Are we in a housing bubble? Nerida Conisbee offers her thoughts

House prices might be at an all-time high, but does it necessarily follow that what goes up, must come down? In other words, are we in housing bubble territory?

It’s a question recently pondered by Ray White Economist Nerida Conisbee who noted, historically, there have been few housing bubbles in Australia and when they have occurred, they’ve been triggered by unique factors.

In the November Ray White Now property report, Ms Conisbee said while there might be talk of housing bubbles, she does not foresee dramatic price declines in the immediate future, based on history and the current state of the market.

No technical definition of a bubble

Ms Conisbee explained in Australia the incidence of house price bubbles is extremely rare, although she conceded there is no technical definition as to what percentage decline the housing market has to achieve to be called a bubble.

For the purposes of her analysis, Ms Conisbee assumed a price drop of 15 per cent from peak to trough.

“Since the 1980s, there have only been two instances where this has occurred,” Ms Conisbee stated.

“The most recent was in Darwin between 2015 and 2016 when prices dropped by 25 per cent, following the end of a mining boom.

“The other was in Sydney during the Global Financial Crisis (GFC) when prices dropped 17 per cent between 2007 and 2009.”

Historical triggers for a price fall

While again stressing declines of more than 15 per cent were exceptionally rare, Ms Conisbee noted the triggers for price drops of this magnitude tend to be unique.

“The GFC was a trigger for a large price drop in Sydney house prices but also impacted Perth houses and units (iron ore also played a role) and Melbourne units.

“In Melbourne, a very deep recession in the early 1990s led to a 7.4 per cent house price fall during that time.

“Given that unemployment reached 12.5 per cent in Victoria during that time period, it was a particularly mild house price downturn given the circumstances.

“Also what’s interesting is the time it takes for prices to get back to peak. Darwin’s mining boom price growth was so extreme that prices still aren’t back to where they were.

“Sydney got back to pre-GFC pricing by October 2009, just eight months following the trough.”

Ms Conisbee noted the driver of the decline is important, as is sentiment towards property following the trough.

“The size of the market also seems to be a consideration,” she said.

“Smaller markets that are far more dependent on a single economic driver (e.g, mining) are far more susceptible to sustained declines in pricing, larger more diverse economies are less so.”

Are we in a bubble now?

Looking at the current market, Ms Conisbee explained there would need to be a trigger for prices to start falling.

Potentially, those triggers could include:

• Greater restrictions on finance

• Interest rate increases

• Iron ore price falls

• Rising unemployment

• Population decline

“More sustained price declines are generally driven by factors that can’t be controlled easily (e.g. iron ore price falls) or shouldn’t necessarily be controlled because of house price falls (e.g. interest rate increases),” Ms Conisbee said.

“Restricting finance can more easily be controlled and if it does lead to a drastic change in sentiment or pricing, can be more easily pulled back.”

Of the other factors that could lead to a price fall, Ms Conisbee said interest rate increases were looking unlikely for some time, while a rise in unemployment or population decline both seemed unlikely to occur due to the borders reopening and expected economic growth post lockdowns.

“Iron ore price falls could be problematic, however the impacts are likely to be contained to Perth specifically,” Ms Conisbee said.

In the current market, she noted recent finance restrictions introduced by the Australian Prudential Regulatory Authority were the most likely factor to impact house prices, but would slow the rise rather than lead to price declines.

“The first set of restrictions came in on 1 November and is fundamentally a stress test for potential borrowers to ensure they can withstand a rise in interest rates,” Ms Conisbee said.

“This controlled slowing of the housing market means that for now, a significant dip in house prices across Australia is highly unlikely.

“What we have to look forward to is a more stable market which is good news for both buyers and sellers.”

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.