My Bubbles: What Bubbles?

Posted by Luke Graham

Like most property enthusiasts, my interest in the asset class began with my parents encouraging me to save my hard earned cash in order to purchase my own investment property. This objective was realised at the age of 21 albeit with caution and reluctance, as I took feedback from market sceptics about how heavily over-priced the Australian residential housing market was and the resultant looming possibility of a ‘housing bubble’.

Enter case study number one, also known as ‘Trevor’. In the year of 1979, Trevor purchased a property in a suburb of western Sydney for $12,000. The zeitgeist: over-valued residential property, meaning investors were sure fools. Some four years later, as an impressionable 23-year-old man, Trevor submitted to the pressure and sold out for $16,500 in order to avoid the looming ‘bubble’.

In January 2014, 35 years after the initial purchase of this property, the comparable dwelling next door sold for almost $600,000. This indicates an annual average growth rate of 11.8 per cent, an absolutely remarkable figure by any standard. Beloved hindsight is always twenty-twenty.

So again in 2014 fear of the property bubble looms its head, as it has so often before. But each time the fear rises, it is the absolute responsibility of any reputable property investment company to consider the merit of alarmist claims. This time the trepidation has been raised by the International Monetary Fund (IMF), their rationale being the relationship between median income and median house price.

Consider the sub-prime mortgage crisis in the United States. In brief, this occurred due to the availability of low-doc loans on a massive scale, which stimulated supply of new dwellings to the point that economists even suggested buying out excess housing stock and burning it to the ground in order to avoid what became the global financial crisis, as the default rate of mortgages reached unimaginable proportions.

In Australia, the catalyst causing alarm from the IMF is only one fragment of the broader property value paradigm. Of concern is that this one-size-fits-all economic perspective effectively tars all markets inside Australia with the same brush. Additionally, comparing median incomes with median house prices completely contradicts niche markets, investment property ownership, the profile and personal circumstance of purchasers and, for any graduates of a statistics-based degree, displays a sweeping generalisation that neglects the political, demographic and economic shifts in Australia over the last century (as well as the core principles of supply, demand and market equilibrium).

The political, economic and demographic phenomena that have changed the face of the Australian property market over the last 100 years include the world wars, the great depression, feminism, superannuation, negative gearing, financial services, foreign policy, technology, education, globalisation, listed property trusts (A-REITs) and the understanding and availability of credit, as well as monetary and fiscal policy. Because of this constant change, analysts across the industry are challenged to vigilantly observe future market indicators with a broad and all-inclusive perspective rather than simply considering a single macroeconomic factor.

What would cause a housing bubble in Australia and how would we see it coming? Simply put, supply of housing at an increasing price would have to exceed the demand created from multiple sources, including population and demographics, economics and employment, and infrastructure spending. Market fluctuations should not be confused with a ‘bubble crisis’.

Consequently we have: the Blue Wealth Research Model.

Posted by Luke Graham, on 17th Jun 2014