Will the bubble burst in Australia?

“Median house prices in both Sydney and Melbourne will reach a new record high in 2020.”

Photo by Matt Howard and Micheal Hold on Unsplash

William Young, Executive Director (Head of Australia), COS Capital answers some burning questions on Australia.

Q: What is the impact of the bushfires on the housing market?

At present, it is estimated that around 6,000 buildings have been destroyed by the bush fires including around 2,500 homes, so the current impacts to the housing market do not appear to be material. However, we envisage that as rebuilding efforts start that it will increase construction costs especially given that building and construction resources are already strained in New South Wales and Victoria with the large number of ongoing infrastructure projects. The increase in construction costs will lead to price increases for new housing stock.

Q: When will the bubble burst in Australia’s frothy market?

In 2019, with more political stability of the election results, three interest rate drops by the Reserve Bank of Australia (RBA) coupled with a drop in development approvals and housing starts over the past few years led to a solid recovery of the residential markets starting with Sydney and Melbourne by an average of 10% – 12% in the second half of the year. In the most recent February results published by Corelogic, it shows continued growth into 2020 with other cities showing some growth as well, due in part to affordability in Sydney and Melbourne.

The forecast (pre-Covid-19) is that the median house prices in both Sydney and Melbourne will reach a new record high in 2020. With the forecast of an interest rate drop by the RBA, consistent population growth (at least pre-Covid-19), decreasing unemployment, certainly give support to this, at least from a medium to long term perspective. So, a bubble burst does not seem likely at this stage.

However, I feel that and I have commented on this pre-Covid-19, 2020 may see a dip as a false sense of optimism may lead to oversupply in the market as developers rush to re-launch their projects. In addition to this, some buyers may find that despite a reduction in interest rates, obtaining bank financing is not as easy as they had envisaged.

Another point to note is that although a reducing unemployment rate us reported, the participation rate is low and wages growth has been weak (which further impacts affordability) for quite some time now.

Lastly, with Covid-19 outbreak dampening sentiment, 2020 is looking to be a challenging year.

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