How could Australia’s property bubble burst?

by Mike Wood18 Aug 2021

Australia’s property bubble could burst if one of the three pillars that have created the boom were to be removed.

The market has seen unprecedented growth since the initial phase of reopening after the 2020 Covid lockdowns, fuelled by the perfect storm of low interest rates, government subsidies and a local market driving demand.

According to Dr Diaswati Mardiasmo, chief economist at PRD, should these key factors change, we could see the property bubble burst.

“At the moment, the reason why we have this bubble is because we’re still sheltered from international demand,” she said.

“This is all local demand from within Australia, and it’s being incentivised by government policies in the housing market. Whether that’s First Home Buyers or single parents, regardless of demographic, the government is pushing for home ownership.”

“You’ve got that incentivisation from the government and then the other side, which is very low interest rates and home loan rates. Those three factors are what is creating the bubble and protecting the Australian property market, and pushing it up and up and up.”

“It could be a massive burst or it could be what we’re starting to see, which is a correction or slowing down with prices stabilising, but for any correction to happen, the three things need to change.”

Those three things are relatively simple, but any burst in the Australian property bubble is based on them.

“If it’s the sheltering of international demand, if that changes, that means that there’s going to be more demand in the market and people aren’t going to be able to fulfil it,” said Mardiasmo. “They won’t be able to compete and afford higher prices anymore, and that’s when we’ll see correction.”

“If there are any mortgage stresses because interest rates have changed to a level that people can’t afford mortgage payments, or if the government does not inject another new policy to assist people, that’s when we’re going to start seeing people sell at a lower price.”

“We’re not talking about a burst that’s going to happen immediately, it’s going be like a pumped up balloon deflating.”