Bubbling house prices – where to from here?

Reports of record-breaking sale prices, high auction clearance rates and Glenn Stevens, governor of the Reserve Bank of Australia (RBA), talking of 'crazy' house prices has greatly inflated the housing bubble debate. House prices are one of the most popular economic topics because many people have an opinion - either they are renting and waiting to buy or they have already bought, usually as a co-owner with a bank. In both cases people are likely to have a view on the outlook for house prices. In September 2013, the RBA said that there was no evidence of a house price bubble but that view has now changed because house prices in certain parts of Sydney have risen sharply. Let's delve into the numbers.

What are the facts?

When we look at house prices at a national level the bubble story begins to wobble. The Australian Bureau of Statistics (ABS) regularly reports average residential dwelling prices, including units and houses, at the state and national level. In the period between March 2012 and March 2015, the average house price in Australia rose by 18 per cent, certainly well above the rate of inflation but not the level of growth that would be needed to describe it as a bubble. The picture becomes more interesting when we look at how different states have performed over the same period. In New South Wales, prices have risen by 30 per cent, in Western Australia they are up by 11 per cent, while Tasmania only managed growth of 1.6 per cent. This diversity in the growth of house prices points to low interest rates not being the dominant factor at work, instead, job availability and wage growth may play more of a role. The chart below shows how price growth has varied across the nation over the last three years.

Change in average house prices – March 2012 to March 2015

house prices

Source: ABS.gov.au. 6416.0 - Residential Property Price Indexes: Eight Capital Cities, Mar 2015 – Table 6

What is the outlook?

The housing market behaves in the same way as any market, prices move in a cycle and from time to time overshoot and undershoot what could be considered a 'reasonable' price. The rate of recent price growth in certain pockets of the housing market, notably in parts of Sydney, indicates that prices may be overshooting and therefore we could expect price growth to moderate or even turn negative in those areas. The broader national picture is different as price growth has varied considerably, driven more by local demand and supply factors rather than low interest rates.