What is a housing bubble?

Recently, almost on a daily basis, we have been seeing property market commentary from “experts”, mostly economists warning of “Australia’s housing bubble”. Most people understand the concept but I thought I would clarify what it is and what it is they are concerned about.

According to Wikipedia, “a property or housing bubble is a form of economic bubble normally characterised by a rapid increase in market prices of real property until they reach unsustainable levels relative to incomes and rents, and then decline.”

In other words, it is an economic measure that doesn’t take into account supply and demand factors, it is the value of property relative to wages and the ability for it to generate rents. Given that some market commentators tend to make catastrophic claims about “Australia’s housing bubble” it is worth noting that they are not actually talking about all of Australia. They just say that to get attention and make you worry, they are actually just referring to parts of Melbourne and Sydney that have seen significant recent price increases due to their desirable nature as places to live and work. They are major economic centres now that attract people from all over the globe.

But should we worried about a housing bubble? What will make it go pop? We are about to publish our full Great Ocean Report for April that will explain more fully what is happening with the Australian property markets, but in essence for a property market to significantly drop in value, supply must exceed demand. It is estimated that Melbourne added 108,000 people to its population in the last financial year and even the much publicised “apartment glut” looks even unlikely to occur. A significant portion of this population increase was via skilled migrants who want to live in popular areas, close to employment opportunities and often have the wealth to do so. (Australia is very difficult to emigrate to without skill or money). So yes, prices in parts of Melbourne and Sydney have become expensive. They are desirable places to live and work and this has resulted in significant demand for some particular areas. In the unlikely event that this changes and population growth and overseas investment slows, then demand will drop and price growth will slow. Will the bubble burst? Not according to this “expert”, but they will definitely stabilise at some point, as they do in every property market cycle.

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