Are we watching a bubble deflate, or could it simply be an over heated market normalising. Debunking the ‘bubble will burst’ theory.
We all remember the balloon deflation and inflation experiment without bursting the balloon, right?
For those who don’t, the balloon represents the property market, the air is interest rates and lending criteria coupled with consumer demand, and the provider of the air is – you guessed it: the banks.
The experiment goes like this…you blow up the balloon (by lowering interest rates and providing 100-110% finance) and property prices rise. Eventually, the balloon gets so full that it becomes opaque and looks like it will surely burst. But just as it looks inevitable, APRA (the sticky tape and the needle) injects itself into the market and applies its rulings: sticky tape to the balloon (so the balloon wont burst when the needle is inserted).
The banks (under APRA’s guidance) then let out enough air (raising interest rates and tightening lending practices), which sees prices plateau before they adjust. Once the balloon has sufficiently deflated, tape is applied to the hole and inflation begins again. This has been the cycle of the last 20+ years…
We are in a perpetual bubble which, to date, hasn’t burst. Why? For a number of reasons:
- The property market is, for all intents and purposes, a financial market – interest rates and lending practices loosen and property prices go up; they tighten and property prices fall. Of course we have supply and demand forces at play and we all need a place to live, and this supports the homeowner and investor markets.
- We don’t have a sub-prime market. Property owners can’t just drop the keys at the bank and walk away.
- Banks don’t go into market wide ‘mortgage in possession’ sales, they have LMI and they don’t want to run down their balance sheets given their high level of exposure to residential mortgages.
- The Government and banks have a vested interest in property – Real estate is one of the largest employers and most valuable sectors within our economy. Residential property in Australia is worth over $4.5 trillion dollars. It is an enormous source of revenue for Government. The big four banks each have loan books accounting for 25-30% of their balance sheets in Residential property. Banks, therefore, as far as possible, manage property price corrections via lending policy.
The over supply theory
Persistent talk of oversupply – particularly in Sydney is only partly plausible. Beyond the Sydney metro area, there is something of an oversupply, however, within 7km of the CBD this is not the case. Particularly in the core markets of the Lower North Shore, city fringe, East and Southeast an under supply of both apartments and houses persists.
Changing demographics, increasing population (more new entrants) and the fastest growing population (the over 60’s) who are outstripping the birth rate, have nowhere to go in the areas they have lived in for 20+ years, which makes for heavy competition in these areas for apartments, semis or small houses…
There is more – stay tuned… Part 2 will be delivered soon.