Australia’s property prices have soared over the last decade, particularly in our major cities like Sydney and Melbourne. But is the property boom actually a property bubble; and what can investors do to protect themselves in case the bubble bursts?
What is a property bubble?
Since the global financial crisis of 2008, residential property prices have increased in Sydney by almost 98 percent, and Melbourne by nearly 84 percent. With prices continuing to rise, many people are worried in case Australia is currently seeing a housing bubble. This is where property prices are driven higher by investors, based on speculation about future capital gains rather than tangible figures such as the rental incomes that properties are generating.
As property prices are so high, it’s becoming more and more difficult for people who don’t currently own property to buy their own homes, as mortgages are so expensive. This means that Australians are having to go increasingly further into debt to buy a home or keep up with their mortgage repayments.
Could the bubble burst?
There are different opinions on whether or not the housing market could crash. Some economists suggest that it’s actually more stable than it appears, due to house prices not rising at the same rate throughout the whole country. In other large cities such as Brisbane, the property market has begun to slow down, and levels of empty properties are rising. If people can’t afford to buy them, developers will have no choice but to sell their properties at lower prices. This pattern could end up being seen in Sydney and Melbourne too, which would lead to a gradual slow-down in the housing market rather than a crash.
However, some argue that as the property bubble is fuelled by debt, it’s only a matter of time before it collapses. Wage growth is slowing so people have less disposable income and are having to struggle to keep up with their mortgage repayments. Mortgage arrears and personal insolvencies are rising, which causes instability in the financial market.
The property market could also be affected by changes in the law. There are currently tax breaks available for investors in property, but many economists are calling for these to be reduced. If these rules were to be changed, the demand for housing would fall. House prices would follow suit as the market became more even, in terms of supply and demand.
How would an interest rate rise affect the market?
If the interest rate were to be raised, mortgage repayments would increase. More people would find themselves unable to keep up with the payments, especially if they have lied about their incomes in order to get more expensive mortgages. This would lead to a greater amount of unpaid debt and insolvency.
As fewer and fewer people would be able to afford property, the construction industry would slow. This would affect the job market and unemployment rates would rise.
In addition, it would cause other problems for property developers. Currently, many properties in Australia are bought off-plan. This involves a deposit being put down to secure a property that’s still under construction, with the rest being lent by the bank once the property is completed. If banks lose confidence in a customer’s ability to meet the repayments, they will not be prepared to lend them the rest of the money. This could lead to a lot of off-plan purchases having to be returned to developers and sold at cheaper prices, causing the whole housing market to slow down.
How can you safeguard yourself against a property bubble burst?
If you are planning to purchase property, there are a few steps you can take to make sure you are not taking too high a risk.
- Buy in an area where property growth is still rising, rather than overstretched markets like Sydney and Melbourne.
- Buy a house rather than an apartment, as houses hold their value better.
- Choose a property that needs some cosmetic work doing to it in order to increase its value and maximise your return on investment.
Above all, make sure you only buy what you can afford. Take all the additional costs into consideration when buying a property, such as stamp duty, legal fees and building inspections. It’s never wise to use up all of your borrowing power, or overstretch yourself financially – that way, you’ll still have something to fall back on should the housing market change for the worse.
And, of course, always make sure you consult your financial adviser before you make any decisions. They understand your specific circumstances and can point you in the right direction for you.