What is this housing bubble we keep hearing about?

What is this housing bubble we keep hearing about?

June 6, 2017

It’s no secret that the property markets in our two biggest cities, Sydney and Melbourne, are booming at present. In WA however, it is the complete opposite. Residential properties are down in value already and anyone who has tried to refinance recently will realise, bank valuations are coming in some 10% to 20% lower than expectations.

Unfortunately, because Sydney and Melbourne are our biggest markets and it is evident that there is a bubble forming, policy is established to help alleviate some of the pressure in those bigger markets.

The banks are quite openly attempting to quell the investor market by making funds more difficult to acquire. Higher equity/deposits are now required for investors and interest only loans are priced at a premium over and above principal and interest or owner occupied rates.

The scary thing about the Sydney/Melbourne markets are that prices are so bullish and there is a frenzy of activity, but rates are still extremely low. Should those property markets take a substantial correction and rates start moving up, there will be many people in substantial financial hardship.

With less investors entering the market due to the banks making it more expensive and more difficult to get loans, and with very few investment properties making profits (based on rental vs interest expenses), most investors rely on capital gains in addition to the tax relief (negative gearing) in order to make property investing viable. If those capital gains start to disappear via a property market correction, you can see that even more investors will leave the market, which will add to the supply of houses for sale and as you can see, prices will have to come down.

Its basic economics but from a WA perspective, we may be excused for thinking: “what is this bubble they speak of?”.

Unfortunately the facts are very real and the property prices in those big cities are simply not sustainable. So, while we in WA are in some sort of a mini recession, I believe the pain we are feeling now is not in the realms of what they could be feeling over east in the very near future.

Watch this space!

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