What’s all this talk of a Property bubble bursting?

Property Bubble? Where? What does it mean? Says who?

We seem to have a lot of attention from ‘industry experts’ at the moment writing about an imminent property bubble bursting and things are set to come crashing down around us (in Australia !!!!)

Really? Should we all be worried and start selling to protect ourselves?

So what is a property bubble exactly? Nobody seems to be able to explain it! But we’ll have a go….

Having personally been involved in buying and selling real estate and monitoring the property market since the 1980’s (thirty-ish years) I am yet to see for myself what a property bubble bursting looks like or who it affects.
Depending on what you may read and by whom, the consensus seems to be that the ‘market’ becomes overheated, prices and values escalate dramatically and then at a certain tipping point, tumble to nothing rendering people broke……what I am always asking is, who are these people going broke?

Real estate historically increases in value, nobody can dispute this fact; it is the natural result of property being a free market driven by supply and demand. Increases in the cost of living, income, inflation and a whole lot of other factors also play a part in property price growth. In addition, the fact remains that some locations will always be more desirable - generally these locations are closer to main cities, have greater employment options and choice of education, lifestyle amenities etc. Investors speculating through short-term buying and selling in a buoyant property market can further drive demand and prices.

At the end of the day, property or a piece of real estate is simply worth what somebody is prepared to pay for it, it really is as simple as that. There are many factors that will determine a property’s perceived value - location, size, quality of construction, suitability of the property to one’s lifestyle etc. Yet still, on the day of selling, it’s purely comes down to what someone is prepared to pay. As an example, an inner city suburb within 5 km of the CBD would be more desirable to the CEO of a large multinational company based in the city centre, just like the line worker in a factory wants to live close to his workplace, generally a larger distance from the major city centre - think of Ford out in Broadmeadows compared to BHP in Collins Street, Melbourne.

A bubble bursting, in a nutshell is when supply exceeds demand, there is far too much stock on the market and values dive. Invariably with oversupply, price increases and values will slow in
certain areas, especially where growth has been unusually fast and significant. Some become desperate if they believe oversupply is affecting their suburb or their circumstances change suddenly, so they sell, often at a reduced or lower price than the top price they may have originally paid. If this occurs en masse, a price correction is inevitable - many start crying out ‘the bubble is bursting’. Unfortunately, this can be a common occurrence in smaller or regional communities when large factories close down suddenly affecting many families (eg Ford, Geelong).

So is that a bubble bursting and values plummeting around an entire city or country?

No. It is in fact a natural part of the property cycle – there will always be periods of increases and corrections. It’s just the length and scope of the increases and corrections that change.

April has seen a number of articles written about why the Reserve Bank ‘NEEDS’ to reduce interest rates by 25-50 basis points. And this month, the RBA met the demand with a cash rate reduction of 25 points. This means access to greater borrowings, so many will automatically plan to borrow more – but it does not improve housing affordability. If anything, home prices may increase in some areas, simply because more borrowing power means more bargaining ability and competition, means driving price when it comes to buying and selling. Importantly, this latest rate cut provides prime opportunity to review your property borrowing strategy and secure a loan at an exceptional rate OR assess any home loans currently in place, as there may be potential to refinance to a better option. This is where a professional broker can effectively assist – in this case, myself!

Have you had your home loan health check to see if there is a better deal out there? Please feel free to give me a call on 0438 041 111 for a confidential discussion about your home loan.

As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’

Peter Vinci - 0438 041 111