Is the Australian Housing Market starting to cool?

In 2011, as the mining boom ended, the RBA cut interest rates, which brought more home buyers back into the market. This in turn, caused property prices to rise, encouraging construction and helping to offset the mining investment slump. But…does this mean there is a property bubble?

At a big picture level, Australian property is certainly expensive. Housing supply has been constrained and household debt is high, although we haven’t seen anything even close to the deterioration in lending standards of other countries. Subsequently, bad debts and arrears remain low, and while loan size has increased, Aussies are still focussed on cutting their debt as soon as they get it. Also, Sydney and Melbourne may appear to have characteristics of a bubble, but the rest of the country does not, hence we can’t generalise.

Our assessment overall though, is that the national property market is cooling. Lending to property investors has fallen and auction clearance rates have slowed, although again, this slowdown is fairly concentrated in Sydney and Melbourne.
Nationwide, we probably won’t see price falls until the RBA start to raise interest rates, and this isn’t likely before 2017. Even then, falls in values are likely to only be around 5% or 10%.
So what does all this mean for property investors? First, remember that over the long term, residential property is cyclical, and has provided a similar return to that of Aussie shares. However, it does look the less attractive option for income, and is more suited to an investor seeking capital growth.

In short, there is always a role for residential property in investor portfolios, but it does carry risks, and investors should diversify into domestic and international shares to provide an offset should Australian housing under-perform.