Is this a property bubble?

An asset bubble is generally accompanied by two key factors, overvaluation and excessive credit.

The median house price in Australia is currently $546,500. This figure is 5.5 times the value of the median household income. By contrast, in the United States the multiple is 3.4 times. Based on this metric it would appear that the IMF’s claims ring true.

The graph below shows the value of real property prices since the early 1900s to today. 

Source: ABS, REIA, Global Financial Data, AMP Capital Investors

As you can see, property prices are currently 13 per cent above their long term trend. Based on this data, there is little doubt that Australian property prices are overvalued.

The other key aspect of an asset bubble is excessive credit.

Prior to the Global Financial Crisis (GFC), banks were giving away NINJA loans. Essentially a NINJA loan meant that you could borrow to buy a house, even if you had no Job, no income and no assets (hence NINJA). Fortunately those days are behind us, with banks and other lenders tightening up their credit lending practices.

Prior to the GFC, housing-related credit growth was increasing at 20 per cent plus each year. In comparison, over the 12 months to April 2014, housing credit growth increased a more modest 6.1 per cent. We would hardly call this excessive credit growth.

So, does the above information indicate Australia is in a property bubble?

We don’t think so.

While it is clear property prices are overvalued, there is little evidence to support a rush on credit to get into the market. If anything, we are seeing potential buyers withdraw as they wait to see what prices do over the coming months.

Although we will eventually see property prices revert to their long term trend, given they are only 13 per cent above trend, a reversion would hardly spell a crash in the property market.

Instead of a property crash, we expect growth in house prices to slow over the coming months. This slowdown may be further assisted with a rise in interest rates as economic conditions improve over the remainder of 2014.