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Housing bubble? No but, yeah but …

By Ross Elliott - posted Thursday, 2 December 2010


Investors have reportedly been keeping the market alive but they will realise that the concept of negative gearing relies on capital growth for the sums to stack up. If prices are at or near their peak, it could be a long wait for capital growth to compensate for the yield losses on mortgaged rental stock.  But unless investors are quickly forced to sell, there's little likelihood of a flood of investment stock hitting the market.

Slower sales rates are already making themselves felt however, and vendor expectations are confronting buyer sentiment, which means prices are being dropped to meet the market. This will have to show up in median price data soon enough, but the percentages won't be the calamity predicted by bubble theorists because as soon as reported median prices fall, bargain hunters will create a new floor of support. There are always plenty of punters who can't say no to a perceived bargain.

Further to that, employment promises to remain strong. I remember the media laughing at claims (not so long ago) that unemployment would fall to 5%. Well, in the midst of the GFC, it's barely moved from there. Provided people have incomes, and provided the cost of living doesn't get further out of control, and provided interest rates don't hit double digits, there won't be that many people in a "forced to sell" situation which would create the imbalance of supply and demand needed for a "bubble" to burst.

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The more likely scenario is not a burst but a slow leak. If next year we start to see median prices falling, the media will latch onto that and headlines will scream "collapse" but in reality, a fall of even 10% will only being prices back to their 2008/2009 levels. Not good news if you've recently lashed out on a big mortgage and bought the most expensive house you could possibly afford, but those people are a minority in the market.  (Media reports will of course focus exclusively on that minority).

Confidence will not be high if the media turns gloomy on all things housing, but perhaps it's the breather the market needs? We can't really sustain further increases in prices unless we are willing to consign an entire generation to non home ownership. Higher income households will unlikely be affected, and investors who bought more than three or four years ago will still find the increased rental incomes over that period sufficient reason to hold. There'll no doubt be some movement in the median price figures, but it's also quite probable those figures will be based on much smaller volumes of activity.

None of which is especially exciting for 2011, and possibly also 2012. Maybe real estate will for a time stop being the BBQ stopper it's become, and we'll see fewer shows on TV about how to make fast money on housing, and fewer spruikers occupying column centres in the press, talking up the future prospects of housing as a "make money" proposition, as opposed to being somewhere to live. 

Market stability doesn't generate headlines, and once you stop reading daily or weekly reports about the housing market, or when TV shows like "The Block" have faded into a memory, it could then be the time to dive back in. But that time may be a while away yet.

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About the Author

Ross Elliott is an industry consultant and business advisor, currently working with property economists Macroplan and engineers Calibre, among others.

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