Homeowners, get ready the Australian property bubble could burst in 2017

Friday 07 April 2017

Article by Roisin Kelly-Goldsmith

Want to know one of the best parts about working for a financial comparison website? Having the inside scoop on what’s happening in the property world.

From the moment APRA introduced tougher lending restrictions for high risk borrowers last week, property bubble talk has been doing the rounds here at Mozo.

Add to that the fact the banks and mortgage broker industry are being monitored now more than ever by ASIC, and we’re definitely not alone in wondering where the Australian housing market is heading.

Are we in a property bubble and if we are, when will it burst?

Mozo’s Product Data Manager, Peter Marshall weighs in on the future of the housing industry and why the bubble could pop as early as October. Here’s a recap of our conversation below...

Is there a bubble?

Q: As you know Peter, the housing bubble debate is heating up again. ABC presenter, Leigh Sales, interviewed former Premier of Queensland Anna Bligh this week, who is now CEO of the Australian Bankers’ Association, to get the banking industry’s perspective on the issue. Bligh told Sales that she’s not hearing from the banks that a bubble burst is in the pipeline. So taking stock of her comment, if the banks can’t see there is a property bubble then where’s the proof?

A: Well you only need to look at the housing affordability problem we have in Australia to see that something’s seriously wrong. Only yesterday a report came out by HSBC that showed Australia ranked among the worst in the world for young home buyers. Years ago, a roof over your head cost four or five times your salary, but the latest research from Demographia has found that the median price for a Sydney property will set you back 12.2 times the median salary today.

The situation is not that different in Melbourne, and in my opinion these two cities are floating in one of the biggest housing bubbles ever. And the longer it takes for the industry to acknowledge it, the more trouble we’ll find ourselves in.

Rate rises could be the pin that pops them

Q: According to economists, all it takes to blow up a housing bubble is a drop in investor sentiment, a few interest rate hikes and noticeable increases in unemployment levels. What makes you think we’re on the brink of a housing bubble disaster?

A: Full disclosure, I’m not a property investor. I do hold the opinion that the global financial crisis back in 2008 left us with a false sense of security because we didn’t take the hit. Since then property prices have spiralled, and what’s left of the government surplus won’t be enough to clean up the mess when it all goes south.

RBA figures suggest that the unemployment rate is 5.9% of the population, but we don’t know what the future holds for the services industry. Here’s a scary thought - today the mining industry accounts for just 6% of employment, compared to the services industry which makes up 59% of all jobs. When you consider the mining industry made up such a large part of our economy just five years ago, any changes to the services industry could have a catastrophic effect on employment.

Now if we look at the cash rate, a few hikes could indeed be a possibility. If the Reserve Bank does decide to hike the cash rate in 2017, I expect it will be a some time towards the end of the year. So for all these reasons, the housing bubble in Australia could burst as soon as October. Historically speaking, that’s when investors get spooked and markets crash.

Q: Let’s say house prices plunge in Sydney and Melbourne. What’s the worst case scenario for everyday homeowners in these capital cities?

A: Homeowners wouldn’t have the ability to sell their homes for as much as they bought them for, which would result in leftover mortgage debt. Mortgage defaults would become a problem and we’d face a similar economic crisis that happened in other countries back in 2008. Like I said before, we don’t hold the crystal ball, however I would advise homeowners to prepare for storms ahead.

Peter’s tips for protecting yourself from a property bubble burst

1. Watch where home loan rates are going. If you’re not happy with your mortgage rate, say no thanks to your lender and opt for a lower rate. The lowest variable rate on our database is 3.39%.

2. Don’t bite off more than you can chew. If you’re in the market to take your first step on the property ladder, buy within your means. To find out how much you could potentially borrow, use our mortgage calculator.

3. Make full use of your offset account. Already committed to a large mortgage? Put aside as much as you can into your offset account. This means you’ll be building up funds in addition to your monthly home loan repayments. Hopefully you won’t have to access those funds, but it’s a good emergency planning strategy.

Curious to know how offset accounts work? Watch our video on the nifty mortgage feature here.

Home loan tips