Does Australia Face a Property Bubble?

Does Australia face a property bubble

For sometime, elements of the media have suggested Australian housing values are over-inflated and face the risk of a speculative housing bubble bursting. This theme arises in some European and US based reports, where an incomplete understanding of the Australian property market’s unique dynamics is evident. Australian media is not devoid of such reports, although they are far less prevalent. 

Of course, there are reasons for concern. Many of the market’s indicators do underline the fact that things are getting hotter. Housing prices have been rising strongly this year, on the back of modest gains even last year. Auction clearance rates started strongly in 2010 and pre-auction sales are well up. The number of properties being sold has risen. Rents continue to rise, although slightly slower than expected, and vacancy rates are at their lowest point in the past twenty years. 

Balancing the rapidly heating market though is a sharp drop in home loan approvals. To an extent, this is an expected result of the removal of the First Home Owners Grant Boost. With many having rushed to beat the phase out in December, there’s a natural adjustment occurring. However, this is also partly attributable to tightened credit conditions. 

The set of fundamentals driving the Australian property market differ, though, from most international markets right now. Firstly, Australians are chiefly coastal dwellers. This is in total contrast to the European and United States property markets. We have a limited number of population centers and these attract the vast majority of our population, as a result of employment and lifestyle conditions. 

Our political structure of Federal and State governance leads to another unique factor. The Federal Government has determined a policy whereby levels of immigration are set at their highest since WWII, generating significant demand for housing. This collides with an environment of under supply and a demonstrated State Government incapability to plan for appropriate land release and building approval processes. 

Australia’s banks are more heavily regulated than those of other countries and the concept of ‘non-recourse’ lending that, in part, led to the sub-prime mortgage crisis in the United States, is simply not a feature of our marketplace. The economy has performed strongly and continues to do so as employment posts some of the strongest gains on record in recent times. 

Banks, however, remain reluctant to resume lending for apartment developments and this is another factor constraining supply. As predicted in First National Real Estate’s Property Outlook 2010, investors have noticed the opportunity for capital gain in such an environment and this is where the Reserve Bank of Australia (RBA) observes some risk of speculation creating a bubble. 

Research shows that basic variable interest rate movements of the past ten years have averaged 6.6 per cent. The last few RBA board meetings have all discussed the need for interest rates to return to ‘normal levels’ if the economy still shows signs of expansion. According to finance brokers Smartline, Australia is now only 0.60 per cent from the medium term average, as the chart above shows. RBA boss Glenn Stevens’ estimate is that it will take one or two 0.25 per cent increases in official interest rates to return to ‘normal’. 

New home sales made an encouraging start to 2010, with sales of newly constructed homes jumping 10.1 per cent in January. Sales of new apartments also rose, but only by 4.1 per cent, following a 14.5 per cent rise in December 2009. However, while sales were up in January, building approvals fell 7 per cent so supply remains the never-ending challenge critical to avoiding a bubble. 

One simple factor is clear. If State and Federal Governments cannot coordinate, at all levels, to solve land supply constraints, high levels of taxation on new housing, and, structural barriers, the strangulation of dwelling supply will leave the RBA with one option only to minimise the chance of a bubble bursting – suppressing demand by lifting rates further still.