bubble

Well we thought it was time to put our builder’s perspective on the so called “Housing Bubble”

First things first – what really is a Bubble? To our surprise, we couldn’t find an “official” definition. But our understanding is that a bubble occurs when house prices rise irrationally, backed by artificial demand. The supply then cannot keep pace, and the prices rise. In the current market this “artificial” demand is set to be based on speculative investments because of low interest rates, demand from overseas buyers etc.

The key problem here is that you can only definitively label it a bubble, after the “bubble” has been burst. In the words of JM Keynes: “Markets can remain irrational longer than you can remain solvent.” The alternative view is that this is part of a Boom cycle, and people left watching for a “bubble burst” are left facing never ending price rises.

The reason there is so much talk about price rises is that there has been an average 22% price rise in the Melbourne median prices in the last 3 years. According to the REIV, the median price in Metro Melbourne is $688,000, while the median price in the inner suburbs is $1,164,500

So back to the causes of this boom in demand. While the dramatic rise in overseas buyers and demand from investors are factors, other reasons for the price rise being mentioned is the lack of supply and planning regulations. Comparing our current market to the GFC and the sub-prime crisis, is a bit misleading. The sub-prime crisis was due to lack of regulation, where mortgages were offered to all and sundry, without deposits, and the ability to walk away from a mortgage if it became all too much. That definitely does not seem to be the case here in Melbourne.

The Bubble effect also promises a drastic decrease in prices if the “bubble” were to burst. That, to my knowledge, has never been the case in Melbourne. A gentle, but brief correction does occur from time to time. And also the type of investors being generally blamed, do often have the resources to out ride these corrections, and project a longer term view.

A quick glance through history may prove the point that the inner suburbs, or the “in demand” suburbs” would always have been unaffordable to all, except the top percentage of earners. This is the way it has always worked, and all over the world. Today’s fringe suburb, could be the “in-demand” location of the future, and what seems cheap now, will have been a bargain in a few years’ time.

So, are we calling it a Bubble or a Boom? Unfortunately we at InnoHomes are not qualified to call it either way. But our homes do not just meet our client’s financial needs, but also their physical, social and emotional requirements. Be comfortable in your purchase, if it ticks all these boxes.

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