Australian property market showing signs of bubble risk, academic modelling finds

Much of the Australian housing market shows indications of bubble risk, new modelling argues, after the return of investors and a fear of missing out has pushed prices higher than can be explained by low interest rates and other factors.

Property prices in Sydney, Melbourne, Brisbane, Adelaide and Canberra have outstripped the growth expected from fundamental factors, such as rents, interest rates, income, and housing supply, and are being bolstered by panic buying and speculation, new modelling by economics professors at Macquarie University and Yale University shows.

“While the interest rate is at its historical low and housing supply has dropped substantially in some cities, they cannot fully explain the fast-rising house prices in some cities,” said Shuping Shi, a professor of economics at Macquarie Business School.

The question of whether Australia’s housing market is in a bubble, or overvalued, has been a hot topic among economists as prices have soared, with many arguing that there is no way to know if asset prices are in a bubble unless the bubble bursts and prices fall sharply. Professor Shi stressed she does not expect property prices to fall substantially, although they might level off or fall slightly in future.

Professor Shi said the increase in demand is also being driven by some buyers purchasing out of fear that they will be priced out of the market entirely if values keep climbing at the current rate and investors counting on rapid gains to make a large profit.

Expectations of a “large and almost certain” profit attract more investors to the market and, combined with panic buying, could lead to a substantial jump in housing demand and an explosive expansion of house prices, she said.

Such factors played the biggest role in Sydney, followed by Melbourne and Canberra, according to the modelling, based on March figures. Speculative bubbles started first in Brisbane and Sydney in spring, followed by Canberra late last year, Melbourne, and even Adelaide in the March quarter.

One of the factors assessed to provide a “real-time bubble indicator” was a price-to-rent ratio, with Sydney seeing double-digit growth in a single month and Canberra recording its strongest increase on record, causing concerns for the general public and policymakers, Professor Shi said.

Hobart, Pert and Darwin, were also seeing speculative and panic buying, but not at a level that would indicate housing fever, Professor Shi added.

The modelling, available on The Housing Fever website, also covered six New Zealand regions. Canterbury and Auckland were both found to be in the grips of a speculative bubble.

“We can expect in the future that these markets will either slow down or see price decreases … and some markets would drop much more significantly than others,” Professor Shi said.

However, she stressed that, unlike in financial markets, property prices were more likely to level off or drop a little rather than see a substantial fall when a speculative bubble ended.

HSBC Australia chief economist Paul Bloxham said double-digit annual house price growth seemed to have run ahead of what fundamentals would explain for Australia.

“We expect that the housing market is going to cool over the coming quarters and running into 2022,” he said, noting ongoing border closures and stalled population growth would weaken housing demand and see price growth drop back to single digits.

The surge in demand brought about by record-low interest rates would also drop off, having worked its way through, he said. And with the Reserve Bank adamant that it won’t turn to negative rates, there are no more cuts ahead to fuel further demand and price growth.

Mr Bloxham added that while the market’s rapid rebound had been mostly driven by first-home buyer activity, it had more recently become an investor-led story.

“The more investors pile in, the more it’s concerning that it might start to become a bit more of a speculatively driven market,” he said.

“[But] we’re not expecting that there will be a need for prudential tightening. What we’ve observed is that lending standards … have all been fairly strict, and we think the housing market fundamentals themselves and, in particular, the closed border will be the main factors that will see the market cool.”

The Housing Fever website is aimed at providing independent modelling for policymakers, and Professor Shi hopes it can contribute to the ongoing policy debate regarding the rapid growth in house price by providing insight into the factors fuelling housing demand.

She noted it would also help individual consumers make decisions, showing whether they were in a speculative bubble and, if so, how long it had lasted.