Over the years, bubbles have come and gone. We’ve already had two bubbles burst in the 21st century – the dot.com bubble in 2000 and the property bubble in the US in 2007.
It can happen in any asset class – property, dot.com shares and even tulips!
Indeed the very first economic bubble was when tulip mania swept the Netherlands back in the 17th century, pushing the price of a single bulb up to the equivalent of ten times the annual income of a skilled craftsman.
What is a ‘Bubble’?
Bubbles happen in an economy when people get caught up in a frenzy to get into a market regardless of the logic. Or to put it more technically, bubbles occur when large sums of money flow into the market for an asset and push up prices in a way that is not justified by the underlying fundamentals.
Can it happen here?
According to Aussie’s John Symond, Victorian property prices grew 19 per cent in Melbourne and 11 per cent in Sydney last year. As a result, he says if this trend were to continue growth, it could lead to a boom/bust mentality which is “the worst thing you can have”.
But most market watchers argue that while demand continues to outstrip supply for property in Australia, the underlying fundamentals for price growth is there.
That was not the case in the US where supply was growing at a faster rate than demand, fuelled by a belief among people who should never have been borrowing in the first place that prices would never fall.
“In Australia, although prices have been rising, there is good reason as demand has been rising much faster than the rate of supply,” says Saul Eslake, economist with the Grattan Institute.
Moves by the Reserve Bank to raise interest rates over time should also put a brake on demand and help to stop any housing bubble developing in Australia.
Figures from Australian Property Monitors showed that the national median house price rose 3.1 per cent in the March quarter, and while this takes prices to record levels, it is down on the 4.8 per cent in the fourth quarter of 2009.
Residex also found that not all markets were going gangbusters. According to Residex’ John Edwards, Melbourne was the only city in the March quarter that recorded across-the-board growth, with all other cities showing suburbs where prices retreated.
“In Brisbane, for instance, 53 per cent of total suburbs fell in value and of those properties, 83 per cent were in the lowest quartile,” says Edwards.
But Melbourne is being viewed as a potential problem. Angie Zigomanis of BIS Shrapnel says Australia in general is not experiencing a property bubble although “there is a risk Melbourne may be approaching one”.
What’s ‘healthy’ growth?
Clearly double-digit growth cannot be sustained forever and hopefully higher interest rates will help keep a lid on prices.
“We need orderly gradual rises,” says Symond. “I’d like to see 4 to 5 per cent growth a year so that you have 30 to 40 per cent growth over a decade. That’s a healthy market.”