AUSTRALIA IN A BOOM NOT BUBBLE
In recent weeks, there has been a lot of talk about a property bubble in Australia. Specifically, that we are in one and it’s about to pop. Meanwhile, many analysts are saying that the enormous price growth we’ve witnessed recently is driven by fundamentals. Therefore, we are not in a bubble. So which is true?
I’m going to run through a few key concepts to help you determine the reality of the situation:
- What is a property bubble?
- How can you identify if you are in one?
- What happens if it ‘pops’?
- How can you invest successfully when there’s a bubble?
What is a property bubble
A property bubble is when prices are inflated above fundamentals. This means that we see house prices soar well beyond what you’d expect from the current growth drivers at hand. The thinking with a bubble is that it is a temporary event – where prices are driven so high beyond their actual price that price growth becomes unsustainable. Housing prices experience a sharp fall. The bubble has burst.
Factors that cause property bubbles
Some of the forces that can cause property bubbles include low interest rates, strong sentiment, risk-taking behaviour by property buyers, easy access to credit, an increase in house flipping and low financial literacy. You might be thinking – but wait, we currently have record low interest rates! Market sentiment is extremely high! We must be in a bubble. But there’s more to the story.
How to identify if you are in a housing bubble
For there to be a housing bubble, prices must be mismatched with fundamentals. Modelling by economics professors at Macquarie University and Yale University says this is currently the case in Australia. According to Shuping Shi, a professor of economics at Macquarie Business School, “While the interest rate is at its historical low and housing supply has dropped substantially in some cities, they cannot fully explain the fast-rising house prices in some cities.” HSBC Australia chief economist Paul Bloxham feels similarly, highlighting border closures and population growth disruption as critical factors.
On the flipside, many experts argue that we have all the necessary fundamentals in place for a boom. In Australia, we’ve experienced strong economic recovery. Employment rates are on the decline. Millions of millennials are reaching an age where they are ready to become homeowners or investors. The borders will eventually reopen. Whether it takes two years or eight years, population growth will take off once again. Modelling a “severe case” scenario, where the pandemic has a significant impact, Australia’s population will still reach 26.6 million by 2025, 29 million by 2030 and 31.8 million by 2040.
The price rises we’ve seen are in response to numerous factors, which include investors returning from overseas and supply and demand issues. It is expected that over time, we may see the rate of growth decelerate. This means house price growth will continue to grow but perhaps not at such a rapid rate.
How can you invest successfully when there’s a bubble?
Here’s the good news: Whether we are or aren’t in a bubble, investment fundamentals remain the same.
While some house prices may be inflated, many properties and areas are seeing price increases that reflect the quality of the location and property. To make a solid investment, you need to analyse your financial goals and how a property purchase will impact your borrowing capacity, cash flow and ability to build your portfolio in the long-term.
In a recent article, I wrote about fundamentals in the face of forecasts. In a nutshell, you need to understand supply and demand in the area you are targeting, council and government plans and the actual property quality. This is where partnering with property investment experts, who have decades of experience, accreditations and proven results, can be hugely beneficial.
AllianceCorp has a dedicated Acquisitions department, with skilled professionals who can identify when a property is being over or underpriced. As Australia’s leading property investment consultancy, we also have greater buying power and access to the wholesale market, which means we can provide our clients with the best deals available.
Media conversations around booms and bubbles can be distracting. Ultimately, if you are ready to set yourself up for financial success, property can be an extraordinary vehicle. With the right partners, you can leverage opportunities in the market to work for you, gaining rental income, capital gains, avoiding lifestyle impact and securing a comfortable retirement.
Focus on time in the market not timing the market
If we look at housing data from the Australian government, which collates 8.3 million data points from 25 key national datasets, we can see that long-term buy and hold strategies pay off.
Take Brisbane in Q1 of 2009. The median house price was $400,000. By Q1 of 2010, just one year later, that house would be worth $460,000. By Q1 of 2021, the same property would be worth $600,000 (an 85% increase on your original purchase price). If you’d held off purchasing back in 2009 because of the newspaper headlines and fear mongering around the Global Financial Crisis, you would have missed $60,000 worth of growth in your first year.
Let’s look at another example. If you bought in Melbourne just before the Global Financial Crisis, you would likely have seen a price drop. The national median house price in Australia fell 3.5% between April to September 2008. If you purchased in Q4 of 2007, the median house price was $410,000. By Q1 of 2009, it would have dropped in value to $375,000. You would have lost $35,000 in 2 years or -8.5%. But that same property would be worth $824,000 today, in Q1 of 2021. Overall, you’d be up $414,500 or a 101% increase.
One property went up, one went down over the first few years. In both scenarios, whether you had a short term loss or gain, you profited in the long run. It pays to focus on fundamentals, not speculation.
If you would like a more thorough analysis of a potential property or area, speak to experienced property investment professionals.
AllianceCorp has a dedicated research team with their finger on the market pulse. You can request a complimentary strategy session with a Senior Property Coach below.