Bubble not close to bursting
IT’S one of the most recurrent of property misconceptions — fearful claims of a bubble when property markets experience strong growth. But the truth is, not only is Melbourne bubblefree, but the upswing has only just begun for many subsectors of the established residential property. Here’s why.
By definition, a bubble presupposes property values are over inflated and a correction is imminent. While bubbles can occur from time to time — and let’s not confuse this with economic downturn or correction — they don’t typically affect all property types simultaneously. The assumption all property is overinflated fails to recognise not all property performs the same, with each subsector and individual property subject to unique drivers.
This is obvious when we compare the vastly different performance of Australia’s capital cities, but unfortunately seemingly less poignant when discussing capital city performance in isolation. So, let’s waylay the misinformation and get to the heart of matter.
But first, a caveat. The following applies to Melbourne’s established property markets, not new or off-the-plan properties. We’re talking generally about established property in greater Melbourne, particularly the inner and middle-ring suburbs.
Now, for the facts. Melbourne’s established residential property market is performing strongly overall, with year-to-date auction clearance rates at 78 per cent — a significant increase from average clearance rates in 2014 (71 per cent), 2013 (70 per cent) and 2012 (61 per cent).
History shows capital growth occurs when auction clearance rates are at or above 65 per cent, so it’s no surprise prices are on the rise. In fact, statistics demonstrate current market performance is well above the long-term average of 6.3 per cent compound capital growth per annum, growing at an estimated rate of 10 per cent per annum. But, how far can property prices rise?
This can be answered by analysing past market performance. The current upswing began in September 2012, with prices rising 16.9 per cent in the two and a half years to March 2015. This marks the fourth period of growth for Melbourne in the last two decades. There was the growth period from December 2008 to June 2010 in which the market
grew by 29 per cent; the period from September 2005 to March 2008 in which the market grew by 36 per cent; and, the period from September 1996 to December 2003 in which the market grew 142 per cent.
During this time there’s also been corrections — not a bubble burst. The most recent downturn was during the GFC, from June 2009 to September 2012 in which the local market fell 7 per cent; then there was March 2008 to December 2009 in which markets fell 4 per cent, and finally December 2003 to September 2005 in which markets fell 10 per cent. What’s clear is not only are the downswings less frequent, but they’re shorter in duration, experiencing modest price falls.
The data demonstrates the cyclic nature of property markets, and reveals Melbourne’s upswing is far from over. What’s driving the market and what are the risks?
First, there’s lending affordability. This has led to a growing wave of homebuyers and investors entering the market. Naysayers believe mortgage holders are too highly leveraged and an increase to interest rates would result in catastrophic impact to markets. While it’s true the average mortgage is larger today than before, current interest rates are seeing existing borrowers reduce their debt levels faster.
Of course, if interest rates rise, overleveraged property owners may experience pressure to sell. But, with interest rates used to manage economic stability nationally, they aren’t likely to rise dramatically anytime soon.
Lower interest rates also mean the funding gap between mortgage repayments and rental yields have fallen, captivating interest from the investor market.
Then there’s supply versus demand. There’s a supply shortage of established property in Melbourne’s inner and middle-ring suburbs, particularly family homes. Couple this with the fact Melbourne’s population is growing faster than any other city and you have an imbalance resulting in strong competition and property price growth.
It’s important to recognise property growth is cyclic, subject to peaks and troughs, and minor reverberations. So property investment is best viewed as a long-term strategy.
And not all property performs the same. Although most established property experiences growth during an upswing, growth trajectory is unique to each property, reinforcing the importance of strategic selection.
Greville Pabst is WBP Property Group chief executive