I got an email from Ben asking me, “People seem to think that property can only go up. But looking at the U.S. and EU, I would say not. Do you think the GFC or the property bubble will affect us in Australia?”
It’s a very great great question and there’s a lot to say about whether or not the property bubble is going to burst. With the bursting of the U.S. and U.K. bubble many people are saying the Australian property bubble will burst. But will it? I think not. Australia is noted as one of the most unaffordable places to live. Compared to people’s income the price of a house is exceedingly high.
So does that mean that the property bubble is going to burst and that prices will fall? People overseas who speculate on the Australian market think that it will fall. Places like the U.S. or U.K. have all had their bubbles burst and they were in the same unaffordable range that Australia is today. But Australia is different to other markets across the world and there are some factors to look at before deciding whether or not the bubble is going to burst.
In order for a bubble to burst you need to have a great deal of people willing to sell their houses at fire-sale rates coupled with a market that is unwilling to buy those houses. So there’s a huge influx of properties on the market from people who want to get rid of them at low prices but there are no buyers on the market who want them.
Also there’s a difference that’s important to note between us and the U.S. At the time, when you borrowed money for a house in the U.S. but then couldn’t afford your mortgage and would default on your loan you handed the house back to the bank. If the bank sold the house but there was a deficit then in most cases the banks would be responsible for it. For example let’s say you purchased the house for $500,000 but the bank could only sell it for $300,000. There is a $200,000 deficit in your loan and you’ve got a 100% loan. In the U.S. the banks would actually be responsible for the $200,000.
However with most loans in Australia it works differently. Using the previous example you have a $500,000 mortgage and default. You then give your house back to the bank and they can only sell it for $300,000. The difference is that the $200,000 debt still gets assigned to you. So I would say that there’s going to be a lot more responsibility in the Australian market compared to the US market because people here know that they will still be responsible for the debt from the house they purchased even if they give it back to the banks.
Anyway back to whether or not the market will crash. Honestly there are just too many factors to say whether it will or not. But I was actually doing some research on this and Michael Yardney who’s a director at Metropole Property Strategists said, “For a property market to crash you need desperate sellers willing to give away their properties at fire-sale prices and no one willing to buy them,” which is what we talked about. He also said that one or more of four things had to happen:
- A major depression
- Massive unemployment
- Exceedingly high interest rates
- Excessive oversupply of properties
For the first point we just kind of went through the great recession but are we coming up for a major depression? Probably not. And interest rates in Australia are so low at the moment at 5% and I’ve even seen interest rates below 5%. Something interesting about the Australian market is that the government limits what land is available to develop on. So in a lot of areas the land is extremely restricted.
Take Sydney for example. You’ve got water on one side (and obviously you can’t build a house on the water) and then there are national park areas to the north and south. Then there are the Blue Mountain ranges to the west so Sydney is pretty boxed in as far as what land is available to build upon. When you have a lot of people wanting to live in an area but the government’s not releasing land for people to build upon then that’s when supply isn’t keeping up with demand.
If it did come to a point where there was much greater supply than demand then prices could definitely go down and there could be a correction of the overall market in Australia. But does that mean that it’s a bubble that’s going to burst and prices are going to decrease 50% like some of these overseas analysts are predicting? I think property prices aren’t in a bubble in Australia but that is due to my limited belief of what the market is and the things that control the market.
Obviously there’s so much that goes into economics at a larger scale but I hope that answers your question Ben and I hope that it helped you. If you have any questions go to onproperty.com.au/contact and send me your questions or you can just email me firstname.lastname@example.org.
Until tomorrow remember that your long term success is only achieved one day at a time.