What’s up with the real estate bubble?

Are you root 2? Because you make me irrational!!!

Almost as irrational as the popping off of property prices before falling back in line. Similar to what Australia experienced back in the early 2000’s.

But… we’re still waiting for prices to fully ‘fall back in line’. The real estate bubble refers to the economic theory which conveys an increase in property prices fuelled by demand, speculation, and excessive spending to the point of collapse. Sound familiar? Since the early 2010’s, various Treasury officials have claimed the Australian property market is in a significant bubble. HMM, so when does it pop? 

What caused it?

Real quick, let’s address the factors which drive up property price in Australia. Surely you’ve heard how Australia has some of the world’s most expensive median house prices. An accumulation of factors such as:

  1. China’s rising economic growth and development.
    1. The increasing demand for Australian property by foreign investors.
  2. The resources boom that led to our mining town property boom.
    1. The flow of impacts from the wealth effect
  3. Low interest rates.
  4. Inadequate supply of properties in relation to increasing population growth 
  5. Reducing barriers to access credit.

has seen the property market surge and has made its mark on the Australian economy.

Australia saw its cash rate reduce by more than half from 7.25% to 3% between September 2008 to April 2009. While the ‘first-home buyer’ stimulus package aimed to boost consumption in response to the GFC, the 50% capital gains tax discount gave higher income earners an irresistible incentive to convert current returns from factors of production. Salaries, profits and investments transformed into future capital gains that would be more lightly taxed. That is, households were taking out bank loans to fund their investment properties. The graph below illustrates the fluctuation growth and decline of total owner occupied mortgages. That phat spike from May 2015 up until September can be explained by the points above. This was where we saw instances of small shacks in the upper north shore being sold for almost $3 million – crazy stuff.

This image has an empty alt attribute; its file name is screen-shot-2020-09-13-at-9.38.39-pm-1.png
Source: ABS Housing Finance Statistics (2014-2018)

International factors

The median house price in Sydney peaked at $780,000 in 2016. However, with new, stricter credit policy and loosening monetary policy, prices started falling within Sydney and Melbourne. In comparison to when property prices popped off in 2017, the housing prices fell by 11.1% in Sydney and 7.2% in Melbourne respectively (2018). 

Let’s be real for a second. As much as Australia will empower and support their domestic home-buyers, the real big bank comes from the international market. Investors looking to secure the bag, have directed their wealth into the ‘safe haven’ of Australian property. Specifically, Credit Suisse recently stated that Chinese real estate buyers are annually buying up $5 billion worth of Australian property investment. This accounts for 12% of new housing supply in the country.The Sydney property market is a magnet for Chinese buyers, with investors securing 18% of new housing supply within NSW. 

Get keen for new amazing Chinese restaurants and ugg boots stores because Chinese buyers are expected to purchase $44 billion worth of Australian residential property over the next seven years. Driving up the demand for properties in concentrated areas such as Chatswood or Epping saw huge increases in the value of properties in surrounding suburbs as well, contributing to the expansion of the real estate bubble. The supply of properties decreased while their prices went up and up. Make way for new rules brought to you by the Foreign Investment Review Board! This restricted international Chinese buyers to only purchase brand new properties, as opposed to established ones. In this way, greater amounts of  activity in the foreign buyer market translated into boating the home renovation/ trades industry. As labour is a derived demand, this resulted in an increase in jobs and general economic prosperity. Ahh I now see why those small shacks magically turned into glamorous mansions. In terms of speculation, the increased demand from Chinese buyers resulted in property prices rising at a faster pace, something that benefits all property investors, contributing to the success of the ‘seller’s market’.

When’s the burst?

The tldr, it burst last year. 

Looking to the future, as of 2020, the government has been racking up incentives for individuals to claim the status of ‘first-home buyer’. For example, the  First Home Loan Deposit Scheme, allows for 10,000 eligible homebuyers to purchase their first property with a 5% deposit as opposed to the usual 20% – thanks to the Government guaranteeing the mortgages. This, in addition to the HomeBuilder stimulus package aims to polish up and present the housing market on a shiny silver platter. 

This sparks the question of ‘when will it be a buyer’s market?’ That is, when buyers have more purchasing power  in the housing market. This would occur when the supply of properties exceeds demand, giving the buyer the upper hand and greater bargaining power when negotiating prices. Contrastingly, Australia previously was a seller’s market (the inverse), however has recently seen many many bumps in their road. Government legislations and rent relief packages have steered power away from property owners, and placed it in the hands of renters and buyers. As mentioned earlier, multiple stimulus packages have been set in place to pick up the broken pieces of covid 19’s impact on the housing market.

Tbh, now would be the perfect time to get into investment properties as a side hustle. Whilst prices have become cheaper, property is very risky at the moment with thousands of tenants and home owners putting their rental and mortgage payments on hold. Once jobKeeper stops and the banks lose patience with their “generosity”, we could see a collapse very similar to the GFC, with thousands evicted from their homes.

References/further readings