Are we really in a housing bubble about to burst?

The reality of the housing bubble myth

With property prices rising around Australia, many are asking if we’re in the midst of a housing bubble and, if so, when it’s likely to burst.?

Prices rising is part of a global trend

At the end of FY2021, CoreLogic’s figures showed national home values had increased at an annual rate of 13.5% - the fastest year-on-year growth recorded since April 2004.?

These price rises have been continuing into the current financial year. For instance, in Sydney, a city that has so far been in lockdown for the entirety of FY2022, the median property price grew 2% over July , and 1.8% in August . In Melbourne, which has been in-and-out of lockdown this financial year (but now looks almost certain to remain in lockdown for some time), property prices grew at the slightly more modest rate of 1.3% in July and 1.2% in August.?

While our two biggest and most expensive cities may dominate the real estate headlines, these same growth patterns are occurring around the country. Every capital city except for Melbourne and Darwin recorded price growth of more than 5% in the three months to 30 August 2021. This is causing many people to question whether Australia is in the midst of a housing bubble.

Part of a global trend

We’re not alone in seeing prices rise at almost unprecedented rates. This is part of a much wider trend that’s playing out around the globe. Those countries that have been least impacted by COVID-19, such as New Zealand , have been experiencing enormous price gains. The median NZ property value rose an incredible 25.2% in the 12 months to July 2021.??

But even those countries more significantly impacted by the pandemic have been seeing prices spike. Across the whole of the United States, property prices lifted 12.7% in the year to June 2021. In the United Kingdom, they rose 7.1% in the year to August 2021. Meanwhile, many parts of Northern Europe have recorded double-digit growth.

Around the world, these price gains have been brought on by low interest rates, ease of borrowing, fiscal stimulus and growing levels of consumer confidence. These factors have combined with an increased number of people working from home and a desire from many for more space. And stock levels are low. The result is that demand for residential real estate is outstripping supply around much of the world.?

In fact, as Corelogic data reveals, in Australia the total listings or stock advertised is down -29.4% on the five year average nationally, which means listing volumes are at their lowest level in at least five years, another factor that is helping to keep prices high.

But is it a bubble?

No less an authority than Bloomberg has dedicated its resources and its data to try to answer this very question. The Bloomberg Economics Bubble Ranking measures how likely to crash the housing markets of various countries really are. It ranks Australia 15 on that list (New Zealand comes in first). The Bloomberg list considered if price rises were sustainable or at risk of falling. While it says it sees warning signs that “haven’t been seen since the run up to the 2008 financial crisis”, it also acknowledges that the “period ahead will more likely be characterised by cooling rather than collapsing”. So we’re not looking at a situation where a bubble is likely to burst. It may just lose a bit of air.?

Another 2020 study of bubble risks by investment bank UBS ranked Sydney 16th out of 25 global cities when it came to whether or not property was overpriced. It found that while property was slightly overvalued, prices fell well short of bubble territory.?

A market defying all predictions

In early 2021, the big four banks and their economists predicted big things for Australia’s property market. But no one saw quite this much price growth unfolding.?

But by late August 2021, ANZ forecast that growth would rise even further. It’s now tipping a 20% total annual gain for the median national house price despite the new and ongoing lockdowns in NSW, Victoria and the ACT. And that’s no surprise, given that much of this gain has already been achieved.

ANZ forecasts Canberra’s real estate market will rise by 24% over the entirety of 2021, Sydney’s by 23% and Melbourne’s by 20%. ANZ’s senior economist, Felicity Emmett, was quoted by Domain as saying lockdowns were unlikely to derail the strength of the housing market and that forecasts had been revised upwards based on how strong prices had been. ANZ is also forecasting that a? steadier, more sustainable trajectory of price growth is on the horizon. In 2022, they’re forecasting a much calmer 7% growth.?

While ANZ is the most optimistic of the banks, CBA isn’t far behind with similar figures of 20% for the whole of 2021, and 7% for 2022. This is followed by NAB and Westpac, who predict growth of 18% to 18.5% over 2021, and 3.6% to 5% in 2022.?

In other words, the banks believe that while the property market may come off the boil over the next 12 months, it’s unlikely to crash.

The future

In some ways, this shouldn’t come as a shock. Many markets around the country actually fell between 2017 and 2019, so one interpretation could be that the market is simply making up for a couple of lost years. In fact, Perth’s property market peaked in 2014, so growth in that city is almost making up for a lost decade.??

Still, there’s no denying that the change in prices we’ve seen around the country over the past 12 months has been spectacular. Corelogic says that, in dollar terms, the national average growth of 18.4% equates to approximately $103,400, or $1,990 per week for the average home.?

What’s more remarkable is that the growth has been so widespread. Virtually every single part of the country has recorded price growth, unlike most previous market booms, which tended to impact only certain cities.

Barring a spike in unemployment or an unlikely hike in interest rates, it seems that, for the moment the only thing that can stop property prices growing on the demand side is if they are bid up to a point where they become unaffordable.?

Perhaps the bigger test will come on the supply side. After all, when the Sydney and Melbourne lockdowns end, we expect a lot more listings to come onto the market in both cities. For the moment, however, our view is that there are enough buyers remaining in the market to absorb it.??