, it’s unwise to do so.
“An investor will miss out on many opportunities if they are not prepared to consider investing simply because prices have dramatically increased in the dominant markets,” he says. “Brisbane is at a completely different stage in the property cycle, as are Perth, Adelaide, Canberra and Hobart. Each city has its own economic drivers that affect the property supply and demand ratio.”
Even individual suburbs within a city have their own micro-economic factors that affect property value. “An investor needs to gain knowledge on the specific location they are considering investing in rather than forming an opinion based on the wider Australian market,” Godden says.
Ben Everingham from buyer’s agency Pumped on Property also believes it is better to look at the markets within individual cities, both major capital cities and major regional hubs. “The Herron Todd White property clock is a good way to determine where the major markets Australia-wide sit. I believe there are some markets on the verge of a decline due to various reasons, but there are some markets across Australia well on the rise, indicating that the Australian housing market is not in a bubble on the verge of bursting.”
Signs of a property bubble about to burst
One of the keys to having success as a property investor is “timing the market”, or knowing the right time to buy and sell your investments. With this in mind, accurately predicting when the property bubble is going to burst or when housing prices are going to take a downward turn can be crucial to turning a profit. So, what are the signs of a property bubble that could be about to burst?
Ben Everingham lists three factors that could indicate a property bubble about to burst:
- Low interest rates
- Over-supply in capital cities of inner-city apartments
Seekology’s Tim Godden also points to the idea of supply and demand as crucial to the performance of housing markets.
“The property bubble may eventually burst due to an over-saturation of the housing market, where housing prices are ‘too high’ and ‘overvalued’,” Godden says. “In terms of supply and demand, the bubble will not burst until demand declines and currently demand is strong for properties that have some degree of rarity. Property investors have fuelled the bubble and still continue to buy. At this stage in the cycle, research is important and with the right property selection in a great location, an investor will always receive great capital gains.”
What does a burst property bubble mean for investors?
Whenever the media predicts that Australia’s property bubble is on the verge of bursting, it’s usually accompanied by a forecast of doom and gloom for property investors. But just because the market is falling doesn’t mean there aren’t any opportunities for investors to make money.
“The risk-averse investor – an investor who prefers lower returns with known risks, rather than higher returns with unknown risks – will be sitting pretty,” Turner says. “Having taken a risk assessment on their portfolio, any oncoming investments will assist the risk-averse investor to ride whatever correction that may come Australia's way. A long-term investor with a risk-averse portfolio will certainly be locking down the hatches, confident in their long-term gains.”
Godden also points out that a burst property bubble certainly doesn’t spell disaster for investors; if a burst occurs, a property investor simply needs to ride it out until the market cycles around again. “The low interest rates will allow most investors to hold on to their property, limiting the probability of an oversupply to the market due to investors wanting to sell. Property prices may reduce in the shorter term; however, with the right asset selection and investment strategy, an investor will still come out ahead,” he says.
Will Australia’s bubble burst?
Regardless of whether or not you believe Australia is in a housing bubble, the question remains, could property prices be headed for a downturn? “I do not believe the property bubble will burst, rather a correction will take place and increases in value may not be as dramatic as they have been in the last few years,” Godden says. “There will not be a blanket burst as demand will still remain strong in Sydney and Melbourne and certain other locations Australia-wide.
“Last year the ABS reported that 23.8 million people are living in Australia and conservative growth estimates tip us over the 30 million mark within the next decade. With Australia’s population forever increasing, these millions of additional residents will need somewhere to live.”
Everingham is also clear-cut in his belief that Australia’s property bubble isn’t about to burst, but he does point out that some Australian home owners and investors could be about to face troubled times ahead. “I don't feel that the Australian property market as a whole is about to burst, but I do feel that there are markets in various cities that are over-exposed and oversupplied. The current low interest rates are encouraging people to buy, but people may be leaving themselves in tight situations if and when interest rates do rise,” he explains.
“There is strong underlying demand for property in Australia's most expensive markets, Sydney and Melbourne. I think certain Australians are currently over-exposed and changes to interest rates could place significant pressure on a number of investors and owner-occupiers in these cities.”
Protecting yourself against falling property prices
Predicting what property markets in specific locations and around Australia as a whole will do in the coming months and years is far from an exact science. However, if you believe that prices are headed for a fall, there are a few simple steps you can take to protect yourself against price drops in the times ahead.
“Investors can do due diligence by ensuring that their business plan is solid, that when increasing their portfolio they do not buy emotionally and that their property purchases are based truly on a long-term strategy with strong rental yields,” Turner says. “A solid business plan will include ensuring a good relationship with their lender, for example re-negotiating their loan rate if necessary, maximising rental income and perhaps looking closely at asset management.”
Meanwhile, Everingham suggests three things investors can do to protect themselves against any damage caused by falling prices:
- “Buy in areas between 6pm and 9pm on the property clock. These areas are rising markets that still have decent capital growth predicted in the coming years,” he says.
- “Do not over-expose yourself or max out your borrowing power. If interest rates rise you need to leave movement in your repayment capacity.”
- “Buy property that has the ability to manufacture value through a cosmetic renovation. Increasing equity in existing properties is the best way to grow the value of your portfolio,” Everingham says.
Godden says that a property investor can protect themselves by carefully choosing the location they want to invest in and the most appropriate type of property within that location. “Research and analysis is required to uncover the best suburb or region to invest in and further research is required to determine what type of property within the chosen region will provide the greatest returns,” he explains.
“Every property will not provide the same capital gains as the next and property selection is paramount in ensuring the investor continues to receive great returns and capital gains from their property – no matter what the market is doing.”