What causes a property bubble?
There are signs that a property bubble is brewing in Sydney caused by a number of factors seen in our Sydney property forecast.
Investment bubbles are commonly described when the market become overzealous in anticipating higher future asset value and willing to pay any price to get their hands on the property today. We can see signs of risk in the stock market form our tech bubble post
This result in runway asset values because the buyer hopes to offload the asset at an even higher price in the future. The key driver of property bubble is fear of missing out and the greed of hoping continual price increases going forever.
Note it is important to know that future price is an assumption only. A bubble bursts when the materialized reality does not work out to what the speculator thought it would with original buyers holding onto over valued asset.
This means the bar at each respective period is the housing increase over the last 12 months. Everyone pay attention to price changes because unlike commercial property investments where investors focus on the income. Most of the return from investing in residential properties are from capital gains.
Sydney Apartment bubble
Previously it was standard practice for developers to pre sell a housing project up to 80% before the bank will release the funds for construction.
However foreign entrance in the market means construction can commence with limited pre sale or directly in the oversea markets. The goal is to sell the projects in foreign markets where Australia residential apartment contain a “safe haven” premium.
The problem arises when construction supply becomes out of step with apartment demand which we forecast will occur in the medium just as we are seeing in Brisbane Fortitude Valley and Melbourne CBD. Then it is up to the market to correct it self. Increase upcoming supply coupled with potential settlement risk and pullback in residential investment lending means that Sydney prices will be increasingly coming under pressure.
After all we have plenty of historical and ongoing examples of excess real estate markets which act as indicator if there is a Sydney Housing Bubble.