What If The Australian Property Bubble Is Made Of Rock?

In an ideal world there will be no cynics. There won’t be people sitting on the fences and announcing the height of the next tide. In an ideal world, whenever that kind of a world chooses to appear, we will all be men of action. We will give due relevance to thoughts but won’t at least be carried away by cynical or baseless assertions of a few. For instance, we won’t be eager listeners to the chant of “Australian property is in a bubble” because if we care to find out, this is far from the truth.

Our property market remains close to economic fundamentals

Are we riding safe? Are things well in control? Is it a bubble? Well! If it is a bubble rest assured that the bubble is made of rock.

Think!

Australian real estate is backed by intrinsic values of economics. No property market with its fundamentals in place can be driven towards a bubble. Taking the reverse line of thinking, when a bubble appears, a market first loses its economic fundamentals or intrinsic valuables.

Nation-wise, the cash rate is holding ever so low, inflation is fairly eased out and median housing prices are close to the long-term averages, the bubble is as far away as signs of life beyond earth.

Why has the bubble not burst for so long?

If it were a bubble, it would have burst by now. It could not have held this long and at any rate, prices would not have corrected moderately in between. Can a bubble reach its elastic extreme (its bursting point) and come back to a zone of elastic comfort? NO.

So this bubble clearly hasn’t inflated. Instead of becoming fearful we should seek ways to ride the great property trend that we are witnessing.

May be the effect of the doomsday prophets is too strong and you are not convinced yet. Let me propose further reasons to assert my claim “there is no bubble”.

Developers are not apprehensive

In course of a bubble build-up, developers and builders become circumspect. Contrarily, in case of Australia, they took a long time coming into their own.

They were apprehensive for long and it was not the shortage of skilled workers or compliance costs or transaction charges that kept them away- they were plain apprehensive since the GFC.

In the last couple of years, they have resolved to ride the trend and are beginning to work furiously. Which bubble showcases such builder zeal?

The myth of generation rent

Cynics say that houses are unaffordable, price corrections notwithstanding. Well! In my opinion, generation rent is not fading out and won’t fade out any time soon but this is not because of non-affordability but because of upfront costs.

This has got nothing to do with a bubble, you can logically infer.

Lease as against “place to live”

It is being said that a property market exhibits soundness till you can seek a “place to live” at a cost no greater than leasing a similar place. If cost of lease outstrips the cost of “place to live”, you are definitely buying in a bubble. Thankfully, Australia is far from witnessing such cases.

‘Median’ well in control

Median housing prices are sticking close to median household incomes. They would have shot a few notches higher with the first sign of a bubble.

Overvalued Vs Undervalued

In proportion to the fundamentals of property economics, some of our markets are overvalued. However, this is clearly compensated by the large chunk of undervalued homes. The price gains can be attributed to real estate ‘rebounds’ and not a bubble.

Yes, there is a disproportionate price rise in a few market segments; what with the environment of low interest rate and undersupply of homes in those areas. This is expected to ease out (quite an opposite movement to a bubble) with further housing inventory being freed in days to come.

We are in a safe property phase

Housing phases exhibit 6 phases at large. We are nowhere close to a Build-up phase or a Euphoria phase. In the first, increase in prices spike transactions, initiating a bubble. In the latter, prices skyrocket and transactions still keep going up.

We are neither in the Despair phase where sellers are getting desperate to offload their homes nor in the Illiquidity phase where transactions and prices are falling simultaneously (and precariously).

Far away from these unsound phases, Australia lies safe in its Consolidation phase- prices hike a little but transactions either remain stable or go down (all for a good cause) and alternates it with an Early Fall phase- prices come down but transactions increase a little.

Well! A sure reason then why the doom prophets should not be shouting hoarse in the first place.

I reiterate- In an ideal world there will be no cynics. Let us not waste any time in seeking that ideal world.