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Ben Kingsley

19/12/2016
Blog post by Ben Kingsley

Is the Australian Property Bubble about to Pop?

Hi Ben Kingsley here and in this Empower Wealth How to Video session, I want to talk about whether the Australian Property Bubble is about to pop. Well, the first question is, are we actually in a bubble at all? We’ve seen the Sydney and Melbourne property prices go very strongly over the last 3 or 4 years. And that is an interesting point, isn’t it? Because most uplift cycles usually only go for around 2-3 years and we’ve extended on from that because of the low-interest rate environment. But for a property bubble to pop, we need to understand all the fundamentals behind what actually makes for a correction in the property market.

Now what happened in the USA where we did see a large correction very quickly in the property market, was because the fundamentals were different than what they are here in Australia. In America, they had non-recourse lending which effectively meant they could borrow money but if a property price dropped significantly, they could hand their keys back in and forego the obligation requirement to pay the bank back. So obviously, all the ownership became the lender’s and that is what caused that credit problem that we saw that was part of the Global Financial Crisis (GFC). Now in Australia it’s a little bit different. We have what’s called, Full Recourse borrowing which means that it’s our obligation to pay the bank back so that basically meant that the fundamentals are really strong. In other words, you can’t really forego; otherwise, the banks will chase you for any loss they will experience. And the bankruptcy laws here in Australia are a lot stricter in terms of trying to get back in and trying to borrow money into the future. That’s not to say that there isn’t any risk in the market, but the underlying fundamentals here in Australia are definitely different. And when you’ve got different fundamentals, it means that the marketplace works in different ways.

So if we go back and have a look through history to see where are the big, large boom periods, and then we look at the correction periods, were they actually busts and did the bubble pop? And the answer to that is, no they didn’t.

We’ve seen over the 19th century and early into the 20th century and 21st century, they were very few corrections of more than 10%. In fact, in our bigger city locations, it’s very rare that we get a broader market correcting more than 8-10% when we go through the correction cycle. And that’s not to say that there isn’t an inherent risk within the property market because there absolutely is. We can see that in more speculative areas such as gold mining towns or general mining towns where you go through this boom periods, and then the jobs or the gold’s not there. We’re talking about the turn of the century stuff. So it’s really important to understand that when the economic fundamentals start to collapse around it, that does present inherent risk and you definitely see larger corrections in those types of environments.

The fundamentals are still pretty good when it comes to looking at our bigger cities. Population growth, reasonable growth around the economy and if those things were to slow down; it will certainly have an impact on valuations. But are we going to see a complete collapse of the property market? Well, that’s unusual and it would require a global event or some significant deterioration that we can’t necessarily see on the horizon. So, to understand that, you need to understand that property is an essential need. It is shelter, and the market will find its value with the confidence that it has in being able to borrow and repay that money. And that’s why it is an illiquid asset, as oppose to a liquid asset such as the share market which is why we see the higher volatilities in those types of areas.

So let’s quickly recap. Is Australia in a property bubble? It’s not really in a bubble. It’s more in a balloon where we are going to see the air ease out of it. Are property prices eventually going to correct? Yeah, there will be some areas where property prices will come off their highs. No different from any market cycle where we see valuation eventually getting ahead of themselves. When will that happen? Well, that’s a crystal ball question and rather hard to work out. But with low interest rate, good job growth, we could still see some potential growth in the market to come. In some areas in some cities where the economy is slowing or declining such as Perth and Darwin, we’re actually seeing property prices retreat and supply coming online in terms of people trying to sell their homes because people are migrating away from Perth because there are not as many jobs in those areas.

So it’s an interesting time but we’re certainly not in a bubble. You really need to be sophisticated about how you approach your research and your asset selection. If you have a long term view, then hopefully your conditions will be great, and you’ll see some great passive income. If you have a short-term view, and you’re going to speculate, well it may not be the time to be speculating in property at the moment. Thanks for watching.

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