IS THERE A PROPERTY BUBBLE?

There has been a lot of talk lately about a property bubble and if/when it’s going to burst. I thought I might use this opportunity to explain what this all means.

As I’ve discussed in earlier posts, Australians are in love with property. Go to any BBQ and at least 5 people will be willing to tell you that ‘property doubles every ten years’ and ‘you need to have at least 3 investment properties’.

A bubble happens when investors’ enthusiasm for a particular type of investment outweighs the actual potential for return in that investment. In this case, the argument is that people are so enamoured with investment properties that they are buying them up without any reference to whether they will actually get a good return from them. As more and more people compete for the limited number of houses, the prices get driven up. As prices get driven up the investor needs a bigger return to offset the cost of the investment. This continues until prices are so high for the investment that returns don’t even come close to the costs of purchasing and maintaining the investment at which the investment bubble ‘bursts’.

The Sydney and some parts of the Melbourne market are often quoted as the most at risk markets. So much so that banks are starting to wind back investment loans to try and curb this action and prevent the bubble from bursting.

So is there a property bubble? I think that depends on where you are. There is fair argument to say that Sydney prices can’t continue the way they are but in Brisbane we are talking a whole different ball game.

What is more important is that your investments suit your goals and that they are appropriately diversified. I’m going to say it again, “PROPERTY DOES NOT DOUBLE EVERY TEN YEARS!”. You cannot assign this level of certainty to any investment market. If the entirety of your investment portfolio is in property, you are flying very close to the sun. Instead you should have a good number of diversified investment (think shares, bonds etc, as well as property) to ensure that a burst bubble isn’t going to ruin you financially.

Once again, if you have any questions about investing why not drop us a line? Our first consultation is always free.

About the author: Cara Brett

Cara Brett proudly heads up Bounce Financial - founded in 2014 after a successful, decade-long career in the financial services industry. Cara’s experience encompasses both the financial product and financial advice sides. This gives her a comprehensive and holistic knowledge of all facets of financial planning.