Speculations about a housing bubble forming have been doing its rounds in the Australian real estate market recently and have taken the market by a storm. The reason being pretty understandable – housing market bubbles are typically more jeopardous than those in stock markets – and have often been covered extensively in the media. International Monetary Fund’s World Economic Outlook of 2003 interpreted the impact of housing price busts on the national economy. It interpreted how these busts, though not as frequent as the stock market busts, last longer and hit the economy stronger. The bust period as well as output losses are generally two times the magnitudes of stock market busts and output losses.

However, Australian real estate property investors need not fear the risk of a housing bubble. Investors, industry experts, and independent researches as well as surveys all point to the fact that chances of the economic bubble forming are quite low.

Research about the housing bubble

City Research published a report recently rejecting the possibility of formation of any housing bubble. It forecasted a 3% rise in house prices over March 2014 and then a possible 2% correction run – an aftermath of the reduced Australian dollar, a weaker Chinese economy, and lower Chinese migration to Australia. In the process, City Research also took into consideration the worst that could happen. Say the dollar remained high, Chinese growth rate was above 10% and cash rate dropped to 2% by next March. The situation would still not start a housing bubble since the prices would still rise by 5% as compared to the pinnacle it had in June 2010, or rise by 8% from the current value.

On similar lines Saul Eslake, the chief economist at Bank of America Merrill Lynch agrees and says he is not agitated by this news of another housing bubble risk in Australia. He reasons out that first home buyers would continue to be extra cautious in entering the market owing to their doubtfulness about housing risks and job prospects. Non first home buyers, on the other hand, would refrain from buying again before having settled their previous loans – limiting the house buying activities from both these groups.

Besides, he feels that The Reserve Bank of Australia and Australian Prudential Regulation Authority could device the use of appropriate macro prudential tools to keep in check any possibility of a housing bubble due to low interest rates. Countries like Canada and New Zealand he says, have adopted similar strategies successfully and Australia could do the same to contravene all housing bubble situations.