Are we in a Housing Bubble? Perth Metro Area Focused

jho

by J.Ho Dept. Economics & Property, Curtin University

Do you believe this is a bubble or not? If so, how or why?


Perth-City-pricesOverall, I do not believe that there is a bubble across the majority of the Perth Metropolitan housing market; however, I do believe that there are sub-markets within the Perth Metropolitan area which are experiencing bubbles. Some bubbles encompass an entire suburb and some in specific property types in a suburb, such as 1 or 2 bedroom units or apartments. Firstly, I would like to qualify that the bubbles we are referring to are probably caused by a significant drop from the previously strong demand for housing in those areas. The 12 to 36 months lag from planning changes to development construction and finally to completion of new supply makes predicting the market equilibrium a miraculous feat; therefore the high risk, and what used to be high return but more commonly now low return,  in real estate development. Supply created to meet the projected demand now became an over-supply and now blamed on the developers as optimistic exuberance. This however is nothing abnormal in real estate markets as the real estate market cycles do over-correct due to the lags.

APRA and major banks have also made finance more costly and harder to obtain with higher interest rates for owner occupiers, even higher with real estate investment loans and preferring a lower LVR; driving down demand further. In addition, increases in Land Tax in WA over the years may also deter some investors real estate acquisitions as a higher return needs to be achieved to attain a profit.  Some of these changes were brought into the market in the recent months or years and it would be cruel to say that developers should have known that the demand would diminish as this would have been hard to predict for most seasoned developers. Although there were indicators signifying a larger than expected downturn. The discussion on the long term benefits or detriment of these changes that affect housing is probably best left for another article.

One could probably identify potentially bubbly markets with the use of web based real estate marketing sites and searching for suburbs where there are unusually high number of properties for sale and for lease that is persistent over a considerable amount of time. The real problem for developers and property investors arise when the stock of properties that they have built or own cannot be rented out to offset holding costs; which could cause a significant drop in price in a sell off. If the sell off is trickled into the market, there may not be a significant drop in real prices at all.

The typical misconception is that a drop in median house price equates to a drop in real house prices for all housing within the precinct. A drop in median house price does not always equate to a drop in real house prices for all properties in the area as the median is a measure of midpoint between the highest and lowest prices within a range. A drop in median house price in a suburb could be the result of a high number of transaction within the suburb on houses below the previous median price; in this case higher density and more affordable housing. Again something which is quite normal in a subdued market.

Is this the best time to buying your first home? What considerations should one take into account?

Buying your first home comes down to need or want. If it is a necessity, the opportunity arrives for the right price and the buyer can afford the home; I could suggest that anytime could be a good time to buy a home. If you are aiming to venture into home ownership with the main aim of building some asset wealth, then the best time to buy your first home would be, much like a Captain Obvious joke – Buy just before a long and significant real price growth for the real estate you are purchasing. Based on current market conditions and in-line with mainstream research; significant real house price growth is a major determinant to a financial cost benefit analysis decision. The “Buy vs Rent Or Stay at home with Mom and Dad” decision is a subjective matter with no perfect answer and is based on a combination of personal preferences, financial circumstances, social status and expectations of growth in house prices. An understanding of Economics, Finance and Real Estate would prove advantageous.

Based on previous research I have completed with my colleagues (Assoc. Prof. Steven Rowley and Assoc. Prof. Greg Costello at Curtin University) and my opinions on current localised economic conditions in the Perth metro area, first home buyers in Perth taking into account the buy or rent decision should consider:

  1. Purchasing properties in centralised locations with strong fundamentals for long term sustainable demand of the property, for example near retail centres, public transportation and employment opportunity locations, within a reasonable distance from the CBD or activity centres.
  2. Purchasing properties types that will always be in demand and attractive across multiple buyer types for example 3 bedroom 2 bathroom properties where a small family, young couple or shared accommodations for housemates could be potential buyers or tenants.
  • Purchasing properties that are cheaper to wisely maximise government Duty exemption and grants, for example buying a home below the $430,000 where no stamp duty is payable at the moment and a FHOG of $3000 for an existing home or $10,000 for a ‘new’ home, that would require a lower rate of property price growth to achieve a financial benefit as compared to home purchased at $700,000.
  1. Objective of the first home across the mid or long term with considerations of the real estate to be
    • used as is,
    • converted into a rental property and possibly refinanced to purchase the next investment or home,
    • selling the first home to purchase an upgrade home,
    • develop first home for investment or owner occupier (or both); or any other possibilities
  2. Other basic considerations that one should consider could be
    • local council’s plans, budgets and developments for precinct,
    • safety and crime rate of the precinct,
    • statistical information such as Census information of the precinct,
    • composition of housing types and tenures,
    • future supply of new housing in the precinct such as building approvals in the precinct,
    • certainty of personal/household income,
    • career mobility requirements,
    • personal life goals or family unit dynamics,
    • future financial constraints,
    • possible refurbishment, extension, redevelopment of your property to meet your needs; and
    • always keep yourself informed, gain as much knowledge about real estate as possible, ask for and read all documents to know what you are signing, and seek reliable professional advice where required.

Housing Bubble 2015 – Expert Comments

christine

Comments By : Christine Williams

Email : christine.williams@smarterpropertyinvesting.com.au

Web : www.smarterpropertyinvesting.com.au

Phone : 1300 736 754

Do you believe this is a bubble or not ?

No I don’t. The reason why I don’t believe this is a bubble, is because it’s no different to any normal residential property cycle over the past 100yrs. There will always be boom and bust.

A “bubble” refers to the potential of property never going up in price again, but it will.

Housing BubbleIt relates back to Paul Keating’s “recession we have to have” and predictions that property had hit its peak.

We’ve been through the GFC and 9/11, each time with a prediction of a bubble due to the economic impacts, but it hasn’t happened.

And the reason why we won’t have subprime like the US or bust like Ireland is because of our mainstream 4 top banks, which are governed by APRA (top 4 are going through capital raising to meet new APRA regulations, which will strengthen them even further).

I believe the banks won’t go under and property owners won’t go under.

There is only a problem for prop owners if they overexpose themselves in the first place ie over buying on their cars, rushing out and filling their homes with new furniture on credit from Harvey Norman, having numerous flat screens etc  – when they’ve overextended, their cashflow hurts.

They may find themselves in crisis and need to sell their homes because of the situation they’ve put themselves in.

Credit policy in general is pulling the reins in.

Is there a boom?

Sydney and Melbourne are definitely going through a boom. It’s definitely a sellers’ market, but there are opportunities if you know where to look for them.

It’s all about knowing your numbers in the first place and covering them. I also expect interest rates will go up over the next couple of years, so that will need to be factored into people’s cashflows.

Buyers also need calculate in life changes (ie starting family, losing a job) and if they borrow with those factors in mind, everyone should be fine and stable.

 

Is this the best time to be buying your first home?

First Home Buyer
First Home Buyer

It really depends on what that first home is. If it’s your first investment, yes I would buy and then hold.

If it’s your first home, it’s a good time as interest rates at all time low.

If you can justify your figures by paying what a property is worth in a boom market, you need to understand the market will come down again. If you don’t have to sell within next two or three years, you’ll be fine.

I would advise people to buy with a view to holding for 10 years and they’ll get their money back and more. If they have the money for a deposit and the bank is willing to lend to them, they’ll be fine.

Understand they’ll have to hold a lot longer because they’re holding in the boom. Otherwise, an alternative is to become a ‘rentvestor’ – someone who buys in an area where they don’t want to live in, then rent in their ideal locality. The equity they build up through their investment will help them buy their own home in the future.