Are we in a Property Bubble? |

There has been prolific debate in the financial press in recent weeks about whether we, or at least Sydney-siders, are in the midst of a property bubble, fuelled by Chinese buyers and record low interest rates., writes Campbell Korff. Closer to home, ABS data suggests the cost of housing in the Northern Rivers is increasing faster than pretty much anywhere in the country. So are we in a property bubble?

The fact of the matter is property market, like any other, is a function of supply and demand. So let’s look at the fundamentals so you can decide for yourself.
Supply:
This consists of the primary market; new construction, and the secondary market; existing properties. Secondary market supply is determined by price: the higher the price the more sellers in the market. Primary market supply, on the other hand, is also influenced by developers’ cost of development (land prices, regulatory cost and access to capital) and their expectations of medium to long-term prices, given the time taken to build. Therefore, built into its dynamics are the policy settings of planning authorities and the risk appetite of banks and property investors; making primary supply slow to respond to a favourable change in market conditions.
Demand:
Simply put, the more people who want to live in a given market, the higher the demand for housing. Sounds obvious, right? However, a few million people got this basic concept wrong when buying mid-West real estate (or related securities) in the US pre-GFC.
What people are willing or able to pay for housing is influenced by the security of and price for their labour (jobs) and their cost of capital (interest rates). Interest rates also influence demand by making property yields more or less attractive to investors compared to cash.
Concerned about the impact on jobs of a slowing resources sector and continuing nervousness about the global economy, the RBA has dropped interest rates to record lows. The key objective being to stimulate demand for housing, thus increasing supply and creating jobs for those laid off from the mines. Throw in resulting downward pressure on a stubbornly over-priced dollar and you have a neat monetary policy solution to the “re-balancing” of the economy.
In the short-term, however, the primary market is unable to respond and prices in the secondary market rise. This is what we are seeing in Sydney and other supply constrained markets currently. Provided developers and their financiers respond to the rising market and start building, prices should correct. Further, the RBA will “normalise” interest rates once it feels there is a healthy flow of capital to the construction sector again. This will also reduce demand.
These are the characteristics of a functioning market, not an asset bubble.
Campbell Korff is the principal of Yellow Brick Road Wealth Management, Northern Rivers. Email: [email protected] ph: 66876678.