Australian housing bubble and ceteris paribus – who to believe?

Housing bubble Australia

Housing bubble in Australia - should we be concerned?

At any one time, there are so many conflicting articles and messages in the media about whether there is an impending housing bubble in the Australian property markets that many investors and home owners just scratch their heads and wonder who’s advice to follow.

Whether it’s property developers, bankers, real estate agents, so-called “property experts” and the whole gamut of financial and market analysts, each of these parties have their own perspectives and vested interests in how the property markets perform and their advice can sometimes be skewed accordingly. The housing bubble in Australia is predicated upon strong upward trend in home prices despite so many rate rises over the last 20 months. On the other hand, there are some who steadfastly hold that house prices are in no way overvalued. Either way, there are conflicting sets of data to prove both scenarios.

For the bullish investors, the current shortage of housing stock in the Australian markets have always been seen as a guarantee for ever-increasing property prices. However, this can be a very dangerous assumption. In my undergraduate economics class, we were told that if supply decreased then, theoretically, prices will increase. The key assumption here is ceteris paribus, that is ‘all other things being equal’. Moving from lecture hall into the real world, we soon find out that in reality, there is a multitude of factors which are constantly changing.

Housing bubble Australia 2

Factors such as demand, personal tastes, housing trends, government policy, significant world events and natural disasters cannot be easily factored into an economic equation to provide an accurate account of property markets. Sadly, and in most cases, it is this ceteris paribus assumption that is conveniently ignored by punters, property spruikers and those who more often than not take an aggressive stance about our markets although their view may be accurate at certain points in the property cycle. This simplistic view that a shortage in supply will spur on price increases can, in some cases, brew the so-called housing bubble as already evidenced in some countries.

As I write this article, we are in the midst of a two-speed economy where the resources and mining sectors are powering ahead whilst the retail, manufacturing, tourism and education sectors are sputtering. The recent announcement that Top Ryde City Shopping Centre in Ryde has been placed in receivership due to debts of $700 million should serve as sober reminder that not all is well in Australia’s so-called “solid economy”. Consumer sentiment and retail results last Christmas show that people are still wary and uncertain about what 2011 will hold for the property markets.

Ill-informed anaylsis is nothing new, but at its worst, it is not only wrong but is also misleading, and can even lead to wars being fought among countries which would surely burst any bubble, property market or otherwise. Next time you hear or read any forecast, analysis or commentary about our property markets, it might help to put into perspective who is the presenter to ascertain any vested interest and if the ceteris paribus assumption has been considered if at all.

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