We may not yet be in a bubble on the verge of bursting, but investors would be wise to monitor the following risks to their portfolio in 2014.
Property prices overshooting
The IMF warned that “a prolonged period of rapid price growth could give rise to expectations-driven, self-reinforcing demand dynamics and price overshooting”. In other words “irrational exuberance” as coined by former US Federal Reserve chairman Alan Greenspan.
This means that if the current rally in property prices is simply fuelled by buyer exuberance without fundamental support, then it could result in unsustainable growth.
Rapid interest rate hike
Economists are predicting the Reserve Bank will raise interest rates towards the end of this year or early next year and some are worried that the RBA may hike in rapid succession.
Borrowers who have extended themselves might find it difficult to service their loans and the higher interest rates could bring forth a rise in mortgage delinquency.
However, Shane Oliver, chief economist at AMP, points out that this is unlikely to happen because a property bust would be bad for the economy and that the RBA would be keen to avoid it at all cost.
“Next year if interest rates go up, it will cause a dampener in price growth. It’s not going to cause a crash in the property market but we’re likely to see some property price growth contraction over next year which I think is good for the economy.”
Massive building boom
There’s no question that there have been some overbuilding in some parts of Australia, specifically in mining towns and in some cities like Melbourne, the Gold Coast and Sunshine Coasts. However, in general, the building construction is still well below demographic demand and it has been falling for a number of years according to Oliver.
“If developers do what the US builders did before the crash and build well above demographic demand, then we’re in trouble,” he says. “I find this hard to see this happening given the constraints on land release. Over the past few years, we’ve been building 30,000 houses less each year, than what we actually need so there’s a chronic undersupply. That’s why each time interest rates come down, prices take off again.”
Oliver expects construction activity to pick up next year, which he believes is a good thing “because it will fill the gap in the slowdown in mining sector.”
Before you buy, make sure you understand and assess the current and future demand and supply situation of the area you’re interested in and avoid those that are likely to be oversupplied in the future.
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