What could make the housing bubble burst?
I’ve been hearing about a housing market bubble for over 10 years but what would actually cause the property market to crash?
If you’re like me, your ears perk up a little when the property market’s discussed in the media.
However, it seems like lately we’ve been recieving mixed messages about what the future holds. I recently picked up a copy of the Herald Sun and read about an oversupply of property on one page and turned over to the very next page to read about the housing shortage we’re experiencing. It seems like most property commentators flip a coin each morning and call out “Heads, property boom and Tails, property bust”.
These over-hyped terms have been dominating the headlines for over a decade. In that time, everyone has been blamed for the possible market crash, from the Labour party to the Liberals, immigrants, property developers, property investors, the rich, the poor and most recently even Donald Trump was going to bring the Australian market to a screeching halt.
In February this year, Jonathan Tepper, the founder of macroeconomic research group Variant Perception, predicted the Australian market would fall by 30 per cent to 50 per cent. This is the perception most people have of a market crash.
So what could cause housing prices to fall that much?
It seems like there’s construction everywhere. Houses are turning into apartments, farms on the outskirts of the city are becoming new suburbs. It would be easy to think that if this trend continues, there will be a drastic oversupply of properties. If the supply of houses exceeds the demand for home ownership, then this will cause property prices to fall.
However, a recent report by senior economists at ANZ bank David Cannington and Justin Fabo suggests that “Following a review of ANZ Research’s estimates of Australia’s underlying housing market balance, we conclude that the national shortage of housing remains significant at approximately 250,000 dwellings, albeit lower than previously estimated,”
Record low interest rates have made it more affordable to buy real estate which has invited many first home buyers and investors into the property market. The increased demand has caused a significant growth in house prices around the country.
If interest rates were to increase significantly, many home owners and investors would struggle to facilitate their loans. The flow on effect would see more properties hit the real estate market and an oversupply in the marketplace causing prices to drop.
Although a steep increase is a possibility, most analysts suggest that it is unlikely. A recent forecast by Tradingeconomics.com has predicted that interest rates in Australia will stay quite steady for the next 12 months with a projected trend to 3.5 per cent in 2020 based on their econometric models.
A countries unemployement rate is a good indication of the strength of their economy. The lower the unemployment rate, the stronger the economy. As of June 2016, our unemployement rate was 5.8%. But what would happen if this doubled or tripled?
Looking back through history, we saw unemployement reach 10% in the 1990’s, this didn’t effect the housing market too much but many analysts predict that if the same thing happened today, with so many people heavily levaraged, it could cause the housing market to fall substantially.
On a local scale, the best example of a rise in unemployment is to have a look into the mining town of Gladstone, QLD. During the mining boom, it wasn’t uncommon to see 10 per cent to 20 per cent growth but due to a cut back in jobs, reversal of mine extentions and an oversupply of property, these gains were quickly replaced with loses of up to 35 per cent in some cases.
So as you can see, if you’re a home owner or property investor, there’s really not much you can do to control what happens to the property market. Just keep in mind, that it’s a long term investment and if you hold onto your property for long enough, you’re bound to see the market soften and the market pick itself up.