What a Property Bubble is


Expert Advice: by Sam Saggers

 It’s impossible to pick up the papers or surf the ‘net without reading about Australia’s property bubble.

The commentators, far from agreeing with each other, all maintain a strong conviction that they’re right; despite evidence to the contrary, and that everyone else is simply wrong.

To weed through all of the media hype and hysteria, let’s take a look at what a property bubble is, including the signs that indicate one is either on the horizon or already in existence, and then finally compare the data on today’s markets to these criteria.

I’d be willing to bet that what we’ll find is a few indicators, which could indicate a bubble but are offset by other criteria that most definitely indicate we’re NOT in a bubble. In other words, the evidence to indicate a property bubble for the entire Australian marketplace will be scant, leaving us with the conclusion that we’re all witness to “much ado about nothing” in terms of a property bubble!


What a Property Bubble Is
Investopedia defines a property bubble as “a run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply that takes a relatively long period of time to replenish and increase.

Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices - and the bubble bursts.”


Does the Australian Marketplace Fit The Criteria for A Bubble?

Let’s break down Investopedia’s definition into four easily digestable chunks and compare them with what’s happening in the marketplace today:


1. Rising housing prices
Experts say that a “sharp rise in housing prices” is a key indicator that the market is headed towards a bubble. RP Data-Rismark’s August report showed a 4% increase of capital city housing prices during the three months preceding August - the most seen since April of 2010.


2. Credit Growth
A loosening of credit standards - when added to low interest rates - can result in borrowers who are over-leveraged. When interest rates rise or a borrower faces financial difficulties, such as a job loss, these borrowers will find it more difficult to stay afloat and may being to default.


3. Lending standards
The “fast and loose” policies adopted by US banks before the GFC fuelled the housing bubble in the States while the prudent lending practices of our own lending institutions helped keep us from being sucked into the abyss of economic suicide.

The RBA, knowing the great temptation to increase profits by easing standards in this time of historically low interest rates, has urged mortgage lenders to “maintain prudent risk appetite and lending practices, especially in the current low interest rate environment.”

Also, the IMF (International Monetary Fund) is urging lenders to adopt macroprudential policies to eliminate the risk of a housing bubble.

4. Speculation
Speculation does certainly impact a market; however the question is to what extent does it drive growth in a market?

As confidence rises we’ll continue to see an uptick in market activity, however our sales inventory is relatively moderate when compared to the size of the market and we’ve still got a long term housing shortage, which will temper any pressure from speculators.


Where’s The Evidence For A Bubble?

So what are the property experts saying? Let’s have a look:

Founder of property research firm Residex, John Edward reveals why the data does not support the premise that Australia is experiencing a property bubble.

“While there is a lot of talk about the market taking off and suggestions that we are about to experience another price bubble there is little evidence to support this. A more accurate statement would be that while the market remains fragile, it looks as though it is moving to a more normal growth phase.”

Explaining further, Edwards says,
“A period of excessive price growth is unlikely as the economy is not strong enough to support such an outcome. We are also likely to see increases in unemployment, which will also encourage a level of conservatism within the community. Additionally, interest rates will rise from the current historical low point.  Despite low interest rates, affordability remains difficult for many people. However, affordability is at a much better level to what has been seen for many years.”

Edwards then continues his reasoning by citing the following facts…

  • Renting continues to be the more affordable option, even with interest rates at a historically low level. This fact will not be lost on many of our younger population.
  • Sydney remains the most unaffordable city while Melbourne is a close second.
  • Even though Adelaide is a low cost housing market, low wages makes housing somewhat unaffordable.
  • Cities where the cost of buying a home takes less than 28% of gross after tax household income can be considered an affordable market. It is the unit market that uniformly presents this outcome.


Embark Intelligent Property Investment director Adrian Stagg, offers a thorough background on why the RBA has lowered rates and in fact why they’re unlikely to increase them in the near future.

Says Stagg, “With Australia’s economy in good shape compared to most other western economies these past few years and the strength of investment in the mining boom our currency has been very strong which has hurt many sectors of the economy, (even mining), to the point where a lot are at, or near, breaking point.

“With mining entering a new phase it has now become very important and urgent to assist and stimulate those sectors through creating the conditions for a lower Aussie dollar. For the RBA that means low interest rates.  To their frustration the low rates to date have not translated to people spending money. Retail prices are still low; profits patchy and minimal. The dent in confidence [post GFC] was deep.”

“The fact is,” said Stagg, “that the RBA does not want to increase rates or have plans to do so anytime soon. They do want to encourage broad activity however across most sectors of our economy, even new home building, but price inflation of existing housing stock is not a preferred outcome so they are attempting to scare people a little too slow things down avoiding use of their interest rate lever.”

Given the fact that the RBA has only the power of setting interest rates at their discretion, they resort to the only other means they have at their disposal; fear - driven and spread by the media.

Why should they wish to do that? Simple. Confidence is returning and as it does we’re going to continue to see upwards pressure on prices as the supply is strained as builders struggle to keep up with demand.

Explains Stagg, “Pent up demand is so great that if left unchecked it may lead to a bubble. Then again it may not. But wasn't that a bubble in US housing prices that caused the GFC? Maybe  - in very simplistic terms. It's a good scary story though.”


Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
Get more from Sam Saggers, register for a FREE property investor night
click here

To read more Expert Advice articles by Sam Click Here

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.


With interest rates at their lowest for more than 50 years, there are some great rates available. The best thing to do is to compare rates from all the lenders. Let us help take the leg work out of doing this - Compare Home Loans now

Top Suburbs : trott park , stafford hts , melton , westbrook , toowong

go back
  • Positive Real Estate says on 31/10/2013 12:41:53 PM

    Sam Saggers will be happy to answer your questions through this forum thread!