Will The Property Bubble Burst?

You would have to be living under a rock to not know that property in Melbourne and Sydney is very expensive and that houses and units in other major centres are not very affordable either. That’s not news. What is news is the recent talk about the property bubble and whether continual price rises are a good thing. As with any argument, there are two sides to it.

Firstly the case for. Most property investors will want the value of their investment to go up. The average landlord is negatively geared, that is they pay out more in maintenance costs and interest on the property loan than they are receiving from their tenants in rent. They rely on the increase in the property’s value to rise so that they can make money out of it.

The owner occupiers (people who live in their own homes) like to see an increase in the value of their homes but they don’t really need to. A rise in the property’s worth will make them feel better and will mean they have more equity in the home. This allows the homeowner to borrow more money against the property to spend on a new car, holiday or to invest. Borrowing for consumables that don’t rise in value is something I am very strongly opposed to, while borrowing for investment carries with it significant risk.

Now the case against. Anyone who does not own property sees the home-owning boat sail further and further away every time prices go up. It is simply not sustainable for house prices to continue to rise at a rate faster than the incomes that go towards paying for those houses. Eventually it has to get to the point where only those on the highest incomes will be able to afford to buy. As those people in society on the lower end of the income scales are so highly represented in younger generations, Australia is coming to terms with growing numbers of people who believe they will never own their own home.

None of this is new, and yes, I realise I’m preaching to the converted. But I reckon it’s a kick in the guts for generation Y to hear very highly paid politicians talking about the benefits of rising property prices while seemingly ignoring the people who are paying for it.

The only consolation is that one day it will have to come back to equilibrium. When the bubble does burst, those who are currently saving up a deposit will be the winners.

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