The number one question everyone is asking…when is this bubble going to burst?

But here is one from left field; when is a property bubble, not a property bubble?

Property is a unique asset class in that individual properties are not valued everyday week or month, unlike share markets. Therefore, we do not see the fluctuations that are occurring based on weekly sale prices and auction clearance rates, let alone reserve bank comments on interest rates. As we know, a simple AFR headline can impact the share market, day by day.

The average home price rose by 8.1% in the previous 12 months, according to CoreLogic. That said, between March 2018 and March 2021, median home values rose 5.7% (Sydney) and 2.2% (Melbourne) respectively.

What is driving the current property market?

• A lack of property supply. While prices are rising (great for sellers), they also need to re-purchase, usually in a higher price bracket.
• FOMO (fear of missing out), otherwise known as the ‘herd mentality.’ There is a genuine fear that prices will continue to become even more unattainable.
• The government gave away free cash during 2020, and further incentives are being provided to renovate/build new homes.
• Low interest rates are making borrowing, dirt cheap!

What will be the catalyst to slow the property market?

Perhaps nothing? Rising interest rates occur to slow a healthy economy (inflation) which would indicate the rising wealth of consumers and as the graph below illustrates, property markets can still grow with rising interest rates.

I do get a sense that interest rates will eventually put the brakes on the property market. Although the banks do their due diligence on affordability at higher rates, I fear that many borrowers will feel the pinch when rates begin to rise.

I also get a sense that rates will rise sooner than currently predicted in 2023. Furthermore, the banks can begin to adjust their home loan rates sooner than the RBA can raise the cash rate.

Is now the time to buy?

Long-term investors shouldn’t necessarily be concerned with when they buy in the cycle. However, unlike share investing, where it’s easy to sell or buy smaller parcels depending on market conditions, property is a lumpy asset. Property owners can’t simply add a new bedroom at a lower price if the market falls.

To best answer this question, it depends on the purpose of the property purchase:

Family Home

A family home should not really be considered an Investment. The interest is not deductible and the intention is to enjoy the property as a lifestyle asset. Therefore, one should be more concerned with their ability to make the repayments at long-term average interest rates (think something with a 7 in front of it!), as opposed to where we are in the property cycle.

Investment Properties

For investment purposes, I would advise looking for an asset with value add possibilities. Therefore, even when purchasing at the top end of any cycle, you can continue adding value to the asset. Think worst home on the best street, and/or a property that can be renovated without making structural changes requiring arduous council approvals (something I have just gone through myself).

Holiday Homes

Holiday homes are a mixture of the above. Typically they are for lifestyle purposes but commonly rented out which makes the asset an investment.

Again, one should be less concerned with the property cycle and more concerned with the ability to make interest rate payments along with the quality of the asset for letting purposes. Something with value-add potential never hurts either.