Is there a property bubble?
There has been a lot of talk lately about a property bubble and if/when it’s going to burst. I thought I might use this opportunity to explain what this all means.
As I’ve discussed in earlier posts, Australians are in love with property. Go to any BBQ and at least 5 people will be willing to tell you that ‘property doubles every ten years’ and ‘you need to have at least 3 investment properties’.
So what is a bubble?
A bubble happens when investors’ enthusiasm for a particular type of investment outweighs the actual potential for return in that investment. In this case, the argument is that people are so enamoured with investment properties that they are buying them up without any reference to whether they will actually get a good return from them. As more and more people compete for the limited number of houses, the prices get driven up. As prices get driven up the investor needs a bigger return to offset the cost of the investment. This continues until prices are so high for the investment that returns don’t even come close to the costs of purchasing and maintaining the investment at which the investment bubble ‘bursts’.
Is property a bubble?
It’s important to note that ‘property’ as an asset class is not one big market.
First of all, property in Sydney behaves very different to property in Brisbane. Further, what suburb you choose, what type of property (e.g. house vs apartment) and what the house looks like can make a big difference to the return on property.
To say that all property is in a bubble or all property is not in a bubble would be over-simplifying a complex issue.
In reality, it is hard to say whether property prices will come down. It’s no secret that Australia’s carry some of the highest income to housing debt ratio in the world. That being said, other countries are quickly catching up and/or exceeding Australia with giant leaps in house prices.
The combination of cheap money and an increasing population around city centres is causing house prices to surge. How long this can continue for is anyone’s guess.
Should I wait until the bubble bursts?
When it comes to financial decisions, it can be best to focus on controlling the controllables. When it comes to purchasing houses, it’s best to understand your motivation first.
Are you buying this to live in? Are you intending to live there a long time? Is this an investment? Is this a house you intend to live in and then turn into an investment?
Understanding your motivations will help you to make a more informed decision. Knowing your motivation should dictate how you feel about taking on risk.
For example, you may choose to ‘wait until the bubble bursts’ and hold off on buying an investment property and instead buy shares. If you did this and property prices didn’t fall (or rose substantially), you likely wouldn’t be that disappointed as you haven’t necessarily lost anything.
If however you are waiting to buy your first home and you hold off and it never bursts, this can have a bigger effect on your life as you will have spent a long time not in your house and have paid more for the privilege.
Nobody can tell you what property is going to do. You unfortunately just need to make the right decision for you at this time in your life. This is where the help of a good financial planner who can map out the big picture will be helpful.
Where to from here?
The first step is to think about your motivations and what will happen if house prices go up or go down and how this will affect your plan. Don’t assume property is going to double every ten years and if the entirety of your investment portfolio is in property, know that you are flying very close to the sun. Maybe look at diversifying your investments to avoid a financial shock if property does go down in price.
Once again, if you have any questions about investing why not drop us a line? We are always here to help.
This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.
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