Is the house price bubble about to burst?

Property expert Associate Professor Clive Warren explains the underlying factors affecting the property market and answers the question everyone is asking.

With median house prices in Sydney having reached $700,000, Australia is now on the list of global property hotspots. Over the past two decades the country has seen some of the fastest rising house prices in the world.

Residential property has increased by 283% since the end of 1995, compared to 194% in the UK, 181% in New Zealand, and 118% in the US.

Runaway house prices are not just a problem for first-timer buyers or families struggling to meet mortgage repayments – they can also restrict growth and wreak havoc with the economy.

Australia’s investment in property, at $5.5 trillion, is almost double the $3 trillion invested in the stock market. The $1.37 trillion we owe in mortgages and home loans is equivalent to 60 per cent of all lending – way more than credit card debt and lending to business combined.

No wonder that the Reserve Bank of Australia (RBA) and the regulator APRA are nervous. Under normal circumstances the RBA might have stepped in and increased interest rates to calm the market, however that would risk stalling the recovery after the end of the resources boom. Instead, for the past six months it has been trying to talk the market down.

Buy why have prices risen so high – and why are there such wide variations between prices in different areas? Are current house prices sustainable or is the bubble about the burst?

There are a number of general factors which are placing upwards pressure on prices. Firstly, historically low interest rates make it easier to pay off a loan, which encourages people to borrow to buy property. It means low returns for savers too, so investing in property becomes a more attractive option than leaving their money in the bank or alternatively risking the volatility of the stock market.

Given the huge rise in the number of self-managed superannuation funds, individuals have more to invest and inevitably some of that money will go into property.

There is no doubt the market is also being fuelled by negative gearing – which allows investors to offset any losses on property against other income for tax purposes. Figures from the Australian Tax Office show that 1.3 million taxpayers made losses on investment property in the 2011-12 tax year, equivalent to about two-thirds of all those with an investment property.

However these factors do not explain the huge variations in prices at different locations. Since December 2008, following the end of the global banking crisis, to August this year, prices in Brisbane increased by just 5.3%, while in Sydney and Melbourne they rose by almost ten times that amount – 50.1% and 47.5% respectively. (Source: RP Data)

The difference reflects the way in which these two established cities have become the focus of economic activity and investment since the end of the resources boom. Whereas at one time residents may have headed for Brisbane or Perth to take up jobs in the mining industry, now the flow of labour is heading the other way as people from mining areas seek work elsewhere. These growing populations in Sydney and Melbourne are creating increased demand for housing.

The two cities are attracting international investors too, particularly Chinese and Canadians. These foreign nationals are often blamed for inflating property prices but as they account for just 5% of purchasers, and their investment is largely confined to inner city areas, in reality they only have a limited influence on the market.

Prices in Sydney rose by 14.8% last year and in Melbourne by 11%. In my view both cities are approaching the top of cycle, and there are signs that the market for inner city apartments is overheating in some areas.

Certainly prices cannot keep rising at the current rate as the situation would become unsustainable. Without an increase in wages, there is a limit to how much landlords can put up rents. Therefore if house prices continue to rise, returns for investors will eventually decrease to an unacceptable level.

However, talk of a property bubble is an exaggeration. There is still a lot of confidence in the market and, although the resources boom may be over, there is no sign of an imminent recession or other factors that could precipitate a crash.

With a growing population and limited supply, house prices in Sydney and Melbourne are underpinned by demand. The market may dampen down but it will not collapse.

One of the metrics often cited by analysts is the ratio of house prices to wages. By this measure, Australian home prices – at six to seven times the average wage – are ‘severely unaffordable’. However they remain low by comparison with many other locations such as Shanghai, where prices are over 30 times income and in Taiwan, where they are 20 times income.

What’s more, demographics have changed since this metric was first introduced. There are often two people in a household working and we tend to have more spare cash these days. Comparing house prices with disposable income might be a more meaningful comparison and would make prices look more reasonable.

If prices do continue rising, however, the government will need to step in at some point but there is no easy solution. Imposing limits on the amount people can borrow and forcing buyers to put down bigger deposits, as countries like the UK have done, risks hurting first-time buyers, while baby boomers sitting on large buy-to-let portfolios would simply borrow against the value of their existing properties.

Looking ahead, one uncertain factor will be whether the housing bubble bursts in China and if so, how that will affect our own market. House prices in China are well above Australian levels. Many Chinese regard Australia as a way to diversify their property investments and a property crash could encourage them to take more money out of their own country and invest here.

So where does this leave Queensland? Brisbane hasn’t seen the same price rises as Sydney and Melbourne. While there have been a lot of apartments built and the market has been fairly slow, prices do appear undervalued by comparison. For those considering buying a property, right now Brisbane might be a good bet.

Clive Warren is an Associate Professor in Property Studies at UQ Business School. His primary research interests are in Property and Facilities Management, Property economics and valuation, Sustainable development, Workplace efficiency and Corporate Real Estate Procurement.

Last updated:
27 February 2019