The Housing Bubble That Never Burst

There has been much talk of a potential housing bubble in Australia, and with good reason. In a number of countries...

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There has been much talk of a potential housing bubble in Australia, and with good reason. In a number of countries, including the United States and in Europe, since 2008, there have been burst housing bubbles in which home prices declined severely over the course of several years.

With housing prices rising steadily, interest rates at record lows, and all of these other stories, it’s no wonder many in Australia are asking this question.

In a recent story, Sarah Miller addressed it head on. The definition of a housing bubble is when unsustainable growth hits a housing market and a sudden downward shift occurs. But that kind of sudden downward shift has never happened in Australia.

What we’re seeing, according to Mark Hewitt, General Manager of Sales and Operations for Australian Finance Group, is growth commensurate with a rise in demand. He points to the situation in Perth where the market has cooled after several years of significant growth, but slowing growth is far from a bubble burst.

What a Burst Bubble Looks Like

When people point to the potential for a housing bubble, they frequently cite the US crisis that started in earnest in 2008. After several decades of consistent growth in housing prices in the United States, a sudden sharp decline occurred, with home prices dropping by double digits between 2007 and 2012 in the majority of US states.

One of the fundamental reasons for the housing bubble in the United States, though, wasn’t overvaluation – it was the availability of credit to those who likely wouldn’t have qualified under different circumstances. Sub-prime mortgages made up nearly 20% of credit for home loans in 2006 according to subsequent investigations, and when interest rates rose, payments defaulted, and homes went into foreclosure, reality sank in – demand for housing was actually much lower than the market could sustain and prices declined.

Why Australia is Okay

In Australia, housing regulation is robust and recent changes in how the Australian Prudential Regulation Authority recommends and guides investor loans ensures a healthy market for mortgages. Low interest rates, high demand from owner-occupiers, and a robust economy mean that housing prices can be sustained and will likely remain stable for many years to come.

Will prices continue to rise by double digits year over year? Likely not. But small corrections and slower growth in some years will not turn into a burst bubble like we saw in the United States. As long as you are investing for the long term, as property is meant to be seen, you will be in a good place for many years to come in the Australian housing market.