The credibility of property bubble talk

The credibility of property bubble talk

One of Australia’s most experienced property analysts says investors and home-owners have no need to be concerned about pricing levels for housing. It had been my hunch for some time, so I started to dig a bit deeper to see whether the analysts who have been forecasting we are in the midst of a property bubble had any merit.

Scott Keck - chairman of valuer and property advisory Charter Keck Cramer, which employs 35 analysts working fulltime on property research - says bubble talk is over-blown. He says the reality is that Australians have strong equity (the difference between the market value and the mortgage), which underpins markets nationwide.

“Is there a bubble? Our well-researched view is definitely not,” Keck told a Property Education Company seminar in Melbourne.

Keck says the idea of a bubble infers that the property market has “too much air”.

“It suggests that it’s pumped up so high that any second it’s going to pop and values are going to fall,” he says.

“The balloon is fairly full, but it’s not going to burst because residential markets have cooled off. There’s still growth there to make it sensible to invest, but not as much as over the past five years.”

Keck says the idea of the balloon bursting suggests a scenario where something economically will occur to pop it.

“The only thing that could do it is a sharp increase in unemployment or a sharp increase in interest rates. I do think unemployment will rise, but it won’t be so sharp or so quick. Real estate rates may rise in 12-18 months’ time, but it will be gradual. It won’t be sharp or quick.

“We don’t see anything domestically that could cause it. We think values will stay where they are. Nothing dramatic will happen.”

Keck says overseas commentators predicting Australian values will fall 40% make the mistake of comparing Australian incomes to the value of our housing. What they should do, he suggests, is compare values with the level of debt on those houses.

“In Australia we have a lot of equity,” Keck says. “That’s where the real analysis lies. Australian residential markets are not over-borrowed.”

Recent research shows that household assets are 4.6 times higher than household debt – and housing assets 3.5 times housing debt. That shows the average household has considerable equity, with assets greatly exceeding the amounts owed in loans.

Most households with mortgages are currently ahead on their loan repayments, with the averaging household being two years ahead on mortgage commitments. Mortgage delinquencies are around 1.2% of total loans in June 2016.

Of course time will tell as to whose assessment of the market is correct. Having heard the property bubble commentary for nearly 15 years by various economists and market analysts, I wonder what it would have cost me had I opted out of the market and sat to wait for the bubble to pop before starting out on my investment journey.  

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