Australian housing market too complex to make sweeping bubble statements: Margaret Lomas

I love it when debates around whether there is a property bubble begin, and so I particularly enjoyed reading about the latest debate, right here on Property Observer. 

This one pitted Terry Ryder, whose job is to examine property markets and their movements at their most fundamental, determining the potential impact of future, planned activity on micro property markets, against Phillip Soos, a master’s research student and employed researcher at Deakin University.

People always take sides, and it comes down to which side of the fence you sit on.  In this particular debate, the two sides have completely different backgrounds, experience and perspectives and use entirely different methods to assess and forecast the property market.

Terry uses factual data to establish whether or not there is likely to be property price growth in the future, along with issues of housing affordability, supply and demand and general price movements.  From what I can see he looks at areas in their individuality, considers the micro-economic situation in its present form and then overlays the information he has about what’s happening next in that area.  When this is all measured against the supply factor, I think he is saying that strong, local area economic growth, where there is an undersupply of property, has to mean that property in that area will go up.

Phillip uses some pretty impressive data, some great-looking graphs and some economic theory to predict a bubble.  From what I can see, he overlays this theory and graph drawing upon the Australian property landscape and from that he draws the conclusion we are in a bubble.  In addition, he quotes Minsky’s financial instability hypothesis, one that says that where income flows cover neither principal nor interest repayments the result is an asset bubble, to assert that there is, in fact, a bubble.

I like economic theory as much as the next guy, and I definitely use economic factors on which to base my own prognosis of where I think a property market is headed.  It’s not an exact science, but there is a good degree of empirical evidence to show that strong underlying economic factors, such as decreasing unemployment, increasing median household income and an improvement in gross regional product can often lead to property price growth.

However, I can’t help but get an uncomfortable squirming feeling when I see someone who devotes their life’s work to studying property markets at the most micro of level debating against someone who uses economic theory to pronounce to the property investing world that there is a bubble.

If my two cents worth means anything, here it is:  If we live in a country where there is such a vast difference in property prices, where we have areas that are ramping up and those that are plateauing or falling in value, where we have two-speed economies (Queensland) and varying degrees of local government activity, infrastructure development and employment opportunities, how can we possibly rely on a single, economic projection of a single property market to establish if there is a bubble or not?