Bubble in House Market, Australia ?

The following information is not to be taken as professional advise, but has been posted so that we may have a better understanding of the word Bubble that appears in media reports now and again, and what happens during this cycle.

Is there a bubble in our real estate market ? There are many that believe there is and others that believe there isn’t.

So lets first start by trying to understand what is a bubble in real estate terms. We can assume that critics will use the term bubble to grab our attention, Reserve Banks will use the term to alarm us and Governments will tell us they will allow the rules of supply and demand to come into play.

As we enter another cycle of the residential real estate market, this is a cycle that supersedes the previous crash     ( bubble ), we have the general public on a spending spree,  they now believe the market is at its lowest and that now is the time to begin buying again, this is usually fueled by low interest rates and Government incentives to commence spending and encourage the public back into the housing market, this may sound familiar. Over a period of time as the market heats up the value of real estate will inflate, this usually takes a duration of between 18  to 30 months before the alarm bells start ringing. By now the general public realise that they are in a Hot Property Market, a new Property Bubble,home values are at new record highs.

So if we have this make believe bubble blow up what will happen to the real estate market today ?  firstly we need to think about this in detail with out over complicating the topic, we need to realise that the Australian market has its own fundamentals and is in its own cycle such as currently today : low supply of stock, historically low interest rates and international buyers now entering and competing in the local market.

We are also now aware that real estate is now no longer viewed just as a family home but as a commodity, a financial asset that people utilise to grow their wealth, a new player in the market, they have been around for a while but a lot more noticeable of late, they are also fueling the so called bubble. So by now we have a better understanding of what is a bubble and how it is created, but what happens if it bursts, over heats and crashes ?.

We need to look at historical recoveries, for they are the only evidence we can utilise as guidance for future growth and recovery. If we look closely, a bubble in the real estate market that bursts and crashes is no different to a Nations financial recession. Recessions are a term that can confuse, scare people and the markets but they are a necessity as they will allow us to have a correction in the market. As we go through the motions of recovering from a burst real estate market, the next so called bubble will have home prices at new record highs, and the new cycle commences.

So what is the conclusion and how can we avoid financial disaster ?, discuss your financial needs with your Accountant/Financial planner first. The following will differ as we all have different needs and our circumstances are all different.

Firstly we should try to avoid buying when the market is hot and look at buying when the market is subdued to stable, there will be plenty of opportunities, we need to be patient. Never feel pressured or rush in and buy from fear of you thinking you will miss out on your dream home.

Utilise the services of a local real estate expert, do not be afraid to ask questions, especially when it comes to asking why are the owners asking this listed price.

Ask the real estate agent for the reasoning and how they arrived at the asking price, you may be amazed with the response. If you are not satisfied with the real estate agents reply you should be cautious with how you approach with purchasing.

Remember if you are buying a home when the market is hot, that is when it is very active chances are that recent sales will reflect inflated values, and this is what we are trying to avoid, hence comparable sales in the area will be higher during this cycle and may not necessarily reflect the true value of the home.

The above method is known as comparable sales, this is when valuers look at recent sales in a particular area. They will look at the attributions of the land and the improvements. When comparable sales are not available or recent sales are not a good guide, valuers will use other methods to arrive at a value, bearing in mind values are applied after a sale has taken place. If you require a valuation prior to buying, contact a Licensed Valuer that works in the area that you are looking at buying in and discuss your requirements in relation to the reason for the value.

Finally this blog is only here to assist people in understanding what happens and what is a Property Bubble as referred by some parties, the above information should not be taken in any way or form as advise on how to buy a home.

If you require legal advise talk to your Solicitor, if you need financial advice talk to your Accountant/Financial Planner, for Finance talk to your Banker/Mortgage Broker and for real estate matters make sure that the agent you are dealing with is a committed licensed Professional, they should posses knowledge and experience of the local market, but above all there needs to be respect, trust and understanding.

The above practice can apply cautiously to all real estate markets in any part of the world.

Regards

George Serghis

Property Consultant

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