Bubble, bubble, toil and trouble?

8th Jul 2015By: Charles Tarbey

Given the property market’s strong run over the last three years, it’s only natural that Australians are interested in the current state of the market.

Much of the attention at the moment is focused on the Sydney and Melbourne markets and the possibility of real estate prices entering bubble territory.

Although it is always difficult to make predictions about the market, I do not see a high chance of widespread price falls in the near future. There are two factors that have a strong impact on the market in Australia: housing supply and interest rates. I believe both of these factors indicate that the risk of a severe price fall is relatively low.

Housing supply

Some commentators have recently argued that there is a large amount of housing supply in the planning stage. This may be the case and housing supply may be due to pick up in the future, but that does not help the problem of short supply that is currently being experienced in many areas. There is a substantial difference between houses to be sold in the future, and houses that are for sale right now. Many Century 21 offices are seeing stock trickle into the market at best. My experience is that there is currently a large imbalance between supply and demand, with demand running far ahead of supply. This imbalance is one of the key reasons that property prices in Sydney and Melbourne have risen strongly.

An effective way to combat this situation would be to speed up the planning process for new housing. I believe that this should be done hand in hand with the development of infrastructure, such as public transport. If this can be done, new housing will be attractive to purchase and the added supply should satisfy some of the pent up demand in the market. This may mean that investment is needed to create employment opportunities in areas further afield as well. Developments like the Badgerys Creek Airport have the potential to create many jobs and draw in employees who would not travel to Sydney for work.

Interest rates

There is persistent speculation about when the Reserve Bank of Australia (RBA) will make its next move. This will no doubt be affected by international economic movements and the domestic outlook.

Interest rates are already low enough to create substantial demand for property in the economy. If the Reserve Bank does choose to drop interest rates to support what may seem to be a slowing economy, this may impact negatively on the property market by creating even more demand. As stated above, I believe that the market is already struggling to meet demand and further demand could create a dangerous environment – particularly in Sydney.

It seems to me that the RBA has a particularly difficult role to play. The RBA may decide that in order to encourage the economy, further monetary stimulus is needed by dropping interest rates. However, if the RBA chooses to take this course, it runs the risk of adding more heat to areas such as Sydney and Melbourne.

Lower interest rates also have the downside of encouraging buyers to borrow more than what they could afford if rates were higher. When interest rates are low, there is a tendency to forget how difficult it can be to repay debt at higher interest rates.

Contrary to what people might think, I hope that the RBA does not drop interest rates further. I would prefer to see steady growth in the property market, fuelled by steady economic growth, not driven by low rates and high levels of investor activity.