What is a housing bubble and should I be worried?

You’ve probably heard about “the Australian housing bubble”. You may even have heard that it could one day burst. But is there really any cause for alarm?

You may be forgiven for thinking all your friends are property experts, the way so many speculate about rising interest rates and the looming spectre of a bursting housing bubble.

But the outlook is far from all doom and gloom, as we’ll discover below.

First, what is a housing bubble?

A housing bubble is said to occur when a rapid increase in the market price of property continues until it reaches a point where incomes and rents no longer make it possible for a large enough percentage of people to pay their mortgages.

When this tipping point is reached, the bubble is said to burst, leading to a tumble in property prices.

Is there a housing bubble in Australia?

Experts are divided on whether we’re experiencing a housing bubble in Australia, which would explain why there is so much room for heated discussion on this issue at barbecues and dinner parties.

ASIC chairman Greg Medcraft said in March that he felt the Sydney and Melbourne housing market was in the midst of a ‘bubble’.

Other experts have also warned of a potential bubble, caused by a heady combination of rising debt, flat income growth, increased construction and a slowing birth rate.

However, the fact the long-predicted rupture has yet to occur gives plenty of room for optimism.

Most recently, the heads of all four of Australia’s largest banks came out to say there was no need to worry, thanks to Australia’s robust banking system and competitive market.

Indeed, Ralph Norris, former head of the Commonwealth Bank, said the spike in house prices has been caused by an under-investment in new stock and strong immigration driving an excess of demand over supply.

He argued that current prices are therefore a reflection of the actual market value, rather than a ‘bubble’ phenomena.

And last, but certainly not least, interest rates are tipped to stay at record lows for much longer than expected.

That’s because new consumer price index (CPI) spending weights released by the Australian Bureau of Statistics in early November suggest that inflation will be 0.2 percentage points lower than otherwise expected over the next two years.

“This will make it even harder for the RBA to raise interest rates before late in 2019,” says Capital Economics, one of the leading independent economic research companies in the world.

Where does this leave me?

It is normal to feel spooked by talk of a housing bubble, even if people aren’t actually clear if there is one.

If you’re worried or want more information, come and have a chat with us.

We can talk you through any potential risks in the market, help you understand ways in which these could be mitigated, and get you on the right path to a strong and secure long-term investment.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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