By Julian

My local mechanic offered me a quick lift back to the office the other day after I dropped my car off for a service. Lovely young bloke. The trip takes about 3-4 minutes – plenty of time to discuss the intricacies of the property market! 

Ever intrigued as to how different sectors are performing, especially locally, I asked him how business was going. 

Mechanic: We have had some quiet weeks… home by 5pm. 

Me: What hours do you usually work?  

Mechanic: Well, usually until 7pm with a 7am start. 

Me: Right, well, seems like expectations are high in all sectors, we are working long hours. 

Mechanic: What do you do? 

Me: I manage a team of experts in the real estate space, we help investors, home owners and business owners secure the right site. 

Mechanic: Ah, my mate works in real estate in the west, he said we’re in a bubble and it’s going to burst soon.  

 

And the not so rare “property bubble” discussion begins. 

 

What is a bubble? 

A bubble is when there is an acute spike in the price of property which far outweighs the value of property at a point in time. It is usually caused by a sudden influx of speculators entering the market. This is very different to property prices rising as a result of an imbalance of supply and demand due to population growth which is what we have seen in Sydney and Melbourne.  

Over the past few years, demand for certain types of properties in Sydney and Melbourne far outweighed the rate of construction or availability of those dwellings. This pushed prices up in certain areas like established inner suburbs with land content.  

 

What is a crash?  

A crash is generally described as a drop of 20 per cent or more in prices across the market; something we are yet to see in Australia. In fact, the gains over the past decade in Sydney and Melbourne have averaged around 6 per cent each while other cities, like Hobart and Brisbane, have remained steady. Darwin and Perth, both bolstered by the short lived resources boom, have experienced significant market corrections and have retuned to pre-mining boom prices.

To a large extent, the property bubble and pending crash headlines have been just that: headlines, none of which have materialised.  

 

Reality check 

Waiting for the boom or bust to take action is ‘picking the market’ on the assumption that all areas will boom or eventually crash across the board. The truth is, Australia has very different property markets and prices will differ accordingly. The key is to look at the macro drivers of that particular market, plus the more localised micro drivers in the areas you research. 

Here’s an example: 

With increased supply and investor activity in the market, rents were expected to decline over the past 12 months, but in fact they have increased by a national average of 2.7 per cent according to RP data. Vacancy rates are at incredible lows, even in ‘no-go zones’ for investment suburbs, like the Docklands and Southbank in Melbourne (these are still poor investment zones so stay away).  

Furthermore, CoreLogic figures show that Sydney houses did not perform nearly as well as Sydney units, registering a gain of just 2.1 per cent over the year with a median price of $1.06 million while Sydney unit values rose 5.4 per cent over the year to a median of $774,000. 

In Melbourne, house values increased by 9.1 per cent and units by 8.4 per cent over the last 12 months. You only have to cast your eyes back to the papers 12 months ago to be told the apartment market was on the decline. This has clearly not been the case. 

I’m not encouraging blind investment in apartments, as always, careful research and diligent property selection is required. The fact is, people do choose location and lifestyle over a backyard and having to battle the main arterials each day. But there is a market for both. 

 

The danger of generalising the market 

While prices have surged in Sydney and Melbourne, they have fallen in Perth to 2007 levels and seen only moderate growth in other capitals. 

We’re now seeing the market begin to correct itself to mitigate any chance of that looming “crash”. Building approvals are fading, lending controls are tightening, population is growing and employment growth is, in most cases, robust. And don’t forget, we all witnessed what happened in the United States a decade ago where the mortgage sector was so leveraged it brought down the mortgage banks and almost the US economy. No government is going to create an environment where they are in danger of causing market failure or, more to the point, losing an election.  

Don’t get sucked into the ‘click bait’ vortex that is designed to scare you into viewing a page imbued with paid advertising. Do your research, stick to the facts, look at median incomes, infrastructure investment and growth or decline in population, wages and construction of dwellings. Be smart and understand the universal drivers in property investment and know that hype does not influence the market, it only influences emotion. The bubble is only as big as you inflate it.