I am often staggered by the property bubble debate and how many believe the answer is black or white, we either definitely do or definitely don’t have one. The debate is a futile exercise, however, as it fails to recognise there are different sub-markets at play at any one time. Those who are arguing a bubble exists are just as correct as those who think there is no bubble. Often they are looking at different indicators that provide a different perspective of a completely different area of the market.
For example, for many years now we have had drummed into us by international economists that there must be a property bubble in Australia because the median price of property is a such and such multiple of the average wage. This is an extremely general statement and while technically true in an economist’s hands, virtually irrelevant to a person who earns five or 10 times the average. It is even less relevant to a home owner who bought a house back in the 1980s and only owes $12,768.
Now we are starting to hear the argument that because auction clearance rates are on the up this is a clear sign of no bubble. But there is a massive hole in this point because according to the REIV 70% to 80% of property is not sold at auction in Victoria, and the percentage of property sold by private treaty is even higher in other states.
However, clearance rates are a good indicator of a very small sector of the market where auctions are prevalent, and they do give great insight into where the market will find its feet first.
Confidence returns to the safe and more established markets first. These are markets that tend to have low levels of debt and lots of equity. For example, property that was purchased more than 20 years ago has quadrupled in value. A property purchased for $200,000 is now worth $800,000. Even if the owner did not pay off a single dollar of debt he or she would have $600,000 worth of equity. It is this equity that allows confidence to bloom earlier than the rest of the market.