Popping the housing bubble’s bubble

Apparently we’re in “the grip of a housing bubble”. If your bits have been feeling a little errr, constricted, this could be the explanation.

What is a housing bubble anyway? In high school they told me it’s always good to start with a definition, so here’s mine:

Housing Bubble (def): Device for driving traffic to media websites, catch-cry of the week for economists and property commentators, mythical object only seen by the eyes of a blind virgin on a full moon.

I’ve been doing quite a bit of reading and here’s what I’ve learned about the bubble – not much. Economists and experts can’t agree on how to define a housing bubble, let alone whether or not we’re in the grip of one. Nor can they agree on what the implications of the bubble might be for homebuyers, first homebuyers, investors, downsizers, developers, the banks and government revenue.

So, what is this thing called a housing bubble? The best definition I can find is that its simply when property prices reach a level that can no longer be sustained and they drop to a lower benchmark. Of course there is no agreement on what that lower benchmark should or will be and whether that drop will have any flow-on effect or even go on to become a fully-fledged recession. This rise, a slight drop and then rise again is what property prices have been doing at pretty regular intervals for the past hundred years or so. I’d say that’s a market correction, rather than a bubble and its influenced by factors other than price – like population growth, household income, savings levels, tax policy, buying psychology and many others.

If you want to talk about a bubble, you could perhaps point to mining towns where property prices were pushed to ridiculous levels and then “popped” when the mining companies pulled up stumps and left town. If you’re an investor, there’s an important lesson there about “hotspots” vs. good investing fundamentals, but that’s a discussion for another time.

Interestingly, the chief executives of National Australia Bank, Westpac and Commonwealth bank, testifying at a parliamentary inquiry into banking this week, said that while they have some concerns about aspects of the housing market, they don’t believe prices are over inflated. Read, there is no bubble. Rather they claim, the higher prices are supported by the fundamentals.

Bubble or no bubble, about to pop or not, the fundamentals should continue to be the major drivers in your purchasing and investing decision-making.

Life is for living. All the best on your investing journey!

 

Words by John Di Natale, Director of Equi Wealth

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