The past couple of months have seen daily headlines about sharply rising Australian house prices. Is it good, is it bad, is it a bubble, or is it a shortage?

Various talking heads at the Reserve Bank think it is a bubble that will end in tears. Their dilemma is that lower interest rates are encouraging borrowing; virtually all for mortgages. But higher rates would stress mortgagees. As they say in the US, the Reserve is attempting to jawbone price moderation. It is also encouraging the commercial banks to tighten lending criteria.

Treasury Secretary John Fraser:

“It does worry me that the historically low level of interest rates are encouraging people to perhaps over-invest in housing”

And this:

“I’m not talking just about buying housing, I’m talking about investing in housing. You’ve just gotta see a plethora of these renovation shows to realise something’s amiss.”

So… television shows are causing a property bubble. Only in Australia.

Our politicians, on the other hand, think rising prices are great.

Here’s something from our Prime Minister, Tony Abbott:

  “As someone who, along with the bank, owns a house in Sydney I do hope our housing prices are increasing,”

The problem is that, in Sydney and Melbourne, many average people are being priced out of the market. Particularly first home buyers. But that’s not a problem according to our Treasurer, Joe Hockey:

“The starting point for a first home buyer is to get a good job that pays good money.”

Well people like nurses, teachers and firemen would be considered to have good jobs. But they are increasingly priced out of the main cities. The alternative is to live in far flung areas, often with huge commute times.

Mr Hockey is from Sydney, where he owns numerous properties, but lives in the nation’s capital. He is paid generous living expenses when in Canberra. He pays rent to his wife, who owns the house he stays in. Good for some.

So our politicians love a housing bubble. But is it a bubble?

Real estate spruikers say the reason prices are high is that there is a housing shortage. Or that demand from investors – looking at you China – is super strong.

Others say that we will have a surplus in supply when all the projects under construction are complete. Certainly, here in Sydney, you are barely ever out of sight of a construction crane.

In my opinion Australian real estate is in an unprecedented bubble, in no small part due to a tax system that encourages property speculation. But we will only know for sure when looking in the rear view mirror. Read more here and here.

Last Word

Bubble or not, what has changed dramatically in recent years is the composition of buyers. A few years ago owner occupiers comprised the vast majority of buyers. Now, well over 50% are investors, of which, perhaps, one third are off shore buyers.

This means that the pool of properties available for rent will continue to increase. It is entirely possible that rents will have to fall to attract tenants. Not only will this eviscerate returns, it will also put downward pressure on house prices.

25 June 2015 Markets